CTA Case No. 6529 (Decision)

.' ." �' 0 REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST EXPRESS PAWNSHOP COMPANY, INC., Petitioner, -versus- C.T.A. CASE NO. 6529 COMMISSIONER OF INTERNAL, Promulgated: REVENUE, SEP 2 4 20046YJ.fr~ Respondent. X- --------------- - - - ---- -- ------------------- -- ---- X DECISiqN This petition is seeking for the cancellation of the alleged deficiency . income and value-added ta.'l: assessments in the amounts of P20,712.58 and P601,220.18, respecti':,ely and deficiency docwnentaty stamp tax assessments in the amounts of P12,328.45 and P62,128.87 issued by respondent for the taxable year 1998. The following are the facts as established in the records of the case: Petitioner is a dqmestic corporation duly organized and existing w1der the laws of the Republic of the Philippines. It is engaged in the ,. pawnshop business with~"business ad,dress at 2435 Rizal Avenue, Sta. Cruz, /\ I \ '' Manila. Respondent, d1rough d1en Acting Regional Director Ruperto P. Somera, of Revenue Region 6, Manila, issued the following assessments. I

'. DECISION- CfA CASE NO. 6529 against d1e petitioner, all dated December 28, 2001, and received by petitioner on January 3, 2003: a) Assessment No. 31-1- -98 for deficiency income tax in the amount of Twenty Thousand Seven Hundred Twelve Pesos and 58/100 (P20,712.58) with corresponding compromise penalty; b) Assessment No. 31-1~00053-98 for deficiency value-added tax (VA1) in d1e amount of Six Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) with corresponding compromise penalty; c) Assessment No. 31-14-000053-98 for deficiency documentary stan1p tax I ' (DSI) on deposits on subscription in d1e amount of Twelve Thousand Three Hundred Twe~ty-Eight Pesos and 45/100 (P12,328.45); and d) Assessment No. 31-1-000053-98 for deficiency DST in the amount of Sixty- Two Thousand On~ Hundred Twenty-Eight Pesos and 87/100 (P62,128.87). On February 1, 2002, petitioner filed its protest on d1e above assessments. Within thirty (30) days from die lapse of the 180-day period within which the resp,ondent has to act on die petitioner's protest as prescribed by Section 228 of the National Internal Revenue Code (NIRC) of 1997, petitioner filed the instant retition ~~1 August 28, 2002.,.' Respondent in his Answer to the petition filed on September 25, 2002, alleged the following Special and Affirmative Defenses:

'. DECISION- Cl'A CASE NO. 6529 8. The assessment is valid and correct and the taxpayer has the burden of proof to impugn its validity (Behn Meyer & Co. vs. CIR, 27 Phil 647). Thus, similarly held, tax assessments by tax examiners are preswned correct and made in good faith. The tax payer has the duty to prove otherwise (Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc. 145 SCRA 671); and an assessment duly made by a BIR examiner and approved by his superior o~ers will not be disturbed (Gutierrez vs. Villegas, 8 SCRA 527); 9. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right (fan Guan vs. Court of Tax Appeals, I et al., 19 SCRA 903 [1967]); otherwise, the presumption in favor of the correctness of the tax assessment stands (Inter Provincial Bus Co., Inc. vs. Collector of Internal Revenue, 98 Phil 290, [1956]; Collector of Internal Revenue vs. Bohol Land Transportation, Co., 107 Phil967 [1960]; 10. Petitioner is subject to 10% VAT based on its gross receipts pur~uant to R.A. No. 7716 otherwise known as Expanded Value Added Tax (EVAT) Law as amended by the 1997 Tax Code (R.A. No. 8424); 11. Unless expressly exempt from VAT, any person engaged in the sale of goods, property or services in the course of trade or business shall be liable to the 10% VAT (Revenue Ivlemorandum Circular No. 45-2001); ' 12. BIR Ruling No. 221-91 provides that pawnshop tickets are subject to Documentary Stamp Tax (DS1) because a pawnshop ti~ket virtua.\ly evidences a pledge. Since petitioner lent money at !interest and requires a pledge of personal property as security,' the essence of its operation is lcndi11g 111011ry. Thus, p~titioner's pawnshop tickets are subject to DST pursuant to Section 195 of the 1997 Tax Code.

\, ~ :I DECISION- Cl'A CASE NO. 6529 In the course of the proceedings, die parties submitted ilie following stipulated issues to be adjudicated by d1is court: 1. Whed1er or not petitioner's interest expense ofP889,909.81 is supported by documentary evidence; 2. Whed1er or not petitioner's donation and contribution of P8,120.00 is in excess of d1e deductible donation allowed by law; 3. Wheilier or not petitioner is liable for deficiency DST on deposits on subscription under Section 175 of die 1997 Tax Code; 4. \Vhed1er or not petitioner is subtect to 10% VAT under Section 108 of ilie 1997 Tax Code; 5. Whedier or .not petitioner is liable for deficiency DST on the pawn tickets 1.mder Section 180 of d1e 1997 Tax Code; ' "'\. 6. \Vheilier or not petitioner is liable for interest and compromise .�penalty; and 7. \Vhedier or not petitioner submitted its supporting docwnents to assail the income assessment within sixty (60) days from filing its protest pursuant to Section 228 of d1e 1997.Tax Code. On July 1, 2003, petitioner, in ilie interest of expediency and to save dus court's valuable time in resolving d1e issue on d1e deficiency income tax, paid d1e amount of Twenty-Seven 1Thousan~ Seven Hw1dred Forty-Four . I.. Pesos and 88/100 (P27,744.88), inch''t'~ive of u;terest.

.. DECISION- CTA CASE NO. 6529 PAGESof22 \\lith the payment of the said deficiency income tax the assessment therefor is considered settled and the court is left with only the following issues to resolve: 1. \Vhcther or not petitioner is subject to 10% VAT under Section 108 of the NIRC of 1997; 2. Whether or ~ot petitioner is liable for deficiency DST on deposits on subscription under Section 175 of the NIRC of 1997; 3. \Vhether or not the petitioner is liable for deficiency DST on pawn tickets w1der Section 180 of the 1997 Ta." Code; '' 4. \Vhether or not petitioner is liable for interest and compromise penalty. Petitioner contends that pawnshops catmot be subject to 10% VAT "\ "\, for the simple reason that pawnshops are not included in the enumeration of entities or transactions subject to VAT under Section 108 of the NIRC of 1997, nor are their services similar to those rendered by those enumerated therein. The legislature in making an enumeration of the particular services covered by a ti.'Cing regulation is deemed to have excluded those not ' enwnerated therein. This is apparent in the use of the catch-all proviso "and similar services regardless of whether or not the performance thereof I :.. } calls for the exercise or use of physib.l or mental faculties". In enumerating . ��~ the particular services subject to the VAT, the enwneration made in Section 108 excluded those not simpar to those enum~rated therein. Petitioner,

.. DECISION- CI'A CASE NO. 6529 PAGE 6 of22 hence, deduces that the inclusion of pawnshops in the enumeration by mere implication is a violation of a fundamental principle in taxation prohibiting taxation by mere implications. Petitioner equates the imposition of VAT on professional services by virtue of R.A. No. 876,and not under the prior law of R.A. No. 8424 and the subsequent amendment by RA. No. 9238 as a recognition of the mle that for a service to be exempted under the V.1\T law, it must ftrst be included among those subject to VAT under Section 108 (A), and I I conversely, services not enumerated are not subject to VKf, even in the absence of an express pt;ovision in Section 109 of the NIRC of 1997. Also, petitioner, infers from the case of Commissioner of Internal Revenue vs. Court of Appeals and Court of Tax Appeals and Ateneo de Ivlanila University, G.R. No. 115349, April 18, 1997, that in applying a tax statute, a determination should fust be made as to its coverage by applying the principle of .strict interpretation in favor of taxpayers, before any detennination could be ,\lad as to its exemptions. On the other hand, respondent maintains that enumeration of I I .. persons performing services for a ;fee is no~ . exclusive, which means that I other persons performing service for'a fee, who are not expressly mentioned in the enumeration, are also subject to VAT. To limit the imposition of

.. DECISION- CTA CASE NO. 6529 PAGE 7 of22 10% VAT to those persons who render services enwnerated in Section 108 (B) of the 1997 Tax Code would create chaos instead of harmony in the present Philippine tax system. And to interpret the enumeration as exclusive would trigger only unjustness, inequality and partiality. This is so because this would s~ly mean that, those sale or exchange of services which are not included in the enumeration and those which will be put up in the future are likewise not subject to VAT. Certainly, tlus is not tl1e legislative intent of the legislature. Indeed, the legal issue on .whetl1er a pawnshop is subject to VAT or not has been passed up<;m by this court in a litany of pawnshop cases and the recent ones are the cases of Intergri(y Pall/mhop, Ittc. vs. Bureau of Intemal Revenue, Kamhata11 Road, . Vale!J:(!iela City, CTA Case No. 6721, Septe111ber 6, 2004 and Fon111J Pawmhop, Inc. vs. Bureau of Intemal Revenue, Tuguegarao City, CTA Case No. 6718, Septe111ber 6, 2004, all pointing to the inclusion of pawnshops as an entity liable to VAT w1der Section 108 (A) in relation to Section 105 of tl1e NIR~. Section 108(A) of the 1997 National Internal Revenue Code provides: ,. SEC. 108. Value-Add~d Tax 011 Sale ofServices and ,. ' Use or Lease ofProperties.1'- �:�. (A) Rote and Base ofTax. -There shall be levied, assessed and collected, a value-added tax equivalent to ten percent

.. DECISION- CfA CASE NO. 6529 PAGE8of22 (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or excha11ge of service/ means the performance of all kinds of services in the Philippines 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 bro~rs; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; p ersons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non- bank fmancial intermediaries and finance companies; and non- life insurance companies (except their crop insurances), im;luding surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the perfom1ance � thereof calls .� for the exercise or use of d1e physical or.mental faculties. xxx. (Underscoring supplied.) From the foregoing provision, it is apparent that d1e sale or exchange of services is subject to value-added tax. The phrase "sale or exchange of I services" encompasses the perfon11~nce of <1,;,ll kinds of services for others ' '; . �' for a fee, remuneration or consideration. The listing provided for in Section 108 (A) is intended merely to glVe examples of persons or businesses

.. DECISION- CfA CASE NO. 6529 PAGE 9 of22 perfomling serv1ces for a fee, remuneration or consideration. The enwneration is not exclusive, which means that other persons performing services for a fee, remuneration or consideration, who are not expressly mentioned in the enumeration, are also subject to VAT. In the case of Gomez vs. Ventura, 54 Phif.� 72~ it was ruled that: "xxx The maxim e>..pressio tmitts est exclusio alteJilts should be applied only as a means of discovering legislative intent and should not be pennitted to defeat the plain indicated purpose of the legislature. It does not apply when words are mentioned by way of example, or to remove doubts. (See Cyc., 1122 xxx.)" (Underscoring ours.) Section 108(A) [formerly Section 102(a)J of the NIRC of 1997 does not limit its application to those enumerated therein because the law speaks of "\ "\. "all kinds of services". . To limit its application to the enwneration would contradict the very clear meaning of the phrase "all kinds of services". In addition, the phrase "including" should be construed merely as an enlargement and not of limitation. . "The intention of an act will prevail over the literal sense of its terms. Thti.s, limited words in one part of an act may be expanded by general words in another part, if the general words more nearly express the legislative intent. I i A term whose statut~ry definition declares what it 'includes' is more susceptibl~ to extension of meaning by construction than where the defiill.tion declares what a term 'means'. Thus, it has been said that 'the word 'includes' is usually a term of enlargement, and not of limitation... It, therefore, conveys the conclusion that there arc other items

.. DECISION- CTA CASE NO. 6529 PAGE 10 of22 includable. though not specifically enumerated..." lSutherland, Statutory Construction, 4th Ed., Vol. 2A, p. 82, Sec. 47.07 citing United States Argosy Ltd. v. Hermigan, 404 F2d 14 (CA 5th, 1968); See United States v. Gertz, 249 F2d 662 (CA 9th, 1957); Federal Land Bank of St. Paul v. Bismarck Lwnber Co., 314 US 95, 86 L Ed 65, 62 S Ct1 (1941)]. (Emphasis supplied.) Hence, the terms "inclu(es" and "including" do not exclude items otherwise within the scope of the defined term. The terms "includes" and "including'' when used in the Code are not deemed to exclude items otherwise within the meaning of the term defmed. Thus, where Section 1(e) applies to the taxable income of estates "including" and thereafter lists four types of income from trusts or estates that are taxable, other types of estates may also be subject to taxation w1der Section 1(e). To. hold differently would, in effect, substitute the term "limited to" for "including". [Mertens, Law of Federal Income Taxation, 1995 Ed., Section 3.37, Chap. 3, pp. 55-56, citing In re Joplin, Jr., 882 F2d 1507 (CA10 1989), applying IRC & 7:Y01(c)]. Moreover, Section 105 of the Tax Code provides: "Any person who, in tl1e course of trade or business, sells, barters~� exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to tl1e value-added tax 01AT) imposed in Sections 106 to 108 of tllis Code." Inasmuch as pawnshops are engaged in tl1e sale of services for a fee, th1y ,.I are su~ject to VAT w1der Section remw1eration or consideration, 108(A) of tl1e NIRC of 1997, as atne~ded. This conclusion Ends support in recent decisions laid down by the Court of Appeals (Commissio11cr of

.. .. DECISION- CfA CASE NO. 6529 PAGE 11 of22 Imemal Revenue vs. Age11cia Exquisite ofBoho-4 Inc., C.A. G.R. SP No. 59282, March 23, 2001; Commissioner of Intemal Revenue vs. Exquisite Pawnslwp and Jewelry, I11c., C.A. G .R SP No. 59401, September 30, 2002; Commissio11er of Imemal Reve11ue vs. Age11cia Exquisite of Bolw-4 l11c., C.A. G.R SP No. 68180, p~ulgated on February 10, 2003 and Commissio11erof Imemal Revenue vs. Exquisite Pam1slwp & Jewelry, Inc., CA-G.R SP No. 70319, May 13, 2003), wherein the Court of Appeals categorically ruled that pawnshops are subject to the 10% VAT imposed under Section 108 (A) of I R.A. 8424, thus: "A value-added tax is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. ! In the case at bar, it has been the contention of respondent Agencia Exquisite of Bohol, Inc. that the business of a pawnshop is not similar to that of a lending investor. A pawnshop, according to respondent is principally engaged in the business� of delivering money to another, secured by personal property, upon the condition that the latter shall pay the fom1er, otherwise, the thing pawned shall be sold for the payment of the',principal obligation. Hence, a pawnshop operator engages in a pledge transaction. We are no'~ convincecL. The business of pawnshops are I Re~pondent itself admitted akin to that of lending inves,tors. that a lending investor is a person who makes a practice of lending money for themsclve~ or �others at interest. It seems that respondent forgotten that the business of a pawnshop is also to lend money for others at interest. The difference between lending inv~stors and pawnshops lies only on the

DECISION- Cl'A CASE NO. 6529 PAGE 12 of22 security given, that is, a lending investor may require both real and personal property as security for the loan; whereas a pawnshop can require only personal property as security for the loan. But in the end, a lending investor and a pawnshop both engage in the business of lending money for others at interest. Accordingly, a lending investor and a pawnshop are both subject to VAT, pursuant to the provision of the National Internal Revenue Code of 1997 which provides that "there shall be levied~:~ssessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by x x x lending investors x x x." I Even assuming arguendo that we do not classify pawnshops as lending investors, still pawnshops are subject to the 10% VAT ~posed under Section 108(A) of R.A. 8424. Pawnshops refer to persons or entities engaged in the business \ of lending money on personal property delivered as security '� for loans. As long as the entity provides service for a fee, remuneration or' .consideration, then the service rendered is subject to value added tax. The personal properties delivered by clients of pawnshops as security for the loans which the former obtained from the latter are in the form of remuneration or consideration, for without such personal properties, pawnshops will not extend any loan to a borrower. Furd1ermore, the payment of interest imposed on a borrower by a pawnshop is equivalent to a fee in exchange of d1e service provided by d1e pf!.wnshop in lending money to such borrower. Thus, the phrase "all kinds of services" as stated in the second paragraph of Section 108(A) of RA. 8424 is broad enough to cover \fle kind of ,service, d1at is, lending money in consideration of personal pr~perty deliyered as security, which is provided by pawnshops '� to d1eir :.borrowers. And the enumeration of sale or exchinge of services under Section 108(A) of R.A. 8424 does not limit nor exclude other kinds of services performed for a fee, remuneration or consideration. Rather, such enumerapon even expanded. the meaning of the

DECISION- CfA CASE NO. 6529 PAGE 13 of22 phrase "all kinds of services". Besides, pawnshops do not merely engage in the service of lending money to pawners. Rather, pawnshops also sells, at public auction, personal properties pawned to them, in the event that the pawner fails to redeem the pawn within ninety days from the date of maturity of the obligation, the pawnbroker may sell or otherwise dispose of any article taken or received by him in pawn. Thus, by selling properties, pawnshops shaJ\.be subject to VAT. Finally, respondent Agencia Exquisite of Bohol, Inc. reiterates that it is claiming exclusion from the coverage of the value-added tax law and it is not claiming exemption from payment thereof. We are not persuaded. When a taxpayer claims exclusion from payment of the VAT, he is thereby claiming exemption from payment thereof. For what is the effect of exclusion from the VAT other than exemption from payment thereof? They have the same effect. That is, when a taxpayer claims exclusion or exemption from payment of the VAT, he is in effect claiming that he is not liable to pay a ' �' value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services. ' It is settled that tax exemptions should be strictly consuued against those claiming to be qualified thereto. Any exemption from the payment of a tax must be clearly stated in tl1e language of the law. Pawnshops are not clearly stated in tl1e National�'Internal Revenue Code of 1997 to be exempted from payment of the VAT. Hence, pawnshops shall be liable to pay ten: percent (10%) of tl1eir gross receipts derived from its sale or exc-hange of services as value-added tax." (Commissioner of Internal Revenue vs. Agenda Exquisite of Bohol, Inc., supra) l It is significant to note that SsFtion 3 of Presidential Decree No. 114, .,. otl1erwise known as the "Pawnshop Regulation Acr', defmes a pawnshop as follows:

.. .. DECISION- Cl'A CASE NO. 6529 '. PAGE 14 of22 "Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably with, pawnbroker or pawnbrokerage." Judicial notice may be taken of the fact that the principal activity of pawnshops is lending money at interest on personal property delivered as "' security for the loan. The act of lending money at interest constitutes the perfonnance of a service for a fee, remuneration or consideration for such service. In other words, the liability of pawnshop op.erators to pay the VAT no longer depends on the classification of their business but on the services they render. As a consequence thereof, any allegation that pawnshops are not lending investors has lost its bearing. For as long as pawnshops are ' ' engaged in lending money on the security of personal property, they are still within the ambit of Section 102(a) [now Section 108(A)]. Petitioner, being engaged in the pawnshop business, is undoubtedly engaged in the sale of services like lending money. Hence, it cam1ot escape liability to pay the VAT. Well settled is the jurisprudence that tax exemptions are stricdy constmed against the 4xpayer (Cyanamid Phlls., Inc. vs. Court of Appeals, 322 I oI 'I ' SCRA 639). In the absence of 1any �.d e a f . provision of law exempting '\ pawnshops from VAT, then, pawnshops are subject to V.Kf on their gross

DECISION- Cl'A CASE NO. 6529 PAGE 14 of22 "Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably with, pawnbroker or pawnbrokerage." Judicial notice may be taken of the fact that the principal activity of pawnshops is lending money at interest on personal property delivered as ~ security for the loan. The act of lending money at interest constitutes the perfom1ance of a service for a fcc, remuneration or consideration for such service. In other words, the liability of pawnshop operators to pay the VAT no longer depends on the classification of tH.oir business but on the services they render. As a consequence thereof, any allegation that pawnshops are not lending investors has lost its bearing. For as long as pawnshops are '\ ' \. engaged in lending money on the security of personal property, they are still within the ambit of Section 102(a) [now Section 108(A)]. Petitioner, being en6Yaged .in the pawnshop business, is undoubtedly engaged in the sale of services like lenduig money. Hence, it cannot escape liability to pay the VAT. \Veil settled is the jurisprudence tlmt tax exemptions are strictly consttued against the ta~payer (Cyapamid Phils., Inc. vs. Court of Appeals, 322 I \1 I I �' SCRA 639). In the absence of any clear :.provision of law exempting 1\ 0 pawnshops from VAT, then, pawnshops are subject to VKf on their gross

DECISION- Cl'A CASE NO. 6529 PAGE 15 of22 receipts considering that they are clearly engaged in the performance of services for a fee, remuneration or consideration. In the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation, G.R. No. 125355, March 30, 2000, the Supreme ~urt ruled that the taxpayer, not falling within the exemptions mentioned w1der Section 109 of the Tax Code, is subject to VAT. The High Tribunal held: "Section 108 of the National Internal Revenue Code of 1997 defmes the phrase "sale of serviC!:CfS" as the "performance of all kinds of services for others for a fee, remuneration or consideration." xxx X.'\: X XXX XXX "\ "\. Hence, it is immaterial whether the primary purpose of a c01poration indi~ates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for pwposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service r~ndered is subject to VAT. At any rate, it is a rule that because taxes are d1e lifeblood of the� nation, statutes that allow exemptions are constmed striccly' against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax,must be clearly stated in d1e language of the law; it cannot bd merely iuiplied d1e,refrom. In d1e case of VAT, Section 109, Republic iAct 8424 clearly enumerates the transactions exempted from VAT." (Underscoring supplied) On the issue of the taxability of deposits on subscription, petitioner points out d1at the entries in the . financial statements (Exhib~t B-2-a) and 1

.. �0 DECISION- Cl'A CASE NO. 6529 PAGE 16 of22 General Information Sheet (GIS) (Exhibit C-1) indubitably show that it had only a subscribed capital stock of PSOO,OOO.OO for which half of it had been paid up. The same fmancial statements reflect a deposit on subscriptions in the amount of P800,000.00 According to petitioner these deposits represent advances ma~e by the stockholders and are in the nature of liabilities for which stocks may be issued in the future. Absent any express agreement between the stockholders and the petitioner to convert said advances/deposits to capital stock, either through subscription agreement I or any other document, these deposits remain as liabilities owed by petitioner to its stoc~olders. Therefore, it ts imperative that a conversion/ subscription agreement first be entered into before any DST can be imposed pursuat1t to Section 175 of the 1997 Tax Code. On the other side, respondent relies mainly on the presumption that the assessment on the DST on deposits on subscription are correct and made on good faith. Respondent also contends that the failure of the petitioner to submit supporting documents within sixty days from the filing of its protest as required under Section 228 of the NIRC of 1997 has caused I the assessment to I' fmal and ~',unassailable. become I, ; As correctly stated by the petitioner, tllis court in its decision in the case of First Southern Philippines Enterprises, Inc v. Commissioner of Internal

DECISION- CI'A CASE NO. 6529 PAGE 17 of22 Revenue, CfA Case No. 5988 promulgated on January 17, 2002, ruled that deposits on subscription are not subject to DST in the absence of proof d1at an equivalent amount of shares were subscribed or issued in consideration for said deposits. Expressed od1c1wise, deposit on stock subscription is not sub~t to DST if. 1) there is no agreement to subscribe; 2) d1ere were no shares issued nor any additional subscription involved in d1e restlucturing plan and; 3) there is no proof that the issued shares can be considered as issued certificate of stocks. II Section 175 of the NIRC of 1997, states: "SEC. 175., Stamp Tax 011 Original Issue ofShares ofStock. - On every original issue, whether on organization or reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, d1ere shall be collected a doc\lffientary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200.00) or fractional part thereof, of d1e par value, of such shares of stock: Provided, That in the case of original issue of shares of stock wid10ut par value the amount of the documentary stamp tax herein prescribed shall be based up.9n the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends~ � on the actual value represented by each share." �' The above provision contemplates a subscription agreement. There can be subscription only,: with reference to shares of stock which have never been issued, in the following dses: a) \ The original issuance from '� aud10rized capital stock at the time of incorporation; b) The opening, during d1e life of d1e corporation, of the portion of d1e original authorized

DECISION- Cl'A CASE NO. 6529 PAGE 18 of22 capital stock previously unissued; or c) The increase of authorized capital stock achieved through a formal amendment of the articles of incotporation and registration thereof with the Securities and Exchange Commission. (Phifippi11e Coporate LaJv, Viffallueva, 2001 Ed., p. 367). In the case at ~ there is no subscription or any contract for the acquisition of unissued stock in the amount of Eight Hundred Thousand Pesos (P800,000.00) in the taxable year assessed. The same is true with the GIS (Exhibit C-1) of petitioner, which showed only a capital structure of Two Hw1dred Fifty Thousand Pesos (P250,000.00) and did not include the assessed amount. Mere ,reliance of respondent on the preswnption that the assessment is correct and done in good faith is unavailing vis-a-vis the evidence presented by 'the petitioner. Thus, the assessment on deficiency DST on deposits on stock subscription did not become fmal. On the issue as to whether or not pawn tickets are subject to docun1entary stamp tLx under Section 180 of the NIRC as imposed by the respondent in his asses~ment, petitioner argues that pawnshop tickets are not among the documents referred therein. Should the legislators have ,. ,. ; intended to impose DST on pawn ticke~, they would have expressly I I� ' provided so.

DECISION- Cl'A CASE NO. 6529 PAGE 19 of22 Petitioner likewise stresses that neither are pawn tickets subject to DST nnder any other relevant provisions of the Tax Code, to wit: 1) Section 174, on debentures, and certificate of indebtedness; 2) Section 175, on ot~ginal issue of shares of stocks; 3) Section 176, on sales, agreements to sell, memoranda of sales, ~liveries or transfer of due-bills, certificates of obligation, or shares or certificate of stocks; 4) Section 179, on bank checks, drafts, certificates of deposits not bearing interest and other instruments; and 5) Section 195, on mortgages, pledges and deeds of trust. The enactment of RA.. No. 9243 "An Act Rationalizing the Provisions on Docume~tary Stamp Tax of the NIRC of 1997, as amended and for Other Puq:>Oses", according to the petitioner, incorporates various significant amendments .not only on the rates of DST imposed but also on the scope of particular provisions, e.g. DST on debt instruments. Despite the long-standing issue on the taxability of pawn tickets involving substantial amounts, nowhere, however in the new act does it expressly provide that pawn ticket,s are indeed subject to DST. This just indicates that the legislature never intended nor does it now intend to impose DST on pawn tickets. .,I 0 Respondent counteracts by 'asserting that pawnshop tickets are subject to DST nnder Section 195 of the Tax Code because a pawn ticket

.. .. DECISION- Cl'A CASE NO. 6529 PAGE 20 of22 virtually evidences pledge since pawnshops lend money on the security of personal property, which is virtually a pledge. The pledge is evidenced by a pawn ticket issued by the petitioner. A pawner presents the pawn ticket to the pawnshop in order to redeem the paumed or pledged personal property. Hence, the pawn tickel\_'\s the logical document subjec t to documentary stamp tax on pledges of personal property under Section 195 of the Tax Code, as amended. Section 195 of the NIRC says: I On every mortgage or pledge of lands, estate or property, real or personal~ heritable or movable whatsoever, where the same s?a-11 be made as a security for the payment of any defmite and tertain swn of money lent at the time or previously due and owing or forborne to be paid .... xxx there shall be collected a documentary stamp tax at the following rate: x x x The foregoing prov1s1on of NIRC, undeniably declares that a docwuent evidencing a pledge of personal property which is made as a security for payment of a loan is subject to documentary stamp tax. Corollarily, Section 3 of P.D. No. 114 (Pawnshop Regulation Act) defmes a pawn ticket as the pawnbroker's " receipt" for a pawn. It is neither a security nor a printed evidence' of indebte,d,ness. Considering that the document 'I taxable under Section 195 ' th~ document evidencing the mus,t, be indebtedness and considering that under that Pawnshop Regulation Act, a pawn ticket is not a printed evidence of indebtedness, consequently, such I .. . .

DECISION- CI'A CASE NO. 6529 PAGE 21 of22 pawn ticket cannot be considered as a document subject to documentary stamp tax. (CIR v. Hon. Andres B. Reyes, jt:, CA. G.R. SP No. 28824, Dece111ber 23, 1993 cited in Exquisite Paumshop jm;efry, Inc. vs. Jaime B. Santiago in his capaciry as Revmue Regional Director, Ret,emfe Region No. 13 rif the B11reau rif Intemaf E.et/enue and the ~JJIIJissioner rifIntemaf Revmue, CIA. Case No. 6755, Ju!J 6, 200-1). IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED. Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-Two Thousand One Hundred Twe~ty-Eight Pesos and 87/100 (P62,128.87) and Assessrnent No. 31-14-000053-98 for deficiency documentary stamp tax on deposits on subscription in the amount of Twelve Thousand Three HumlrcJ Twenty-Eight Pesos and 45/100 (P12,328.45) arc CANCELLED and SET ASIDE. However, Assessment No. 31-14-000053-98 is hereby AFFIRMED e~cept the imposition of compromise penalty in the absence of showing d1at petiti~ner consented d1ereto (UST vs. CoUector, 104 SCRA 1062; Exquisite Pazv11Shop Je1velry, Inc. vs. Jaime B. Sautiago, et al, supra). Accordingly I is O~' EREJ.l to PAY d1e deficiency value- petitioner , added tax in dte aniOWlt of Si..-..;: Hundred One Thousand Two Hnndred Twenty Pesos and 18/100 (P601,220.18) inclusive of deficiency interest for

DECISION- CTA CASE NO. 6529 PAGE 22 of22 the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge and 20% delinquency interest per aJll/11111 from February 12, 2002 w1til fully paid pursuant to Sections 248 and 249 of the 1997 Tax Code. SO ORDERED. Associate Justice WE CONCUR: CL-=ta.,~ ERNESTO D. ACOSTA Presiding Justice (Wid1 Concwring & Dissenting Opinion) JUANITO C. CASTANEDA, JR. Associate Justice CERTIFICATION I hereby certify� that the above decision was reached after due I consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. I I I ~; :;~~'~ I ERNESTO D. ACOSTA Presiding Justice

E UBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST EXPRESS PAWNSHOP COMPANY, INC., Petitioner, -versus- C.T.A. CASE NO. 6529 COMMISSIONER OF INTERNAL REVENUE, Promulgated : Respondent. SEP 2 4 Z004 0h ~20\~ X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X CONCURRING AND DISSENTING OPINION I concur with my distinguished colleagues that petitioner is subject to deficiency value-added tax, including penalties but not to deficiency documentary stamp tax on deposits on subscription and that no compromise penalty may be imposed for the reasons stated in the decision. However, with due respect to my colleagues, I dissent from the decision insbfar as it cance ls the documentary stamp tax (DST) assessment on pawn tickets . Section 195 of the Tax Code provides in pertinent part: SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds or Trust. - On every mortgage or pledge of lands, estate, or property, real or personal, heritable or mo\lable, whatsoever, where the same I shall be made as a security for the payment of any definite and certa in sum of money lent at the-1 time or previously due and owing or forborne to be paid , being payable , and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be llected a documentary stamp tax at the following rates :

CONCURRING & DISSENTING OPINION - ' C.T.A . CASE. NO. 6529 PAGE 2 "(a) When the amount secured does not exceed Five thousa nd pesos (P5, 000) , Twenty pesos (P20.00). "(b) On each Five thousand pesos (P5,000) or fractional part thereof in excess of Five thousand pesos (P5,000) , and add itional tax of Ten pesos (P1 0.00). "On any mortgage, pledge, or deed of trust, where the same shall be made as a security for the payment of a fluctuating account or future advances without fi xed limit the documentary stamp tax on such mortgage, pledge or deed of trust shall be computed on the amount actually loaned or given at the time of the execution of the mortgage, pledge or deed of trust. However, if subsequent advances are made on such mortgage, pledge or deed of trust, additional documentary stamp tax shall be pa id which shall be computed on the basis of the amount advanced or loaned at the rates specified above: Provided, however, That if the full amount of the loan or credi t, granted under the mortgage, pledge or deed of trust is specified in such mortgage, pledge or deed or trust, the documentary stamp tax prescribed in this Section shall be paid and com puted on the full amount of the loan or credit granted ." [Underscoring ours] Pawnshops lend money on the security of personal property, that is, a pledge. The pledge is evidenced by a pawn ti cket. Hence, the pawn ticket is the ) log ical document subject to documentary stamp ta x on pledges under Section � 195 of the Tax Code, as implemented by Revenue Memorandum Circular No. 43-91, May 27, 1991. In this regard , it should be noted that the pawner presents the pawn ticket to redeem the pawned or pledged item. The pawn ticket is thus document evidencing the pledge . Section 173 of the Tax Code provides: SEC. 173. Stamp Ta ~es Upon Documents , Loan Agreements, Instruments and Fl'apers. Upon documents, instruments, loan agreem ents and papers , and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transactions so had or accomp lished, th e corresponding documentary stamp

CONCURRING & DISSENTING OPINION- C.T.A. CASE. NO. 6529 PAGE 3 taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting or transferring the same wherever the document is made. signed , issued , accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines , and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. [Underscoring ours.] In Cruz vs. Chua, G.R. No. 31018, November 6, 1929, 54 Phil. 10, our Supreme Court refers to the pawn ticket as a contract of pledge as follows : In applying this prov1s1on to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery ot the ticket; and the contract of pledge is , therefore , absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge if it is to be kept alive. [Underscoring ours,] As the person accepting the pawn ticket, which is the evidence of the pledge, the pawnshop is liable for documentary stamp tax thereon. ~ It is noteworthy that the Court of Appeals in the case of Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc., CA-G.R. SP No. 67667, June 29, 2004, affirmed the above ruling , to wit: Pawn tickets per se are not subject to Documentary Stamp Tax. Rather, it is the transaction involved that is being taxed . In the case of pawnshops, the property pawned , or pledged , is transferred to the pawnshop as security for the payment of money lent. This is where the Documentary Stamp Tax is imposed. xxx The law is clear. On every pledge of personal property, "where the same shall be made as a security for the payment of any definite and certain sum of money lent," a documentary stamp

CONCURRING & DISSENTING OPINION - C.T.A. CASE. NO. 6529 PAGE4 tax is imposed, based on the amount involved. Again , adhering to the fu ndamental rule in construction regarding taxation, any claim for exemption must be shown and based on the express provision of the law. Pawnshops are not included in the exemption provided by the National Internal Revenue Code ,� as amended . Moreover, while it is true that Section 3 of P.O. No. 114 (Pawnshop Regulation Act) defines a pawn ticket as the pawnbroker's "receipt" for a pawn , this does not detract from the fact such receipt is also an instrument evidencing the pledge. The instrument may be both a receipt and a pledge at the same t ime . At any rate, it does not matter whether such instrument is designated by name as a receipt or pledge. What matters is the nature of the instrument considering that the documentary stamp tax is imposed on the transaction itself, not merely the document. It cannot be gainsaid that the pawnshop ticket must be surrendered and the indebtedness of the pawner to the pawnshop paid if the thing pledged is to be returned to the pawner and both the loan and the pledge ~ extinguished . Even if it were to be conceded for the sake of argument that the � pawnshop ticket is not an instrument evidencing a pledge but merely a receipt, what is important is the substance of the transaction and not the form . And it is clear that when a pawner pawns an item with the pawnshop that there is a pledge transaction involved as the pawned item is pledged and may only be redeemed upon payment of the loan. �, J' In the recent cases of Philippine Banking Corporation (now Global Business Bank, Inc.) vs, Commissioner of Internal Revenue, CTA Case No. 6395, July 16, 2004; Banco de Oro vs. Commissioner of Internal Revenue,

CONCURRING & DISSENTING OPINION - . C.T.A. CASE. NO. 6529 PAGES CTA Case No. 6390, July 1, 2004; Keppel Bank Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6560, June 23, 2004, Traders Royal Bank vs. Commissioner of Internal Revenue, CTA Case No. 6392, April 28, 2004, and United Overseas Bank Philippines vs. Commissioner of Internal Revenue, CTA Case No. 6411, April 21, 2004, this court ruled that the anniversary or special or mega or super savings deposits involved are subject to documentary stamp tax (DST) on time deposits under Section 180 of the Tax Code inasmuch as they partake of the nature of time deposits. In the Keppel Bank Philippines, Inc. case, this court, in ruling that the Anniversary Savings Deposit (ASD) should be subject to DST in the same manner as time deposits, held: Records reveal that ASD is an interest-bearing account and has the same character and has the same characteristics of a time deposit account. There is a required minimum deposit balance and a holding period before the depositor can avail of the preferential rate which is higher than the regular savings account x x x. The �~ only difference lies on the evidence of deposit. In time deposit account, petitioner issues certificate of deposit while in ASD petitioner issues a passbook. Should this difference in the medium used result in a different tax treatment? We do not agree. Equity and law always exalt substance over form. The difference of the documents used to cover the transaction should not be a hindtance to impose the much-needed tax. Well settled is the rule that a documentary stamp tax is an excise tax, the purpose of which is to raise revenues . Documentary stamp tax is a privilege tax because it is really imposed on the privilege to enter into a transaction rather than on the document. The law taxes the document because of the transaction (HectorS. De Leon, Comprehensive Review of Taxation, 2000 edition,

. CONCURRING & DISSENTING OPINION - C.T.A. CASE. NO. 6529 PAGE6 page 381). As held by the Supreme Court in the case of Philippine Home Assurance Corporation vs. The Hon. Commissioner of Internal Revenue, GR. No. 4208-4211, January 21, 1999, thus : The respondent court correctly characterized a documentary stamp tax as in the nature of an excise tax. As such, it is imposed on the privilege of conducting a particular business or transaction and not on the business or transaction itself. x x x This means then that the documentary stamp tax accrues when the privilege is exercised . As the respondent Court stated , while it is true that a documentary stamp tax is levied on the document and not on the property, which it described, the documentary stamp tax is not intended to be a tax on the document alone. The law taxes the document because of the transaction so that the tax becomes due and payable at the time the transaction is had or accomplished , in this case, at the time of the issuance of the document. In fact, we already have ruled on two occasions that special savings account is subject to documentary stamp tax. Pertinent portions of the recent case entiled Traders Royal Bank vs. Commissioner of Internal Revenue, CTA Case No. 6392, April 28, 2004, is hereby quoted for excellent reference : �~ XXX XXX XXX But in determining whether a certain instrument is subject to documentary stamp tax. substance would control over over the form and labels xxx (Knudsa Creamery Co. of California vs. US, 121 F. Suppl. 860, 26 U.S. C.A. 1800, 1801 ). The court agrees with the findings of the respondent that the nature of Special Savings Deposit and Time Deposits are akin to each other in such a way that the bank acknowledges the receiP.t of a sum of money on deposit and which the bank promises to pay to the depositor, bearer or to t~e order of a bearer on a specified period of time. The difference lies on the document issued to evidence the transaction. In Special Savings Account, the transaction is covered by a passbook, while in time deposit, it is through a certificate of deposit.

CONCURRING & DISSENTING OPINION - C.T.A. CASE. NO. 6529 PAGE 7 Considering that the transaction evidenced by the different documents are similar and that documentary stamp tax is an excise tax on the privilege to enter into a transaction , we find both the certificate of time deposit as well as the passbook clear evidence of such transaction in favor of the person whose name appears therein, subject to documentary stamp tax. We find the above pronouncement in all fours with the case at bar. Therefore, the Anniversary Savings Deposit of petitioner, although evidenced by a passbook, is subject to documentary stamp tax. [Underscoring ours.] I believe that the principles of taxation governing documentary stamp tax applied in the aforementioned cases equally apply to this case. Here, there is a contract of pledge when the pawner pawns an item with the pawnshop. Documentary stamp tax is thus applicable on the transaction whatever the instrument of pledge may be called. It is simply imposed on the pledge transaction whatever form the pledge instrument may take. In view thereof, petitioner should also be held liable for deficiency �~ documentary stamp taxes on pawn tickets , inclusive of surcharge and interest �� thereon but not compromise penalty, in the amount of P62,128.87 for the year 1998. In addition , petitioner should be liable for 25% surcharge and 20% delinquency interest per annum from February 12, 2002 until the amount is fully paid . ., J' cz.~e.~)~� 0uANITO C. CASTANEDA, JR. Associate Justice