CTA Case No. 5046 (Decision)

- ":� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MANILA MANDARIN HOTELS, INC. , ;.R C.T.A. CASE NO. 5046 Petitioner, - versus - THE COMMISSIONER OF INTERNAL Promulg 2 d' 4 1997 REVENUE, Respondent. X - -- - -- - - -- -- --- -- -- --X DECISION This Is an appeal from the decision of the respondent Commissioner of Internal Revenue, dated October 25, 1993, denying the petitioner's protest on the 1988 deficiency assessment issued for value-added tax and percentage tax in the total sum of P12,211,987.53. Petitioner is a domestic corporation engaged in business as a hotel and restaurant operator . It is a VAT registered enterprise with VAT Registration No. 32-0- < 000281 . I On July 8, 1992, petitioner received an assessment notice, dated June 22, )1992, demanding the payment of deficiency value-added and percentage taxes for the taxab Ie year 1988, the deta I Is of which are enumerated hereunder, thus:

DECISION - C.T.A. CASE NO. 5046 - 2- Deficiency Business Tax - 1988 Va I ue .. Added Tax Percentage Tax Basic Tax p 5,545,002.13 P208,390.65 Add: 25% surcharge 1,386,250.53 52,097.66 Int. fr. 1-20-89 4,774,801.35 179,445.19 to 6-30-92 50,000.00 16,000.00 Compromise Total Amount Due P11,756,054.03 P455,933.50 In a letter, dated July 27, 1992, received by the Office of the respondent on July 30, 1992, petitioner protested the assessments issued by the respondent. Petitioner alleged that the tax deficiencies stemmed from respondent's erroneous interpretation of various tax laws which resulted in a I ega I I y-f I awed assessment. This protest cited four items of value-added tax and one item of percentage tax which petitioner claims to have been wrongly imposed by the respondent. As a collateral information, It Is to be noted that as early as November 28, 1991, the petitioner has signed a waiver of the statute of IImitations for the running of the prescriptive period provided by the Tax Code with respect to the Issuance of assessment and the consequent collection of its business taxes (see page 211, BIR records). Petitioner received the final denial of Its protest on November 10, 1993 in a Ietter, dated October 25, 1993,

DECI S ION - C. T . A. CA SE NO . 5 0 4 6 - 3- which prompted the petitioner to file a petition for review by this Court on December 1 0, 199 3 . This petition for review was initially entitled "Mandarin O riental Hotels, Inc. vs. The Commissioner of Internal Revenue" but was later changed to "Mani I a Mandarin Hotels, Inc. vs. The Commissioner of I nternal Revenue" in an amended petition fi I ed on June 9 , 1994 as the latter title is petitioner's registered name with the S ecurities and Exchange Commission (see page 64, CT A records). Respondent filed its Answer (p. 2 8 - 31 , CTA rec.) on January 2 8, 1994 by registered mai I, wherein she proposed the following S pecial and Affirmative Defenses, thus: 3. Petitioner was assessed for deficiency V AT and Percentage taxes for the year 19 8 8 in the total amount of P1 2 , 211 ,9 8 7 .3 3 I! a s f o I I ows: I1 Valu e Added Tax Percentage Tax I (ASS. NO. FAS-488-92-002804) (ASS. NO. FAS-4- 88-92-002805) Basic Tax p 5,545,002.13 P208,390.65 52,097.66 Add: 25% surcharge 1,386,250.53 179,445.19 Int. fr. 1-20-89 16,000.00 to 6-30-92 4,774,801.35 P455,933.50 Compromise 50,000.00 TOTAL AMOUNT DUE P11,756,054.03 4. Petitioner is not engaged in the business of a common carrier as It transports its hotel guests merely as part of its hotel services. Hence, Its transp ortation services

DECISION - 5046 C.T.A. CASE NO. -4- extended to the hotel guests is subject to VAT under Section 102 of the Tax Code. 5. Reimbursement cost of telephone biIIings of the petitioner form part of the gross receipts for VAT purposes. Therefore, the tax base for the purpose of computing the tax due must incIude the handIing fees, the gross profit from petitioners telephone service activity rendered to hotel guests, plus the toII fees due to Ph II Ipp Ine Long Distance Telephone Company. 6. The sale of property and equipment (Furniture and Fixture) from company/borrower to the financing company is considered sale of personal property subject to 10% value added tax. 7. The deficiency tax assessment of and P455,933.50 for percentage tax is legal of justified In accordance with the provisions Sec. 113 of the Tax Code. 8. In this jurisdiction, tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise (CIA vs. Construction Resources of Asia, Inc. 145 SCRA 671). 9. Likewise, all presumptions are in favor of the correctness of the tax assessments. The taxpayer has the burden of proof to impugn Its validity (Interprovincial Autobus Co. , Inc. vs. CIA, 98 Phil. 290; 290; CIA vs. Aveline, 8 SCRA 570). The present dispute centers on two kinds of taxes namely: value-added tax (VAT) and the percentage tax. The Schedule of Deficiency VAT on other income for the year 1988, per examination of the revenue officer, in the amount of P11,756,054.03, is computed as follows: ( p. 216, BIR records)

DEC ISION - C.T.A. C ASE NO. 5 0 4 6 -5 - MANILA MANDAR IN HOTEL, INC. INCCJ.E SCHEDULE OF DEFICIENCY VAT ON OTHER FOR THE YEAR 1988 Department TotaI Income Output Tax Telephone P45,847,628. 69 Guest Laundry 4,988,665. 83 Health Center 893,554. 58 Business Center 4,662, 142. 87 Garage 3, 149,239. 37 Rent and Other Income 6,219,940. 10 TOTAL P65,760,496. 13 p 6,576,049. 6 1 Add: Disposal of Assets 7,609,725. 36 69 1,793. 2 1 Total Subject to VAT P73,370,22 1. 49 VAT Due thereon 7,267,842. 82 Less: Payment Percentage tax payments Garage Other Income p 84,954. 06 241!4 10. 8 1 Total p 326!364. 87 VAT Payments p 591,164. 72 1st Qtr. 2nd atr. 545,135. 44 3rd Qtr. 4th atr. 382,927. 03 481! 137.42 Total p 2,000,364. 6 1 TOTAL p 2,326,729. 48 Less: Disallowed Input Tax 603!888. 79 Total Claimed P808,095.40 Less: AI lowed 204,206. 6 1 Total A I towable Payment 1,722!840. 69 Deficiency Value Added Tax p 5,545,002. 13 25% Surcharge 1,386,250. 53 Interest ( 1-20-89 to 6-30-92) 4,774,801. 35 Compromise 50,000. 00 Total VAT Due and Payable P 1 1,756,054. 03

DECIS ION - C.T.A. CAS E NO. 5046 -6- The Schedule of Deficiency Percentage Tax for the year 1988 in the amount of P455,933.50, is computed hereunder as follows: (p. 215, BIR records) MANILA MANDARIN HOTEL, I NC. SCHEDULE OF DEFICIENCY PE RCENTAGE TAX FOR THE YEAR 1988 Gross Receipt Reservations Total Tax Due Tax Paid Deficiency !Receipts) Taxable Tax Banquet Receipts Roo Revenue Pl55,083,830.66 155,083,830.66 18,610,059.68 18,610,059.68 P Food Revenue Beverage 76,215,586.95 1,436,725.39 71,652,312.28 2,866,092.49 2,808,623.49 57,469.01 Revenue 19,094,305.19 _____.;19-IL.0. 9-' ._4,-'305_ ._1_9 1,527,544, 42 1,376,622, 78 1501921.64 TOTAL P244,393,722.80 1,436,725.33 245,830,448.13 23,003,696.59 22,795,305.94 P208,390.65 25\ Surcharge 52,097.66. Interest fro 1-20-89 to 6-30-92 179,445.19 (.68888) Coproise 16,000.00 P455,933.50 Total Deficiency Percentage Tax The assessment for VAT is subdivided into four I terns. This Court finds it appropriate in the Interest of clarity to discuss each item Individually. VALUE-ADDED T AX Petitioner contends that a substantial portion of the VAT assessment stems from the respondent's inclusion of an additional sum of P35,900,388.53 as part of its gross receipts subject to the 10% VAT. The additional amount of P35,900,388.53 represents the tol Iing charges of PLOT on the overseas calIs of the �guests of petitioner

DECISION - C.T.A. CASE NO. 5046 -7- paid to PLOT and which respondent claims should form part of the petitioner's taxable base for VAT. Petitioner disagrees with the respondent and opines that only the handling fees (the amount which actually accrued in favor of petitioner) should be the proper tax base for VAT purposes since the handling fees represent the actual gross receipts of the petitioner, and it should not include the amount that the petitioner pays to PLOT for the usage of its telephone I ines because such amount pertains to revenues of PLOT and not petitioner's. Respondent, on the other hand, theorizes that the VAT is based on gross sales or gross revenue, thus, It should include the handling fees, the gross profit from petitioner's telephone service plus the tolI fees due to PLOT. The issue Is whether or not the amount that petitioner paid to PLOT should form part of the gross receipts subject to the 10% VAT. .( Section 102 of the Tax Code which served as the basis of the 10% VAT on the sale of ( ,) fo I I ows: services provides as ' � I Sec. 102. Va I ue-added tax on sa I e of services. (a) Rate and base of tax. There shall be levied, assessed and collected a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of services. The phrase 'sale of � services' means the performance qf alI kinds of .,

DECISION - C.T.A. CASE NO. 5046 - 8- services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic fi I ms; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof ca I Is for the exercise or use of the physical or mental faculties: xxx. XXX XXX X X X. 'Gross receipts' means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. The abovecited provision speaks of gross receipts as the basis of the 10% VAT. Section 2(m) of Revenue Regulation No. 5-87 defines gross receipts in exactly the same manner as that of Section 102(a) of the Tax Code, thus: (m) "Gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actua I I y or constructive I y received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.

DECISION - C.T.A. CASE NO. 5046 -9- The definition of gross receipts refers to the amount of money actua I Iy or constructive Iy received by the taxpayer. The facts show that the amount paid by the petitioner to PLOT as tal Iing charges for the overseas calls made by its guests were not actually nor constructively received by the petitioner as service fees but were instead charges of PLOT so there is no reason why the respondent should include these as part of petitioner's gross receipts. In the cases entitled The CoIIector (now Commissioner) of Internal Revenue vs. Mani Ia Jockey Club, Inc., and The Commissioner (formerly Collector) of Internal Revenue vs. Mani Ia Jockey Club, Inc., Nos. L- 13887 and L-13890, June 30, 1960 (108 Phil. 821), the Supreme Court ruled, thus: "Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement pIace has been especiaIIy earmarked by law or regulation for some person other than the proprietor . " In a more recent case entitled, Commissioner of Internal Revenue vs. Tours Specialists, Inc., and The Court of Tax Appeals, G.R. No. 66416, March 21' 1990 (183 SCRA 402)' the Supreme Court again delved into the concept of gross receipts in a broader sense than what

DECISION - C.T.A. CASE NO. 5046 - 10 - was enunciated in the Mani I a Jockey C I ub case quoted earlier, thus: "As demonstrated In the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it Is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code." <Underscoring supp I ied) Therefore, We find respondent's inclusion of the amount paid to PLOT as part of petitioner's gross receipts subject to 10% VAT erroneous and therefore must be cancelled in favor of the petitioner. The second Item in Issue is the respondent's imposition of VAT on the gross receipts of petitioner stemming from the amount received on the transportation services extended by the petitioner to the guests of the hate I . Petitioner argues that the revenues It received from this type of service are already subject to the 3% tax on common carriers under Section 115 of the Tax Code hence, these should no longer be subject to VAT as clearly provided in Section 103(j) of the Tax Code which mentions that services rendered by persons subject to percentage tax under Title V are exempt from the payment of VAT.

DECISION - C.T.A. CASE NO. 5046 - 11 - Respondent disagrees with the contention of petitioner and proposes the argument that petitioner is not engaged in the business of a common carrier because It transports its hotel guests merely as part of its hotel service. This particular activity according to the respondent falls outside the ambit of Section 115 but falls squarely within the provision of Section 102 of the Tax Code subjecting such sale of service to VAT. On this score, petitioner insists that It is a common carrier subject to the 3% commtin carrier's tax instead of the VAT. The issue to be resolved here Is whether or not the revenues received by the petitioner in providing transport service to its hotel guests are subject to the 10% VAT in accordance with Section 102 of the Tax Code. Corollary to this issue Is whether or not the petitioner in extending transport services to Its hotel guests can be classified as a common carrier subject to the 3% common carrier's tax under Section 115 of the Tax Code. We find petitioner's contention that It Is a common carrier subject to the 3% tax under Section 115 of the Tax Code, bereft of merit. Article 1732 of the New Civil Code defines a common carrier as follows:

DECISION - C.T.A. CASE NO. 5046 - 12 - ART. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. Petitioner is engaged in the hotel business and not in the business of transporting passengers. On the occasion when the petitioner extends transport services Iike providing Iimousine service and the ike, It does so only for its hotel guests and not to the public in genera I. In the case entitled United States vs. Qulnajon and Quitoriano, No. 8686, July 30, 1915 (31 Phil. 189), the Supreme Court defined a common carrier as fo I Iows: "A common carrier is a person or corporation whose regular business Is to carry passengers or property for persons who may choose to employ and remunerate him. A common carrier Is a person or corporation who undertakes to carry goods or persons for hire." <Underscoring supp Iied) Black's Law Dictionary, 6th ed., 1990, p. 275, defines a common carrier in this manner, thus: "Any carrier required by law to convey passengers or freight without refusal if the approved fare or charge Is paid in contrast to the private or contract carrier. One who holds himself out to the public as engaged in business of transportation of persons or property from place to place for compensation, and who offers servIces to the pub Iic generally. (Tilson v. Ford Motor Co., D.C. Mich., 130 F. Supp. 676, 678)"

DECISION - C.T.A. CASE NO. 5 0 4 6 - 13 - The petitioner does not f at I within any of the aforequoted definitions and It w as erroneous on Its p art to subject Its gross receipts resulting from the tr ansport service to percent age t ax under Section 1 1 5 of the T ax Code. Respondent is correct In subjecting these revenues to the VAT in accord ance with Section 102 of the T ax Code. The third item of VAT ass ai led by the petitioner rel ates to its dispos al of assets which respondent subjected to the 10% VAT pursu ant to Section 100 of the T ax Code. The dispos al of petitioner's assets for the year 1 9 8 8 , consists of the fo llowing: (see Exhs. U, p. 2 12, BIR rec.; R-4 , p. 1 7 7 , CTA rec.; R-1 6 , p. 1 8 8, CTA rec.; R-23, p. 1 9 5 , CTA rec. ) Transportation Operating Equipment Bultd I ngs Equipment Total Historical cost P3,893,086 P106,621 P1,159,811 P5, 159,518 Appraisal Increase 2,450,207 P106,621 P1,159,811 5,450,207 Accumulated P6,343,293 P106,621 P7,609,725 depreci ation: P1061621 On cost P1,137,886 P1,244,507 On appraisal 570,881 570,881 P1,7081767 P118151388- Net appraised value P4,634,526 p P1,159,811 P5,794,337

DECISION - C.T.A. CASE NO. 5046 - 14 - The disposal of these assets were assessed to be subject to the 10% VAT. It Is petitioner's position that the amount of P6,343,293.00 represents the costs and the appraisaI increment from civi I works performed on account of the renovations made thereon. The demolition of the o Id civI I works to give way to renovation of the hotel cannot be considered as subject to the VAT. The transportation equIpment which has been fu I Iy depreciated was sold In 1988. It was alleged that the transportation was used In the catering business which business is already subjected to the 4% caterer's tax under Section 114(1) of the Tax Code, as amended, therefore, should not be subjected to the 10% VAT under Section 103(j) of the Tax Code. The operating equipment consisting of silverware, china and Iinen used in its hateI operations amounting to P1,159,811.61 after inventory count was found to have been lost, destroyed or no longer useful. In view thereof, the retirement of this equipment can not be considered a deemed sale transaction. Respondent, on the other hand, subscribes to the theory that the sale of property and equipment Is considered sale of personal property subject to 10% VAT. This Court believes that the petitioner's disposal of its property and equipment after taking into

DECISION - C.T.A. CASE NO. 5046 - 15 - consideration the manner for its disposal is not sub j ect to the 10% VAT. The demolition of the civi works in the bui Iding of petitioner paving the way for a renovation thereof per se cannot be considered sub j ect to the VAT. The same is true with the retirement of the operating equipment ( s I Iverwares, etc. > because the reason for their retirement was due to loss or obsolescence but not the sale f1/lf' thereof sub j ect to the VAT. Now with respect / to the sale of transportation equipment it is noteworthy to point that the asset sold has been fully depreciated and is connected with the catering business of petitioner. Considering further, that the catering business is already sub j ect to the caterer's tax under the other percentage taxes In Title V of the Tax Code, the same should not be sub j ect to the VAT. The Supreme Court in the case entitled Standard Vacuum 011 Co. vs. Antigua, etc. , et al., No. l-6931, AprII 30, 1955 (96 Ph II. 909), ru I ed: "In conclusion, we hold that when a person or company Is already taxed on Its main business, it may not be further taxed for doing something or engaging In an activity or work which is merely a part of, Incidental to and is necessary to Its main business. " In the cases of Insular Life Assurance Co. , ltd. ' vs. Commissioner of Internal Revenue, CTA Case No. 2336,

DECISION - C.T.A. CASE NO. 5046 - 16 - and Fi Iipinas Life Assurance Company vs. Commissioner of Internal Revenue, CTA Case No. 2337, both dated November 12, 1973, this Court had the occasion to rule: "We have had occasion to express the same view. xxx. Where the law taxes a business, it Is presumed to be the legislative intent not to separately tax every activity which is merely incidental or necessary to the conduct of said business. (p. 7, supra.)" Moreover, pursuant to Section 99 of the Tax Code, as amended, quoted hereunder: "SEC. 99. Persons I iable. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in simI I ar transactions and any person who imports goods shal I be subject to the value-added tax (VAT) imposed In Sections 100 to 102 of this Code. (As added by EO 273)" VAT shall be imposed only if the sale of goods is "in the course of trade or business of the taxpayer". The selling of unserviceable equipment and other assets including real property improvement are not subject to VAT. The sel Iing of those assets are merely incidental to Its renovation. Petitioner is in the hotel business. Besides, rea I property in 1988 are not yet included among those subject to VAT. In conclusion, We find that respondent erred in subjecting the disposal of transportation equipment and

DECISION - C.T.A. CASE NO. 5046 - 17 - the retirement of the operating equipment and the renovation of the building to the 10% value-added tax. The last item relating to VAT Involves the input taxes which petitioner claims to have been disallowed by the Revenue Examiner . Petitioner insists that such disallowance was arbitrary and was not based on factual findings. The Revenue Examiner who conducted the investigation explained the disallowance by stating that out of the claimed input tax in the amount of P808,095.40, only P204,207.21 was properly documented, thus, a total of P603,888.79 was disallowed. An analysis of the records of this case including the BIR records submitted by the respondent reveal that the working paper prepared by the revenue examiner reflected the disa I I owed Input taxes of P93.964.54 instead of P603,888.79, (see pages 39 to 47, BIR records). In summary, the overall findings with respect to petitioner 's deficiency VAT assessment for 1988 are deta I I ed hereunder: MANILA MANDARIN HOTEL, INC. INCOME SCHEDULE OF DEFICIENCY VAT ON OTHER FOR THE YEAR 1988 Departent Total Incoe Guest Laundry p 4,988,665.83 Health Center 893,554.58 Business Center 4,66Z, 14Z.87

DECISION - C.T.A. CASE NO. 5046 - 18 - Department Tota I Income 3,149,239.37 Garage 6,219,940.10 Rent and Other Income P19,913,542. 75 Total income subject to VAT p 1,991,354.27 VAT Due thereon p 84,954.06 1,612,598.62 Less: al Percentage tax payments p 378,755.65 241,410.81 Garage 94,688.91 Other Income 326,093.05 p 799,537.61 Total p 326,364.87 bl VAT payments p 591,164.72 Output Tax Iiabi Iities 545,135.44 1st Otr. 382,927.03 2nd Otr. 481,137.42 3rd Otr. 4th Otr. Total VAT liabilities p 2,000,364.61 Less: Allowable input tax p 808,095.40 Total input tax per return 93,964.54 Less: unallowable Total allowable input tax p 714,130.86 Tota I VAT payents p 1,286,233.75 TOTAL Deficiency Value Added Tax Plus : al 25\ Surcharge b) 20\ Interest 11-20-89 to 6-30-92) Total VAT Due and Payable PERCENTAGE TAX It Is petitioner's analysis that the deficiency percentage tax assessment arose due to the Imposition of the tax on deposits made by Its cIients for the use of the hotel faci Iities. Petitioner contends that these deposits, if not applied against hotel biIIs is not subject to percentage tax because these deposits partake of the nature of a security deposit which cannot be classified as income.

DECISION - C.T.A. CASE NO. 5046 - 19 - This Court disagrees with the respondent in the assessment of the deficiency percentage tax, primarily because the deposits made by petitioner 's hotel clients should not be treated as part of Its gross income. Under the realization principle, revenue is genera I I y recognized when both of the fo I I owing conditions are met: (a) the earning process is complete or virtually complete, and (b) an exchange has taken place. This principle requires that revenue must be earned before It is recorded. Thus, the amounts received in advance are not treated as revenue of the period in which they are received but as revenue of the future period or periods in which they are earned. These amounts are carried as unearned revenue, that Is, I iabi Iities to transfer goods or render services in the future unt I I the earning process is complete. (Campilation of Statements of Financial Accounting Standards No. 1-22, pp. 41-42). As explained by the witness Ms. Fernando, its co I Iection is in the nature of a security deposit to ensure that the other party wi I I perform his end of the contract. It is only upon the use of the reserved faci I ities or the default of the reserving guest to cancel the reservation on time that the deposit is clearly convertible to revenues. Since the deposits are

DECISION - C.T.A. CASE NO. 5046 - 20 - payment for future services it cannot be treated as part of its gross income unti the earning process Is complete. From the above discussion, We find that the deficiency percentage tax assessment is erroneous and should be therefore be cancelled. WHEREFORE, in view of the foregoing, petitioner is hereby ORDERED to PAY the sum of P799,573.61 representing its value-added tax deficiency for the taxable year 1988, plus 20% interest from June 22, 1992 until fully paid pursuant to Section 249(c) of the Tax Code, as amended. It should be noted that the compromise penalty originally imposed by the respondent is deleted inasmuch as there was no mutual agreement reached between the parties. (Ben L. Chuy, et al. vs. Collector of Internal Revenue, CTA Case promulgated In July 16, 1958). The assessment for deficiency percentage tax for 1988 is hereby CANCELLED for lack of merit. SO ORDERED. -J! -r. RAMON A Associate Ju CONCUR: QQ' ERNESTO D. ACOSTA Presiding Judge

DECISION - C.T.A. CASE NO. 5046 - 21 - CERTIFICATION hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VI I I of the Constitution. Ul� ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals