CTA Case No. 4806 (Decision)

~<----- ' -....�"' -� HCPUBLIC OF THE PIIILIPPINt:S COLJHT OF TllX APPEnLS QUEZON CITY TOURlST TRRDC RNO TRAVEL C. T. A. Ca:.e No. L,OOE� COHPOH(.)TION 1 - )( - v l? r�� S U !.... -- COMMISSIONER OF INTERNAL REVENUE, Re:.pondent. X- - - - - .DEC IS I OI'J This is an appeLll by way of a ~etition fDr rev1~w from the decis1cn of the Commissioner of Internal Revenue denying petit i one1.. ' s fo1~ of the ~ssessments is~ued c~llcgcd unp~id income tax and valu~-added tax for the year !388 in the total amount of P38,955,5b5.07. P e t i t. 1 o n (;' ,~ 1 :; ~ domestic corporation duly and e H i s t 1 n !J t..m d e ~~ a n d � by v 1 ~~ t 1.1 c of the Ph 1 1 i p p 1 n e:;. '~ Incorpor~t1bn of pctltioner Th c At~t 1 c 1 e ;:. of on the b '.1 s 1 n e :;. s o f t o u ~~ i :. m a �n d t ~~ a v e l , t o development o f t Cl r.w i s t operate and malntain essential f a c i l i t i e s f t.ll~ t o m~ i ~. t an d 70

-- - lDECn!ION �- C.T.A. CASE NO. 4006 - 2- hotels, c:thet~ t o�.w J 5t. serv1ces; to t en�y boats to t t�an::. port tourist& and other persons 1n connection w1th <s e �> E >< h i b i t '" S" ) In t h i S p I,.W p 0 "S !? , pet1tioner leased the C1ty of Man1la 1n 1971 a parcel of land upon which a shopping complex was built now known a~ Harrison Plaza. 1 e a s e c o n t r� a c t ent1tled pet1t1oner to a lea!::.ehold right over the property for a period of tw~nty (20) year~ <seE' [ x h 1 b 1 t '' F" ) � I On J�.me 7 1 of by ,.. !? s pond ent demanding payment of and value-added taxes for the 1388 detailed as follows; A. 1 NCOME TAX - 1988 Net Jncoar prr return P20, 810, 2C!P.. 0(1 P 2,GB4,077.00 ~d: ~) !nc~ar from ~3.172,317.42 431 9B2, ;;,~'5. 42 S.'1 & Ru;tan'; b) Llnr!r::-hrrd ~46&~�.1 69?� ~~- 1&,_.-m, Jrl. oo rrntal inCCJf Ta11able [nca�e 835, ~6S. tJt~ P151 4'J8, 043.00 Tax drs~ th~reon , :., 3, 874,510. (J less: Talt pa1d 7, 71;':, 0.:?!. ::�~ Defic1ency [ncaae Tax P27,121,~75.2S ~dd: cJ~ Surcharge 9,489,839.17 PJ~.!i.u! _41_~~-~s- SQ1. Surcharge Total Add: [ntere>t fra: 4/16181. to &/15/31 <34. 99) Tatdl A�cunt Due d.nd Cotll!ctiblP 71

!DECISION - C.T.A. CASE NO. 4006 - 3- , B. VALUE-f"IDDED TAX 1988 .. . Ba~ic Tax !PlO,l03,S5B.b4 x 1/lll P ':JlB,545.33 Add~ ~m Surthargr 45'3, 272. t�7 i'51 Surchargt Total Add: [ntere~t fro� l/20/31 to &/15/91 t~S.BJ> 735, E,:J�.~ 3~~ Total Atount Due and CollectLble �1 P__s_J44_1 12~� On l'J'Jl 1 petitioner' filed <t l�' t; t (' ,.. r�espondent n?quest 1ng t- P 1 n v P :; t t 1 ~1 ,-:~ i. on f reconsideration of the findings made by 4 regarding their tax liabiliti~s~ Th i-;; r c�q tJ est fOI'' per�1 ud reinvestigation was well within the prescribed by law as July 7, 1991 thus it was finally filed on the next wori(Jng rl..�li' �..lhtch July 8, 1991. On Apt~il 20, 1392, petitlonet.. t�ecet�.-l:r.J ,- E' s pond en t deny~ny q ,. f� ~; r ,- 'J>" ,.. 12 i n v e !:� t i g at 1 o Tl � ThE' ,�. P rn .:-1 � 1t .:.' �" t I, o ~:vents which led to the ,~ejection of ~' f pet 1 t i one,~. Responden~ maintains t h Cl t. S IJ L ! I r� ' l.J 'J ( �;. \: t 0 t.. t_l ,- n t; v r r�� )" i? c o n s 1 r.:! e ,~ tl t : o n � th i ~. that it <: o 11 u n d o v e t" t h �? d t' c '-' r<1 ~! n t s L1�.; t BJH 0 f f 1 C'l' ,~ s 72

lDECISION - C.T.n. CRSE NO. 4006 - 4- investigation as i t was the month of December and th~re was th~n a temporary ban on tax invest1gat1ons. From th1s d~nial, pet1t1oner elevated 1ts case to this Court on May 19, 1992 pray1ng for the null1fication� of the aforemention~d assessmpnts. Dur1ng the hear1ng of th1s cas~, pet1t1oner wrote letter to the respondent, dated June 21, 1993, offering to settle th1s d1spute by requesting that it be allowed to pay an amount equivalent to 30% of the basic tax due. Respondent has not taken any actionfwith respect to this offer of comprcm1sc made by petit1oner. The issue that confronts this Court is whether or not pet1tioner is I1able for the payment of unpa1d 1ncome and value-added taxes as its tax l1abi11ty for 1988. However 1n resolv1ng this 1ssue, a far more complex task ahead wh1ch an analys1s of the theorJes formulated by the BIR examiners leading to the quest~oned assessments. R portion of such assessment p~rtains to the rental5 paid by Shoemart and Rustan's which respondent insists beloHg to petit1oner and as such are '~ to be cons1dered part of 1ts income. hav1ng received the rentals from these two establishments as 1ts income because it claims that it does not wholly own Harrison Pla~a. ln fact, it stressed that there are two other corporatlons who share ownership with them and 73

!DECISION - C.T.A. CRSE NO. ~OOG - 5- that. the spacE's leased c:md OCCUpl!?d by R�.:st an' s and Corporation <MMC) belong to l' :> :::. p e c t i v e 1 y , and Plaza Aml..&sement Co., lnc. <PRC! >, the c on c 1 1..1 s i on of the BIR examiners a3sess1ng them for income wh1ch two aforecit~d corporations is mi sdir�ected. pet1t1on~r refuses the asser�t ion of rt'::;pondent that PACI sister companies as they have no common stockholders or stoc~: own t'l' s. To pt'ove the p o i n t s s o fa l' the lease bc�t.ween the City of r�ian1la and p e t. i t i on P ,~ <E>:h .i. b1 t "F.,> ; the cant t"act s of e>nt l?t'ed into between petitioner and 1'1�.11 t i pl ex fl1m�k et in g Corporation and Plaza Amusement Companies Inc. subleasing portions of the lot leased by pet1tioner from th11 C1t';' of 11anila <Exhibit:::. "G" and "H" ) ; At�t i c 1 e ;:, of of the and PACI (Exhlbi't:s "Q '~' �~ R" and "S", r-espectively). �This Co�.wt. finds that the t�ental incoml:' from Rustdn' s and T h e D 1 R )' E' c o t' d s by them �:W. s �.I b m i t t c d do not belong to pet1t1oner. indicate that originally petitioner was the l I?SSOt' of ';he space occ�.1p1 ed by Ru:.tan's and a lea~e was eHecuted on S~ptember 5, 1983 whereby Rustan's Commcrc1al t 0 PCI')' mo n t h 1 y l' e n t a 1 :. to 74

1DECISION - C.T.n. CASE NO. ~006 - G- ?Ptitioner as le~sor <see page 173, on January 15, 1985, an assignaent of ownership and lease ,~ i ght s the building was :tnto petit i onet~ and 1'1MC <see page 169, petitioner assigned the ownet~sh i p, and obligations over the building rented by R u s t. ;:l n ' <:- 1 n r ~" v o ,~ of Multiple>~ The cons i d et~at ion f OJ~ S'I.IC'h assignment to t'nabl f:' petit i onet~ to pay 1'1MC for the financial tJ e x t end e d by the 1 at t e ~~ t o t he f o ~~me i n t h e c C'f 1 s t ,- u c t i or-: o f t h i s p a~~ t i c u l a ,~ b u 1 1 d i n g � A s a c o n s e q �.t e n L P D f t h t' assignment, MMC assumed the rights of the pvLit1oncr lessot~ to Rustan' s whet~eby t h E' 1 at t e ~~ pai ll Mf'1C the of the st. Ll ~- t. :i 1! l] !�; 1 m ~ 1 .-~ ,- 1 'I , a "1s::-:1gnment. of lt'i~'c�.� ,. 1 g h t s o v e r t. h t' builchng occupied r71nd J"'f!Td:��c' t_.,. ,_.J.::JS ('">!E'CUted between petitioner an cJ t h r; ;::� 1 ,,, .: i\ Cumpanies, Inc. <PAC I> on Decem be,~ 2'�' .\ 90''. a::. si gnment ha:J identical arrangements t. h i3! l:r? t HI? e 11 pl?t 1 t 1 onet- and MMC, thu~ rentals were ttl petitioner but to Thr.: con c 1 1.1 s i on of t he Rev e 11 u v. Exam 1 n!? ~~ s 0f onl '/ papet"' nr..�t i n fact. be c <.t �.1 ~� e the f i nan c ' r:tl �, t. << t c mP rd. of '' rrt a~~ k e d n o 1ts cq�.:: pment 75

!DECISION - C.T.A. CASE NO. ~BOG - 7- acco\tnt. 1 n 1 '38::, when the alleg~d ass1gnment took place" i ::. No of thE' buildings occup1ed by Rustan's and Shoemart were effected but merely assignments of the rights of ownership such as the lease rights to enable petitioner to pay the debts it to 1'11�1C ;.=md no in the '' b u i 1 d 1 n g " accounts of M1'1C and PRCl which could 1n their financial statement::.� reflected however in MMC's financ1al ::.t .:.<t em en:. in 1385 was the Rustan's as a result of the ass1gnment Bl R recot=-ds >. 1 n con c 1 1.1 ::. i on, we f i n d t hat p E' t i t i 0 TH'1~ i S not l1able for the income tax corresponding 1ncorne generated from the leas�.' of the bu1ld1ngs occupied by Rustan's and Shoemart. The second aspect of the as5essment by respondent concerns the alleged undeclared rental o f p e t i t i o n e ,- in 1:?88 in thE' amount of P23, 172,317.42. claims t.hat thi ;:. amount corresponds to the s 1 x-m onth ,~ental d c po ~.it.::. given by 1ts shot,ild not be 1ncome frn- tht> fo!lo~t~.ing 1) ih E' cJdvant::e rentals rece1v~d by p e t 1 t i o n e ,~ a s l e s s o ,- .:n- e ~v~ntually returned to 76

!DECISION - C.T.A. CASE NO. 480G - a- the less~es on a quarterly basis lifetime uf the lease contract; 2) The rental deposits : ntact. during the lifetime of the said contract and are to be returned to said lessees upon the expiration of the contract. PE't 1 t i onet~ evidencE' sample5 of lease contracts with some of its s~mples having been picked at random by the C ~-' mm 1 s s i on r. l" appointed by thE' among the c u n t ~~a c t s s '�' b mi t t e d � All of the lease selected i"lnd eventually offered as evidence provide the following: �f 5. Upon the e~ecution this contract, LESSEE shall deposit in ~ash with the LESSOR an amount eq ...li valent to 6 months Rental Deposit and 5 muPths Rent a 1 Advance t o be I" e btl t. c cl on q u a l" t e t" 1 y b a s i s t h t" o ugh o u t t h P. 1 e , ' ~. P. pel~iod e~~. imposed in this Co�tb��,:lct which shall be non-intP.rP.st. ~r~r1ng a s. a g u .:n-an t e ~ t o s e c �.n- E" t 11 !' f ,... �: : h r �J 1 c o rr. rll j ,;~: w c by t h e LESSEE {) r "' .1. 1 1 ��) r;� coven.:Ftt.~ and conditltlT�'~ �.f ~.!,j:; cont.t-act and to .;~nswet- fo�� �~-~--1i�1~;r-:.. whJcll m,;~y bP sufFC'I"P.d b/ \.'�(� ! CSr.fJH .:t n d s u c h o t IJ e t" rr. o n �! t .-::u�� 1 1 :: , : !.1 : � : t .t c ::. and oblig~tion:, as. th~ LL':;:;r:: ,.,~,�,� have �-� n d c ,- t. h i s Contract � 1 �� :~.. � :. F r.... an y I" e n t a 1 ad j 1.1 s t me n t , t. !-: c ,.. e �:. ! ; ' ' 1 ~ '.J e a coJ~t~l'spondlng adJJ,.IS.tmPnt. 11� ~.he !:d.> C J,.W l t. 'y' d l> p 0 5 i t , p r 0 p 0 I' t .\ (:ll d t r� ~ :.1 t h e i nc,~~.:-t::.e. Said s.ec~wity deposit ~.t:~<.d 1 r<~d. ~:�c appl :ied to any unpaid t.. ,_.,,t,,' ..11,tJ :.hall be l~ept intact th,.. o�.qJ!lu�.;: Ll�tt t.Pt"m or the Contt�act <.utd s.h.:t11 be ,~et�.wned to the LESSEE "'.'lt.lrc��.r: 1 n t F r�!? ::� t on 1 y '-� ;::ron t h e C' >< p 1 1.. �Tr. :: u n ~; f this LP.ast> Contt~act ,�lf\.!~,- !.. CSS[E shall have complt::t.P.l'l .:�nd and 77

lDCCl.SION - C.T.O. CASE NO. 400G 9- redeliv~red the Leased Premi~~s to th~ LESSOR, less whatever amount LESSEE may owe LESSOR or what may be due as payment of unpaid bills by LESSEE. Should LESSEE terminate this Contract b e f o ~~ e i t ~" e x p 1 l~ y , f o ,~ d n y c .:H.I s e , o ,- ln any case of a breach of any term or cond1t1on of this Contract, the security deposJt shall automatically be fol�feited without pn:�judice to th!:' LESSOR's exercise of h i s ,. i gh t s i n accordance with Par. E.-E of thi :. Contract, provided that LESSEE's l1abil1ty for any breach of th1s Contract or any obligation on the Leased Premises shall in no case be l1mitcd to the Iamount c1f said sccur1ty depos1t. In .c~ddition, of statements of account 1ssued by petitioner to 1ts lessees it gave to its lessees corresponding to the security advances the latter mac.! e at of the lt>cJse pe~iod as stipulated 1n thE' contt�act. <see E><h1b1ts "X", "Y", "Z") A review of the evidence presented convince Us that thE' assessed undeclared income corresponding to the s~cur1ty advances and security deROSlts sho�.1ld not bE' c on s l d En~ e d as 1ncome for- tax n a t. '-It~ e , t h e r:un o ~m t ~~. b y " t h e p e t i t i o TH.' l~ e i t h e ,- as ~~ e c �' i v e d s c E' '.lt' i t y advances or deposit i~ eventually returned to the lessees hencs petit1oner d1d not E'arn any ga1n profit therefrom. In the ca~e of Madrigal V �.. '-'� 78

l DEC IS IUN ... C.T.n. cnSE NO. 400G -� 10 - 38 Phi 1. the Supt��em�> defir-:r?cJ �. nc.: :.� mc follovJs: 1nc.::om' as contt~asted with cap1 t.al or� pr~opt?r~ty is to be the t e s t . Thv f's!:>c;�tia1 diffprence bFtween capital and income is that Cap 1 t a 1 i S a f l.lrl d j j n CD m!? l !:� a f 1 D W. (.1 f U r ; d D f property ~?Misting at an instant time is c~~led capital. A flow of services rendered ~y th~t capital by the payment of money from 1\ o,� ..Jny o t h e r ben e f i t ,- e n d e t� e d by a fund o F c a p i t c"'- ~- i n relation to such find through a period of ti~e is called income. Capital is '"11.?<1l!;h, �.1hi :.c income is the service of wealth. <See Fi -'"le1�, "The Nat\we of Capital and Income.") Thp Supr~eme Com~t of Gt>or~gia expr~t>sse~ the; th('~.tght in the ftdlowing figa.wat.ive language: "Tilt? fact is that pr~ope,~ty is a tr~e~, 1ncom�' 1: th�? f,~ ..l i t ; labo�~ is a tr~ee, . inco!Pe the f, .. u i t ; cap i t. a 1 :i s a t ,~ e e ' i n c (I me t h e f r"' i t � " n: c1 ,~ i f1 g vs. City of Savannah [1878J, 50 G~., '33. > e. t �.l x on income i s not a tax on p.J.:: o p ,, ~-~ "In'comt>," as het~e ust?d, can be dt?flne.r:1 M'"� "profits or gains." <London County Counci: vs. Attorney-General [1901J, R.C., 2G; 70 L.J.K.B.J'J ..S., 77; e.3 L.T.N.S., �.(>~!; ~~~J ~-:t:''~~! .. Rep., �,[:1�,; 4 Ta>< Cas., 2G5. See ft�"�tf�tT F o 5 t e ,~' s l nco me T a 11 , s e co n d e ch t t on L \ � � 1 :~, 1 , Chapter~ 1'J; Blacl{ on ]rJCt�me T.:<'<P.S, :�,:cu:HJ !:.>dit.ion (l':315J, Ct1apter~ ' J i l l ; Gib-!:.on~, v:.� ~��,:.r�c�Tl [1890], 13G U.S., 5'�9; and Towne �n.. El.t� 1:r:����, dccid(.>d by the Un1 tl?d States Supt�pr.c :.;.�,wt., Janu~ry 7, 1918.) <Underscoring oursl In the :instant case, the s e c ur~ 1 t. ,. d ( �-~� 0 ::. J t s stipulated are to the to the the cont ,~act; lesser:- a s p::~yrr�.Pnt of �~ <� cl v il r : t: c :;. �"~ t~ E' l. 0 1 P. s s o�.. 01~ what. may be d\.lf.' b�,.. ~.:ill:-. 1Psscp''. bf::' , .. I? !J i:l t P d G 7� q t ~1.:.1 , �. l' , .. 1 y bt.:-1 !:'� l S l:h�"O �.1qh (I''\. ~. t ( l 79

lDECISlON -� C.T.A. CASE NO. 4806 - 11 - Th~ last part of the ass~ssment i ssu~d by n?sponde>nt 15 for f 01~ 1 98B 1 n the� amount of P2,3'14, 150.G5. R~ spondnYt that u p r- t 1 t 1 o n !? ,~ ch ;:1r~ e ~� ::. t s fot~ e 1 e c t l~ i c i t. y , cantlitioning, w~"\t ~r, common f L\C i 1 i t i e ;, .:1nd services based on the floor area occupied by ~:� ach -~ c nan t and 1t is h1s content1un that such servic~ subjr.ct.ed to t .:l.H. mLl:intains that the made.� by it::. re1mbursements for whatever advance~ it had made for the w., paym!?nt of c 1 r! c t ,~ i c , t e ,~ , and tele>phone bills and for� the j an 1 ~ o 1~ 1 a 1 :; t? ,~ v 1 c c s p .~ 0 v l d !! d � In c>ffect, p e t i t i c' n e ~~ 1nsists that they are not the ones directly providing fur these serv1ces thus they cannot be made liab]~ for valu~- We agree with the petitioner. Evidence adc::htc cd the trial IIJ C 1 1 a::. te~.timon1es madt� by "Vntne~.ses l" e v e a 1 t h L1 t a} 1 c 1 c,� ct I" :i c, t!:?lephone bills 'VJ!? 1 1 as f Ol~ t h!? maintenance of common �facilities and pdt1tioncr and the '~l security S!:?rv1ces w~?re all pa1d by the ill~e made to the::.e advances... made 1n accordunce with the lease agreements .. T- 3 '' , "T- 4 " , "T- 5 .. .:.utd "T-5"). Fot~ instance, the whole Harrison Plaza compl~x ha5 only cnc electric meter~ in the 80

lDEC IS rON -- C.T.A. CASE NO. 430G - 12 - of the pet i t i one,., hence init.l.ally lt the petitioner who pay~ for all the electric b1lls ilnd since the tenants the i ,. in the be d c t e r� m i n e d by own i n d i v i r:l '�' .:1 1 Section 99 of the Ta~ Code provides the following: Person� liable - any person who, 1n the cours~ of trade or b~siness sells, barters or c >< c h a r, y c :.; g o o d ;:. , t" e n d e ,. s s e l" v i c e s , o ,. e n g a ;; !:' s in similar tr~nsact1ons and any person who lmports uoods shall be subject to the value- udded ta>! <Vf.lT) I impo!:.ed in Sections 100 to 102 of this Code. lt 1 s the that docs not fa l 1 �.1nd et� the of the 1aw. 1 s not the petit i one1� who suppl1es elcctrlcity, good::. t.o the Je>sse�:�::., nrnthet� docs it render security ilnd l�Jh at. pet 1 t 1 onet� d0�.>5 1 =� to PLDT, Meralco, MWSS and similar other establ~~hmcnts the Sl'TVlCe::. that goods th.;~t :;..._, p p l y f o ,. l h e whole Harr1son Plaza Complex. reimbursements sought from the tenants for advances made by petitJoner are not ~ubj'~ect to value-add~d ta><. WHEREFORE, judgment. i s r� e n d c r e d in fa VOl' o-F the pet 1 t ion ET. The presumption in favur of the of the assessments issued by the respond~nt for alleged 81 -

nn: J~;J nN � C.T.n. COSE NO. ~OOG l3 ~- ::.1 �' 1 i il !J ~ 1 i t: / , . , r r ~ :.:� J e n t- .� . cv.it~C'PL'C' .. nc c 0 r� d j n ~j 1 :r', Cummissie;lcr CJ n d cl E' :, i s t f t~ 0 rn E' n f t; ,. c : ' ' !:J ': ' r t, "' ;:. :. E' ;, s mc n t. s f tJ r� t. h e ~,~~! SO OHDERCD. nr '.:7:?Pn WE CONCUR: ' .' : v RAMON0.~� J ~._:;;;; (.9' C'~ A!:� s CJ c.i '-' ERNESTO D. I / I I C E R T I r=- I CAT I 01'-J I cet"!;ify that thi.s '1j. t: r r � : n accol-d~�r\l;:~~ ~>Jith '.: ,- ~ h P r. on .:_, L 1 t� u t i (J n. ~-M::UJ.Q~ ERNESTO D. ACOSTn P :~ I=' s i tJ i n y J q d :t.; c n C o :.It' t u f T i:�~ ~r F ;:~ ,. ,, ~ :. 82