CTA Case No. 4463 (Decision)

REPUBLIC OF THE PUILIPPINES COURl- OF TAX RPPERLS UUEZON CITY CONSOLIDATED ORIENT LEASING RND FINANCE CORPORAfiON, Petitioner��, C.T.A. CASE NO. 44~3 COJiftJtJSSJUNER UF JN.TERNAL REVENUE, Respondent. )( - - - - - - - - - - - - - - - - - - - - - )( DECISION This is a case involving alleged deficiency gross 30, of P725,G38.00 and P584,719.9l, respectively. leasing operations under the provisions of Republic Act No. 5980 otherwise known as the "Financing Coapany Act". Under its Articles of lncorporation, its priaary purpose is "to engage in the business of financing by leasing all kinds of equipment, machinery, vessels, airplanes, facilities appliances and all other types of real and personal property for whatever use through finance-related tr~ansactions ��� "C" and "C-A").

DECISION - C.T.A. CASE NO. 4463 - 2- On July 1, 1988 Petitioner received fro� Respondent a letter of de�and and assess�ent notices nos. FAS-4-83- 88-001795 and FAS-5-83-001796 (EMhs. "A"' "A-1" and "A-2'' > for alleged deficiency gross l"'eceipts and documentary stamp taMes plus increments, for fiscal year ending Sept eJJJber 30, 1983 totalling P1,310,357.93 coJJJputed as follows: Deficiency Gross Receipts TaM Gross Receipts subject to taK P35,388,885.15 5~ Gross Receipts TaK due p 1,769,444.26 Less: Quarterly Payment 1,189,173.84 Deficiency Gross Receipts TaK p 580,270.42 Plus: 25~ Surcharge 145,067.60 Co�pro�ise Penalty Total 300.00 p 725,638.02 Deficiency Docu�entary Stamp TaK On transfer or collection of proceeds of co��ercial paper: 1='32,025,930.56 M P0.24 = p 40,032.41 P200.00 On certificates of indebtedness issued during the year: P180,350,000.00 = M P(). 65 p 586,137.50 P2()0. 00 p 626,169.91 Total docu�entary sta�p taK due 41,750.00 Less: Pay�ent p 584,419.91 Deficiency documentary sta�p taK 300.00 Plu~: Co�pro�ise penalty p 584,719.91 Total Total a�ount due and collectible p 1;~310;~357.93

DECISION ��- C.T.A. CASE NO. 4463 - 3- ln justifying the above assessments, Respondent argued that "petitioner's alleged lease contracts are, in substance and sale, hence, covered by Section 42 of the 1986 Ta~ Code, as amended" The factual and legal basis of the gross <GRT> assPss�ent ,~e l i ed upon by the Respondent was dontained in the RPvenue Me�orandulll Repo�~t dated Apl~il 7, 1988 which stated, thus: The results of the business ta~ investigatipn at~e as follows: GROSS RECEJPTS TAX <GRT> (Sec. 120, N.J.R.C> - C.T.A. Case No. 3354, i.e. MAKATI LEASING AND FINANCE CORPORATION, Petitioner - Versus COMMISSIONER OF INTERNAL REVENUE, Respondent, which falls squarely on this instant case of Consolidated Orient Leasing.and Financing Corp. <COLF>, thus - "5. Petitioner's lease contract is, in substance and purposp, an install�Pnt sal�>; hPnce, it is coverPd by SPction 43 of the Ta~ Code, as a111endpd; "G. WhilE' PPtitioner maintained its books of accounts under the opPrating �ethod, in its financial statPment, it usPd th�> financing mPthod. UndPr the "oper~ating method", the entire rent income is recorded as income and depreciation of the leased equipment is claimed as deduction therefrom. Under the financing method only a portion of the amount received is considered income and the rest is treated as part of the cost. Depreciation is not claimed as deduction, the equipment being . 1400

DECISION - C.T.A. CASE NO. 4463 - 4- considered sold under the installment basis; "7. Some of the terms and conditions of petitioner's lease agreement are different from those of the ordinary contract of lease, to wit:. The 1 essee is .~equired to pay the i nstn~ance premium on the eqttipment; 2) The lessee, according to the agt~eement, is .~equired to pay "all licence fees, registration fees, assessment, charges and ta~es imposed upon the ownership��� sale, possession o�~ use of the equipment ��� " "8. In determining the real character of a contract, the purpose, rather than the name given to it by the parties governs." and the documentary stamp ta~ <DST) was based "per BIR Ruling of Commissioner B. Tan on the case of State Financing Centel~, Inc., the debt instruments issued by corporate ta~payer before October 15, 1'984 to secure bills payable, whether negotiable or non-negotiable, were considered certificate of indebtedness under Sec. 223 of the Ta~ Code and therefore ta~able at P0.65/P200, citing Sec. 9 of Finance Reg. No. 26 <DST Regulations>." <BJR RecoY�ds, p. 114) In a 1 ett e�~ dated July 1 '9, 1'988 received by Respondent on July 20, 1'988, Petitioner formally pt~ot est ed the assessments, saying: 1401

DECISION - C.T.A. CASE NO. 4463 - 5- We submit that we are a financing company engaged in leasing activities and operating under the guidelines of R.A. 5980. We don't have any merchandise being sold on cash or installment basis. Apparently, the e>eaminer included our lessees guaranty deposits in his computation of initial payments to arrive at the conclusion whether the transaction is one of installment or cash sales. This procedure, in effect, makes the guaranty deposit a ta>eable income on our part at the time of receipt. Please note that the guaranty deposit or security deposit is solely intended to ensure the faithful performance by the lessee of all the provisions of the lease agreement and is returnable at the end of the lease upon faithful performance by the lessee of the lease conditions. Thus, no ta>eable income could have been realized in the year the guaranty 'deposit was received. )()()( )()()( )()()( As mentioned, the e>eaminer made the assessment on the basis that the transaction is a cash sale per Section 43 <now Section 42>, NlRC, if the initial payment is more than 25~ of the selling price. A close look of the Section stated above, one wi 11 not ice that the initial payments apply to sale or disposition of Real Property and not to sale of personal property on a regular installment plan. The gross profit method of recognizing income without taking into account initial payments is allowed on sale of personal property. With regard the alleged deficiency documentary stamps ta><, Petitioner argued, thus: B. DEFICIENCY DOCUMENTARY STAMPS TAX ON TRANSFER OR COLLECTION OF PROCEEDS OF COMMERCIAL PAPERS P40,032.41 This assessment was made by, the examiner allegedly on the premise that the 14U2

DECISION - C.T.A. CASE NO. 4453 - b- act of surrendering commercial papers/treasury bills certificates to the bank upon maturity of the investment is still subject to documentary stamps tax. We submit that collection of proceeds of commercial papers/treasury bills is not anymore subject to documentary stamps tax and that only one tax shall be collected on each sale or transfer of securities from one person to another regardless of whether or not a certificate of stock on obligation is issued, endorsed in pursuance of such sale or transfer. Furthermore, documentary stamps tax, per se, is a tax on document and not on the transaction. C. DOCUI'1ENTARY STAMPS TAX ON INDEBTEDNESS ISSUED DURING THE YEAR- P584,719.91 This amount was arrived at by the examiner allegedly using Section 223 of the NIRC as basis. He subjected our Company's borrowings/loans at P.&5 per P200 citing as example the case of State Financing Center. In that case, we quoted hereunder the part of the letter which was used by the exa�iner as his basis of assessment: "Where corporate borrowings are derived from the general public designed to raise funds for use by the corporation for its business activities, the debt instruments are not promissory notes but partake of the nature of investment securities." <Underscoring supplied). We submit that all our Company's borrowings came from banks and other financial institutions only. These are evidenced by non- negotiable pro�issory notes wherein there is a 1403

DECISION - C.T.A. CASE NO. 4463 7- � clpan cut distinction bPtwPen the lendPr and the borrowpr. WP can neither borrow funds from the general public nor issue commercial papers to them becausP of Central Bank regulations limiting our creditors to only nineteen (19), our Company being a non~quasi bank financial intermediary. Furthermore, Revenue Memo Circular No. 33-8& a copy of which is hereby also attached, provides that non-negotiable promissory notes are not subject to documentary stamp tax prior to October 15, 1984. On May 10, 1990, Petitioner received from the RPspondent a letter of final denial of its protPst informing it that ''after carpful evaluation of the issues raisPd thPrein, this Office finds no ground to cancel tir even modify the same." <Exh. "B" > Hence, this appeal. The issues to be resolved are thP following: Whether or not the lease agreements into by the Petitioner are considered cash or installment sales transactions and hence, covered by Section 42 of the Tax Code, as amended; 2) Whethet~ or not the act of s\.wrenderi ng commercial paper for collection or procPeds upon maturity is subject to document at~y stamp tax;

DECISION - C.T.A. CASE NO. 4463 - 8- 3> Whether or not non-negotiable promissory notes executed by the Petitioner in 1983 are subject to documentary stamp tax. As regards the first issue, We are of the opinion and We so hold that the Petitioner is indeed a financing company engaged in leasing operations as evidenced by its Articles of Incorporation <Exh. "C"). ln fact, the present Respondent Commissioner herself in her BlR Ruling No. 241-93 admitted that Petitioner is engaged in lease financing when she said, thusly: "such being the case, your lease agreement model and its au~iliary contract as submitted to this Office ~eet the requirements to constitute the same as a finance lease contract pursuant to Revenue Regulations No. 19-86, as amended. " <Exh. c II II' Rebuttal, CTA Records, p. 151-152>. Hence, the contention of the previous Respondent of this case that the lease agreements entered into by the Petitioner are considered cash or installment sales necessarily fell apart as the idea was now debunked by the present Respondent Commissioner "herself. And rightly so. Not even the case of Makati Leasing and Finance Corporation vs. Co��issioner of Internal Revenue <CTA Case No. 3354> cited by Respondent's Examiner, Mr. 14u0

DECISION - C.T.A. CASE NO. 4463 - 9- Francisco S. de Guzman as the factual and legal basis in his recommendation for the assessments could save this instant case. In fact, We think that the statement of Mr. de Guzman saying that "the present case��� is parallel to the case of this Makati Leasing and Finance Corporation wherein the BIR won" <T. S. N. Hearing of February 24, 1993, p. 11) is Misleading. In the cited case, contrary to the statement of the Respondent's witness, ~he BIR lost the case. Said judgment of this Court was "AFF1Rit1ED in its entirety" by the Court of Appeals which ruled in part, thus: In this appeal interposed by the Commissioner of Internal Revenue (herein petitione":">, it is insisted that the agreements entered into by MLFC with the lessee (e.g., Exh. "C") were "in substance and purpose" installment sales although in the form of lease contt~act s. After due consideration and evaluation of the facts and applicable statutory provisions, We have found no sufficiently valid and convincing reasons warranting reversal or modification of the appealed judgment. <Underscoring supplied; CA G.R. SP No. 23578, November 25, 1992, p. 2) As to the second issue, We resolve in the negative. Respondent assessed Petitioner of alleged deficiency Documentary Stamp Tax on what the Revenue Exa�iner Mr. de Guzman termed as "transfet~ or collections of pl~oceeds of commercial papers'' purportedly under Section 225 of the 14u8

DECISION - C.T.R. CRSE NO. 4463 - 10 - 1983 Tax Code. However, a closer scrutiny of the said law reveals that there is no such specie in the Tax Code. Section 225 of the 1983 Tax Code is hereby quoted, thusly in part: SEC. 225. Stamp ta.)( on sales, agreements to sell, memoranda of' sales, delit-�eries o,~ transFer of' bonds, due-bills, certif'~cates of' stock. On all sales, or agreements to sell or memoranda of sales or deliveries, or transfer of bonds, due-bills, certificates or obligation, or shares or certificates of stocks ��� Clearly, it does not provide for a stamp tax on the s u r r end e t' o f com m!'! r� c i a~l--t:!p:.!::a~pl:!.e=..!.r'_.!...f~o:.!.r_=c~o~l~l~e~c=-t~ic.!o:!-'n~~o~f!...-__.pl:!.r~o~c=-e~e~d~s upon matur~ There being none, said assessment has no leg to stand on and should therefore be cancelled. In its desire to raise revenues for the goveJ~nment, the Bureau of Internal Revenue can only think of the weirdest "grounds" for assessment emanating from its wildest imagination to the detriment of the innocent taxpayers. We cannot allow that. With regard the last issue, again, We resolve in the negative. The legal basis used by the Respondent's Examiner in �assessing documentary stamp tax <DST> on non-negotiable promissory notes is Section 223 of the 1983 Tax Code which provides, in paJ~t:

DECISION - C.T.A. CASE NO. 4463 - 11 - SEC. 223. Stamp tax on bonds, debentu,.~es, and ce,~tif'icates of' indebtedness. On all bonds, debentures, and certificates of indebtedness issued by any association, company or corporation��� " The examiner, therefore, treated the non-negotiable promissory notes as certificates of indebtedness which is subject to documentary stamp tax under the above-cited law. We, however, are not prepared to accept the argument of the Respondent as it lacked basis in law and juri spr1..1dence. Petitioner's promissory notes are clearly not certificates of indebtedness having the form of investment secr..wities but pl~omissory notes in form and in substance. <Exhs. "E", "F" and submar~kings>. The law is clear and leaves no room for interpretation. We have no alternative but to apply the law as it is clearly worded. Moreover, under Section 229 of the 1983 Tax Code prior to its amendment by P.D. 1959 on October 15, 1984 provides that promissory notes are subject to the stamp tax only if negotiable. It should be remembered therefore, that it was only after October 15, 1984 (effectivity date of P.D. 1959} that non-negotiable promissory notes became subject to documentary stamp tax. But since the above-subject non-negotiable promissory notes were issued by the Petitioner before October 15, 14ua

DECISION - C.T.A. CASE NO. 4463 - 12 - 1984, it should, therefore, not be liable for documentary stamp ta:x. Lastly, needless to state that a ta:x cannot just be imposed by mere implication or without clear and e)(press words for that purpose. Thus, "if the intent or meaning of the tax statute is not clear, or is doubtful as whether a taxpayer is covered by the ta)( obligation, the tax law shall be construed against the Govern�ent because reven\.te laws impose special " but~dens. <Marinduque Iron Mines Agents, Inc. vs. Hinabangan Saaar, L-18924, June 30, 1964). WHEREFORE, in all the foregoing, the assessments issued by the Respondent are het~eby CANCELLED, the Petitioner not being liable to the alleged deficiency gr_oss receipts and documentat~y stamp taxes for SO ORDERED. 14UJ

DECISION - - 13 - C.T.A. CASE NO. 4463 WE CONCUR: C....,X\Jt� ~ ERNES 0 D. ACOSTA i ding J1..1dge . ~._�, I DE VE~ / Associate Judge ~ CERTIFICATION� I hereby certify that this decision was reached after due consultation between the members of the Court of Tax Appeals in accordance with Section 13, Article Vlll of the Constitution. ~a,~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 1410