CTA Case No. 6154 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CEBU RO SVER PA WNSIIOP, I NC., C. T.J\. CASE NO. G154 Petitioner, Prom u!gated: - versus - AUG 16 20o!p,',i.~F:z c~.Z COMM I SS IO NER OF INTERNAL REVENUE, Re s pondent. X----------------------- - ------------------------- ------- ---X DECISION Thi s is a Petition for Review filed by the Petitioner on August 18, 2000 seeking to set aside the ruling of the Regional Director of the Bureau of Interna l Revenue. Revenue Region No . 13. Central Visayas, Ccbu City vvhich sustained the assessment in the total amount PG40,313.42 issued by the said regional onice for alleged Va lu e ;\dd ec.l Tax deficiency lor taxable year 1996. The f"acts or the case as jointly stipu lated by the parties arc summarized as lo ll ows: Petitioner is a corporation duly organi zed and exi sting under and by virtue of the laws or th e Philippines with main oflicc at 4111 Don CJOITLS-Lacson Bld g. , Colon St.. Cebu City. Petiti oner corporation operates Ro s-Vcr Pawn shops. On April 14, 1998, Audit Notice No . OCN 2ANOOOOOO 164 was issued by the Respo nd ent to hi s Revenue Oniccrs. Eli zabeth Concha and Lot ie Blando for the purpose of co nductin g an examination of the book s or account and other record s of the Petitioner coverin g taxable period 1996.

DEC ISION - CTA CASE NO . 6 154 PAGE 2 As a result o r the sa id examin ati on, Pcti ti oncr co nfo rm ed and was all eged! y made to exec ute an Agreement form. On the bas is of thi s Ag reement form , Petiti oner all egedl y paid a total am ount o f P23,4SS.94, broken down as f'oll ows: a) Defi ciency Inco me Tax P1 9.064. 18 b) Defi cie ncy Reg istrati on Fcc p 4,414.76 J_>_2_:2_,1JUL 94 TO T A L Subseq uentl y, on June 2 1, 1999 the Res ponde nt issued to Petiti oner a prelimin ary assessment noti ce dated May 05 , 1999 info rmin g the latter o r its all eged De fi ciency Perce ntage Tax in th e amount o r P208A67.50. On March I0, 2000, Petiti oner rece ived a copy of a Post Reporting No ti ce issued by the Respondent info rming the Petiti oner o r its alleged de fi ciency va lue added tax in the am ount of P62 7.350.02, inclusive o r surcharge, interest and penalty. On March 24, 2000. Petiti oner file d its letter protest to the aJo resa id Post Reporting Assess me nt. On April IS, 2000, Respondent iss ued another Preliminary Assessment No ti ce assessing Petiti oner or all eged dcti ciency va lue added taxes lor the year 1996 in the total amount o f P632,929.22. Finall y, on May 30, 2000. an Assessment Not ice was rece ived by the Petit io ner informing it of its all eged va lue added tax li abi lity in the amount of P640,3 13.42, inclusive o r surcharge, interest and penalty. On June 6. 2000, Petiti oner filed its letter protes t with the Res ponde nt in co rporatin g and bringin g to th e attenti on of' the Reg ional Directo r the Ma rch 20, 2000 protest to the Post Reporting No ti ce dated Ma rch 9. 2000.

DEC ISION- CTA CASE NO. 6 154 PA GE 3 From the deni al o f the Petiti oner" s req uest fo r reconside ratio n of its assessed 1996 VAT li ability, Pet iti oner f~ l ed the instant Peti tion for Rev iew with thi s Co urt on August 18. 2000. In its r'Jetiti on fo r Rev iew, Petit io ner alleged in the main that there is no prov ision in the Rev ised Internal Revenue Code nor in th e success ive ame ndatory laws which include paw nshops as among those li able to pay value added tax. Thus, acco rding to the Petiti oner there is no va li d and legal bas is for the Res pondent to assess and co ll ect the I 0% va lue added tax from p(lwnshops and/or pawnshop operators. Moreover, Petiti oner asseverates that Reven ue Me morandu m Order No. 15-9 1 and Revenue Memorandum Circ ul ar No. 43 -91 arc null and vo id fo r expandin g the prov isions o f the Tax Code when they include paw nshops as amo ng those that arc subject to value- add ed tax. The Respondent. in hi s Answe r fil ed on Septembe r 26. 2000, interposed the fo llow in g Spec ial and Arfirm ati vc Defenses, thus: "8. Under Sec ti on I02 (a) of the Tax Code, as amended by R.A. No. 77 16. the sa le o f serv ices rendered by lendi ng in vesto rs ancl serv ices simil ar thereto is subject to I 0% VAT on gross rece ipts derived fro m sa id sa le. Secti on 4. 102- 1 of Reve nue Reg ul at ions No. 7-95 defin es a " lending in vestor" as includin g "all persons, other th an banks, non-bank fin ancial intermed iaries, fin ance compani es and other fin ancial intermedi aries not per!orming quas i- bankin g functi ons, who make a prac ti ce of lendi ng money Jor themsc ives or others at interest. " Since the se rvices of pawnshops arc simil ar to those of lending in vestors. the sa le of said services is subject to I 0% VAT. 9. The assess ment was iss ued 111 acco rda nce with law and reg ula tio ns.

Dt::C ISION- In "Co mmiss ioner of Internal Revenue v. Antoni o Tuaso n, CTJ\ CASE NO . 6 154 In c.",. 173 SCRA 397 ( 1989) the Supreme Court dec lared, PAGE '-I VIZ: 10. "A ll presumpti ons arc 111 favor of the co rrectness of the assess ment made by the Commi ssioner of lntemal Reve nue. and the tax paye r must prove th e contrary. '' 11. In '' Molina vs. Ra fTcrty." 37 Phil. 546 (February I, 19 18), th e Supreme Co urt anirmcd the dec ision in Farrington v. Tennessee, 95 US 679. 686 ( 1877). whi ch is quoted hereunder, viz: "When exempti on from taxati on is cl aimed, it must be shown indubitab ly to ex ist. The pres umpti on is always aga in st any surrender of the tax ing powe r. " 12. The Court of Appea ls' ruling in "Commi ss ioner of Intern al Re ve nue v. I Ion. Andres Reyes. et al.. " : A-G. R. SJ> . No. 28 824, whi ch dec lares that RMO No. 15-9 1 and RM C No. 43-9 I arc null and vo id fo r being a "taxati on by impli cati on," is still under appea l befo re the Supreme Co urt (G R No. 11 3459). As such, said ruling is not ye t fin al and executory. Clearly, the questi oned Revenue Mcmorancl um Circul ar/Ordcr arc still in full fo rce and cfTcct. 13. Secti on 2 18 of the 1997 Nati onal Internal Revenue Code prov id es, viz: "Sec. 2 18 . Injunct ion not Ava il ab le to Restrain Co ll ecti on. - No co urt shall have the authori ty to grant an injuncti on to restrain the co ll ecti on of any intern al reve nue tax, fCc or charge im posed by thi s Code." 14. The Suprem e Co urt in "O bill os Jr. vs. Co mmi ssioner of Intern al Revenue," 139 SC RA 44 1, rul ed that: "Taxes being th e chi ef so urce of revenue fo r the gove rnment to keep it runnin g must be pa id immed iately and without delay." (Co ll ector o f Internal Revenue vs. Yuseco, 3 SCRA 3 13) 15. Sec ti on II of Republi c Ac t No. 11 25 prov ides, viz:

D EC ISION - CT/\ C/\ SE NO. GI 54 PA GE 5 "Sec . II . Wh o may appea l; c iTcct o r appeal. - XXX XXX XXX No appea l rrom th e deci sion o r th e Commi ssioner o r Internal Re ve nu e XXX shall suspend the paymcnL le vy , di straint. and/or sa le o r an y property or the ta xpayer lor th e s ati s l~te ti o n o r hi s tax liability as provided by existing law. xxx" On April 10.2 001 , after the parti es have submitted their respecti ve memorandum . this case was considered submitted lo r dec ision. The vo rtex o l the co ntroversy lies on wheth er or not pawnshops arc subject to the pay ment o r the I 0% va lue added ta x. We rul e in the negati ve. !\ carci'ul readin g o r the di sputed prov isions o r the Tax Code becomes necessary fur the proper di spos iti on o r the issues, thus: "Sec. 157. \Vo n.ls and Phrases defin ed . - x x x (u) " Lending in vestor " includes all persons 1rho make a practice of lending money f hr themselves or others at interest. Sec. 16 1. Fixed Ta xes . - x x x (3) Oth er fi xed tax es . - x x x (dd ) Lending im �c:slors - I . in chartered citic:s w1djirst class nwn icipa/ities. one thousand p eso s : 2. in second and third class municipalities, .five hum /red pesos; 3. in .fourth and f!fih class municipalities and nwnicip a/ districts. !1 110 hundred .fijiy pesos: Provi ded , /'h at lending in vestors who do business as such in more than one pro vince shall pay a tux o{one th ousand p esos. XXX XXX XXX

DEC ISION- CT/\ CA SE NO. 6 154 PAGE 6 Sec. 175. Percenta ge tax on <.lea lers in securities, len<.l in g in ves to1�s . - Dealers in securities shell/ pay o tax equi valent to six (6%) p er c:enl q( their gross inc:ol/l e. Lending im�eslors shall pay o lox equi valent to j ive (5 %) per cent of their gross incol/l e. (Form erl y Secti on 11 6.) Pertinent prov tstons of Pres identi al Decree I 14 (Pawnshop Regul atory Act) arc likewise cited, to wit : Sec. 3 . Definitions. - As used in thi s dec ree, un less the co ntex t otherwise requires, the lo llowin g terms shall have the lo ll ow in g meanin gs: " Pawnshop" shall relCr to a perso n or entity engaged in the business of lending money on perso nal properl y deli vered as security lo r loans and shall be synonymous and may be used interchangeabl y, with pawnbroker or pawnbrokcragc. XXX XXX XXX Sec. I0. Roles ul interest. - No pawnshop shall directl y or indirectl y stipul ate, charge, demand . take or rece ive any hi gher rate or greater sum or va lue for any loan or fo rbearance than the rate all owed by the Usury Law fo r such transac ti ons. x x x" The a lo requoted prov isions wo uld apparently bo lster the theo ry of Responde nt that pawnshops are indeed lendin g investors because the principal ac ti vity of the pawnshop is lending money at interest. Thi s interpretati on by the Respo ndent was o iTicially decl ared in the now di sputed RM O 15-9 1 and RM O 43-9 1. both hereinbelow quoted, thus: RMO No. 15-9 1, Marc h 11 , 199 1 "A restud y of P.O. 114 shows th at the principal ac tlVlty of pawnshops is lendin g money at interest and in cide ntall y acce ptin g a paw n o f personal properti es deli ve red by the pawner to the pawnee as security lo r the loan. Clea rl y, thi s makes pavvnshop business akin to lendin g in vestor' s business acti vity whi ch is broad enough to enco mpass the business of lending money at interest by any perso n whether natural or juridica l. Such be ing the case, pawnshops shall be subject to th e 5% lendi ng in ves tor' s Lax based on their gross inco me pursuant to Secti on 11 6 of the Tax Code, as a me nd ed ."

DECISION- CTA C/\SE NO. 6 154 PAGE 7 RMC No. 43-91, May 27,1991 "Thi s Circul ar subj ects to the 5% lending in vestor's tax the gross income of pawnshops pursuant to Secti on 11 6 of the Tax Code, and it thus re vokes 131R Ruling Nos. 6-90, and VAT Ruling Nos . 22 -90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of taxpa),crs if the y arc required to pay the tax on past transactio ns, and so as to give meanin g to the express provisions of Sectio n 246 of the Tax Code, pawnshop owners or operators shall become li ab le to the lending investors tax on their gross income beginnin g January I, 19S I. Since the deadline l<.n the filin g o f percentage tax return (131R Form No. 2529A-O) and the payment of the tax on lendin g in vesto rs coverin g the first ca lenda r quarter of 1991 has already lapsed taxpayers arc given up to June 30, 199 1 withi n which to pay the said ta x without penalty. If the ta x is paid al'tcr June 30, 199 1, the co rrespo ndin g penalti es sha ll be assessed and computed from Apri I 2 I, I99 1. Since pawnshops arc considered as lending investors clTccti vc .January I, 1991, they also become subject to documentary stamp taxes prescribed in title VII of the Tax Code. BIR Ruling No. 325-88 dated Jul y 13, 1988 is hereby revoked." Both RMO No. 15-9 1 and RMC No. 43-91 had the cf!Cct of revoking 131R Ruling _Nos. 6-90 and V!\T Ruling Nos. 22-90 and 67-90 whi ch exempted pawnshops !'rom the 5% lending in vestor's tax. We do not however ag ree wi th the Respondent and lind that pawnshops arc not J subj ect to the 5% lending investor's tax and thi s has been we ll-settled by this Co urt in the case of Agcncia Exquisite of 13ohol, CTA Case No. 5990 pro mu lgated on March 14, 2001 and Tru stworth y Pawn shop, Inc. vs. Co llector of Internal Revenue, CTA Case No. 5691 promul gated on March 7, 2000 . In CTA Case No. 5691 entitled Tru stwo rth y Pawnshop , Inc. vs. C oll ector of Internal Reve nue promulgated on March 7, 2000 , thi~ Co urt ruled: " If we go by the contention that pawnshops are lend in g investors, then Co ngress wo uld not have been mi staken in treating the two separately under paragraph s (dd) and (//)o f Sec ti on 16 1 of the Tax Code, as amended,

D LC ISION- CT /\ C A SE NO. 6 154 P/\GE 8 supra. Logic simpl y di ctates that if by pri or definition und er Secti on 157 (u) o f said Code pawnshops and lendin g in vestors arc of the same class, then there is no rati onal bas is for differenti atin g them unde r one head ing later.--except for the f~1c t that they arc di ss imilar as tax subjects. Further analyzin g sa id Sect ion 16 1, supr .,, it appears that lending investo rs we re imposed a graduated type of fi xed taxes depending on the class of the city or muni cipality invo lved whil e paw nshops we re differentl y levied a fl at amount of tax. Thi s parti cul ar obse rvati on bolster Our posit ion that pawn shops arc not similarl y situated as lending in vestors. Congress wo uld not have intended otherwise, because the ac t of segregating and impos ing upon them unequal amount of taxes would transgress th e rundamcntal rule on taxa ti on on uni i'ormit y or eq uali ty enshrin ed under pa r. I, Secti on 28 of Arti cle VI o r our Co nstituti on. The rul e requires that all subj ect or obj ects of taxa ti on. similarl y situated, arc to be treated alike or put on equal foo tin g both in pri vil eges and li abili ties (Juan Luna S ubdivision vs. Sarmiento, 91 Phi. 371 ). It has also been interpreted to mean that all taxabl e arti cles or ki1~d s of propert y of the same class shall be ta xed at the same rate (City of llaguio vs. de Leon, 25 SCRA 938). Ve rily, Co ngress is presum ed to have acted in full knowledge of thi s particul ar constituti onal limitati on when it class ifi ed paw nshops apa rt from lendin g in ves tors." The Co urt of i\ ppca ls also had th e occas ion to rul e on the va lidity o r RMO No. I5- 9 1 and RM C No. 43 -9 1 in th e case of Commiss ioner of lntcmal Revenue vs. Hon. ' B. Reyes, Jt�., ct. al., CA-GR SP No. 28824 when it rul ed, thu s : Andres "xxx. Revenue Circul ar Nos. I5-9 1 and 43-9 1 arc nu t implementin g rul es but arc new and add iti onal measures which onl y co ngress is empowered to impose. Secti on 245 of the Tax Code has limited OJ confined petiti oner's powe r to iss uing rules and regul ati ons to impl ement or carry into effect the prov ision of the Code in the enforcement of taxes therein , and petiti oner cannot impose additi onal taxes not prov ided therein . Und er the Co nstituti on, the power to tax is sole ly vested in Co ngress. In issuing subj ec t Reve nue Circul ars imposing new taxes again st pawnshops, petiti oner arrogated unto himse lf legislative powers, with grave abuse o f di screti on and in excess o r j uri sd icti on." We do not sec any va li d or cogent reaso n to depart fro m the wisdom of the a fo requotcd dec ision o r the Co urt of Appea ls inso l~11� as it dec lares the in va lidity of RMO No. I5-9 1 and RM C No. 43-9 1 in th e li ght of clea r co nsti tutio nal prov isions. And sin ce

DE C ISIO N - CTA CASE NO. 6 154 PA GE 9 ...the deficiency VAT assessment iss ued against the Petiti oner is hinged on Respond ent 's conc lu sion that the former is a lending investor thus also subj ect to VAT, thi s Co urt ' s contrary ruling as di sc ussed above, e fTcc ti ve ly strik.es down th e said assess ment as being null and voi'd to r lack or lega l basis. WHEREFORE , in view of all the fo rego in g, the in stant Petiti on lo r Rev ie w is hereby GRANTED . Revenue Memorandum Circul ar No. 43-91 an d Revenue Memorandum Order No . 15-9 1, classi f'y in g pawn shops as lending in vestors, arc hereby decl ared NULL and VOID . Accordingly, Assess ment No ti ce No. 81-V/\T- 13-96-2000- 5-1 04 is hereb y CANCELLED and SET ASIDE. SO ORDERED . Lw ~ c~~ ERNEsTo D. ACOSTA Pres idin g Judge I CONCUR: ~A-NC.I O\Q~.~-Aa. Associate .I ud ge CERTIFICATION I hereby certil'y th at the abo ve deci sion was reached afte r due co nsultati on with th e members or the Co urt o r Tax Appea ls in accordance wi th Section 13, Arti cle VIII o l' th e Constitution . ~- ~ ct-y./L ERNESTO D. ACOSTA Presidi ng .I ud ge n, } 0' ' , j