CTA Case No. 3532 (Decision)

~U9LiC OP rHol FIUUI'I"t ., \.!OURT OF T � P ~ QU:U:ON Cl"t? MANUEL L. QUEZON EDUCATIONAL INSTITUTION, Petitioner, - versus - C.T.A. CASE NO. 3532 THE COMMISSIONER OF INTERNAL REVEJUE, Respondent. X -------- - --------~---- - --- X DE C I S I 0 N This is a petition to review the decision of ~ es- pondent Commissioner of Internal Revenue dated September 30, 1981, assessing against petitioner Man-uel L. Quezon Educational Institution, the sum of Pl,737.61 represent- ~en tage ing deficiencyzd and taxes, interest and pena l ties for the fiscal year ended March 3l i 1978. Petitioner is a domestic corporation which operates t he Manuel L. Quezon University with offices a t 916 R. Hidalgo, Manila. Pursuant to Letter of Authority No. 11536 NA dated March 15, 1980, respondent ' s examiners cor;cuctecl an investigation of the business tax aspect of petitioner for fiscal year ended March 31, 1978. Upon verification, I 11 0

DECISION - CTA CASE NO. 353 2 2 said examiners found that no percentage and fixed taxes were paid by petitione r on its receipts from sales of examination booklets and rentals from typewriting books. Consequently, respondent ass es sed and demanded fr om petitioner the amounts of Pl,055.41 as graduated fixed tax for the fis cal y ea r ende d Marc h 31, 1978 and ~682.20 as fixed and percentage taxes as contr ac tor for the same year , inclusive of surcharge ar. J interest, or a to tal of Pl,737.61 compu ted as f ollows: (Annex "A", p. 5, CTA r e cords) 1 . Graduated Fixed 'Tax on Sales Gross receipt s � � � � � . :Pll5,005.13 Gradua ted f ixed tax due .. 500.00 25%. surcharge 125.00 625.00 14% int. fr. 4 -20 -77 to 7-30-80 286.77 20% i nt. fr. 8-1- 80 to 7-21-81 143~'64 ft 1,055.41 2 . 3 %.- cont ractors tax Gross receipts � . p 7, 4 39. 65 3% tax due the reon . 223.19 25 % surcl1arge 55.80 - - - 2.78 . 99 14% int. fr. 4-20-77 to 7-30-80 128.01 20 % int. fr. 8-1- 80 to 7-21-81 64.12 4 71.12 3. Fixed tax as contractor FY 3-3 1 -78 � . . � � . . 100.00 25% surch arg e � . � . � � 25.00 - --125.00 14% int. fr. 4-20-7 7 to 7-30- 80 57.35 20% int. fr. 8-1-8 0 to 7-21-81 28.73 . 211. 08 TOTAL AMOUNT DUE AND COLLEC TIBLE l;1 1,737.61 In a lette r d ated November 26, 1981 (pp. 30 and 31, BIR re cords) ., petitioner re que sted reconsideration of the 111 I

DECISION - CTA CASE NO. 3532 3 assessment asserting that these activities of the University are related s chool activities within the provisions of Section 24 of the National Internal Revenue Code. However, the request was denied by respondent in a letter dated August 31, 1982, which was rece ived by pet'tioner on Sep- tember 22, 1982 (Annex "B", p. 7, CTA records) �. Hence, petitioner appealed to this Court. The basic issue for res .)lc _ion is whethe r the activi- ties of petitioner i n selling examination �booklets and . rating typing books to students are subject to the afore- said deficiency business taxes. The graduated fixed tax was assessed agains t ~eti - tioner for selling examination booklets to students pur- suant to Section 192(2) of the National In-ternal Revenue Code, the pertinent portion of which reads: "SEC. 192. Fixed taxes. XXX (2) Persons not subject to r;:e.rc~_nt�.ge tax. - Every pe rson who is not required to pay the per centage tax prescribed under this Title shall pay for each taxable year in which the person shall engage in b~siness a fixed annual tax based upon his gross annual sales during the pr eceding taxable year, as follows: XX X XXX Five Hundred pesos , if the amount of the gross annual sales exceeds one hundr~d thousand pe s os but does not exceed one hundr�d fifty tho usand pesos; xxx xxx" while the fixed and percentage taxes were imposed upon petitioner for renting typewriting books to students, 11 2

DECISION - CTA CASE NO. 3532 4 pursuant to Sections 192{1) .and 205(17) .of the same Code, which are quoted insofar as applicable hereto: "{1) Persons subject to Qercentag,g_~ - Unless otherwise provided, every person en- gaging in a business on which the percentage tax is imposed shall pay a fixed annual tax . of one hundred pesos". "SEC. 205. Contractors, propriet:.�E...�. or operators of dock~ards , and others. - A contractor's tax of three E~r cen~~E!! of the gross receipt i~ hereby imposed on the following: XXX (17) Lessors of personal property, except non-resid~nt owners of property subject to the final tax unde.r. Section 24 (b) (vii) of this Code." Petitioner assails the legal ity of the assessment of the above taxes contending that it is not liable for business taxes as its continuing activities in selling examination booklets and renting typewriting books to students are not and have never been conducted for profit, but are undertaken purely in aid of its function as an educational institution; that its purchase of examination booklets and the sale thereof to studen~s for use in examinations given periodical ly during each school year is designed pr imarily to prevent anomalies and inspre clean and orderly examinations~ and that whatever amounts char�ged to students for the purchase of the booklets \1ere barely sufficient to defray the cost of said articles a nd overhead expenses in the handling and distribution thereof 11 3 I

DECISION - CTA CASE NO. 3532 5 to students. It is argued, likewise, that petitioner has never been en~aged in business as contractor for leasing books for profit, apart and distinct from its operation as an educational institution; that the practice of renting books specifically typing books to students of the secre- tarial department is to lessen the financial burden of said students and not with the intention to profit from the leas e of said books; an d t~ j t in fact, petitionff has been consistently sustaining losses in the renting of these books as well as in the sale of 'elamination booklets by reason of the ov~rhead expenses in the handling thereof. In his answer to the petition for review, res~ondent alleges as special and affirmative defenses that the activitie s of petitioner az~e business tran~actions separate and distinct from the operation of an educational insti- tution and are not related school activities in accordance with Section 24(a) of the Tax Code; and that the design, motive and purpose behind these activiti~s however noble they may be, do not negate the fact that petitioner is engaged in selling examination booklets and renting books for�a fee. ~ Respondent is in error. The subject activities of petitioner are not business transactions separate and distinct from the operation of an educational institution but are related school activit ies in accordance with 11 4

,� DECISION - CTA CASE NO. 3532 � 6 Section 24(a) of the Revenue Code, and the purpoce behind these act ivities is determinative of whether petitioner is engaged in the business of selling examination booklets and renting books. The pert ~nent portion of Section 24(a) of the Tax Code reads: "Private educational institutions, whether stock or non-stock, shall pay a tax of ten percent of their taxable net ir' ~a . ~ from the operation of the schoc l 9 related school activities, and on their passive investment income consisting of interest, dividends, royalties, and the like: Provided, however, that dividends received by a private educational institution, whether stock or non- stock, from a domestic corporation shall be subject to the inter-corporate dividends tax under s� b- section (c) hereof." In his letter to respondent dated November 26, 1981 requesting for reconsideration of the assessment, peti- tioner's auditor explains the nature of petitioner's ac tivities in question as follows: (p. 31, BIR records) "Distribution of examination booklets. - For purpeses of simplicity, uniformity,-aDd more importantly economy of large scale, the University undertakes the p r ocurement of examination booklets and some laboratory supplies for t he benefit of its students. The amount paid by the students is barely enough to reimburse the costs to the University. .. Before a student is allowed to sit down in an examination he is required to obtain from � the administration office an examination booklet which also serves as permit to take an examination. Furthermore, the Universitv does not operate a store that sell these it~ms indiscriminately to the public. 11 5

.� DECISION - CTA CASE NO. 353 2 7 Lending of books. - Certain books pres- cribed to be used a~e too expensive for some s ecretarial students to buy. For reason of economy, some students prefer to pay a nominal amount as reimbur sement for the use of the University books. , It is only the secretarial department where some books are lend to students of its own department. 11 It is not controverted that petitioner sells exa- mination booklets only for the benefit of its students for purposes of uniformity, economy and for the prevention of irregularities, at an arno:mi barely sufficient to reimburse the costs to the University~ and that it does not operate a store that sells these items to the public. It is not also disp~ted that these booklets serve as permits to take the examinations, which are part 3.Ld parcel of a school's operations. Clearly, the sale of examination booklets to vetitioner 1 s students to be used ~ ~ exclusively for said examinations, is a related school activity. Similarly, the renting of typing books to students only of the secretar ial department of the University. is also a connected school activity . These books are not regul ar school books but are primarily� for clas s room study, to be used for just one semester, and are depre- ciated over a period of two years or four semesters (Exh. "A", petition er 1 s envelope) ,as the pages are of newsprint only. (See Exh. 11 B", petitioner 1 s envelope.) 'rhe p(upose 11 6

DECISION - CTA CASE NO. 3532 8 behind this activity is to enable students to make use of these books at affordable prices, since the rent charged for each book hardly covers the cost of the book and its handling expense. Certainly, the renting of these books to petitioner's students for reasons of economy, to assist them in their typing studies, is plainly a related school activity. To prove its contention tt ~t it carried on the activities in q L; estion with no motive of profit, peti.- tioner presented the statements of income from sales of examination.booklet~ and from book rentals p~epared by its Assistant Chief Accountant for the school ye2cs 1976 t o 1 977 , 1 977 to 1978 and 1981 to 1982, showing losses s us ta ined i n these activities. The statement for the school ye a r 1977 to 1978, the year involved, is reproduced hereunder: (Exh. "A", petitioner's envelope) SCHOOLYEAR 1977-1978 I. Exam . booklets school supplies,& I.D~ Sales of exam. booklets , suppl ies & I.D. ~115,005.15 Less: Cost of booklets supplies & I.D. ~75,987.77 Salary & Living Allowance personal handling booklets, supplies & I.D. 38 , 472.00 Depr eciati on of Laminating Machine, cost of laminating mat .rial & � electricity 2,000_.Q.Q 116,459.77 Loss on Sale of booklets, supplies & I.D. cards (P 1,454.64) 11 7

DECI S I ON - CTA CASE NO. 3 53 2 9 . Arts Law Note : Se lling p rice of boo klets El 0 .25 ii 0.70 Cost 0 . 18 0.-5 7 Ov e rp r i c e �l 0. 07 :El 0.13 Selling price of the s is paper ~50 . 00 Cost Over p r ice 47 . 00 ~ 3.00 Se l ling price o f I. D. Card p 0.95 Cos t 0.50 Overp rice ~ 0.45 II. Book Rental Renta l I ncome It 7,439.65 Deprec i ation 15 0% o f Cust, �3,923.00 7,862.00 (P 422.35) Salary of cle.r k 3,939.00 Gain (Loss ) Note: The To tal Cost o f the typing books is ~7 ,846.0~@ ~ 19. 8 0 p er unit. The book is paper bound & made of news ~rint. The books are de' rec iated over a peric1 of 2 years o r 4 seme sters. No t e t ha t the overprice on the items sold to stude n ts was n o t e n o ug h t o c ov er the cost of the items and the ha n d- ling e xpense s, result ing in l osse s from these activities. Th e st a teme nt of inc ome fr o m sales of examination boo k l ets a r. d fro m bo o k rentals for the school year 1976 to 1977 , (Ex':l. "C-1" , pe t itioner's envelope) likewise r ef l ected l o sse s fr om these a c tiv i ties in th~ � amounts of ~1,630.79 and � 824.9 5, r e s pe ctive l y; and t hat for the school year 1981 to 19 8 2, losses in the ~mounts of ~1,625.45 a~d ~580.35, . r es pecti ve l y. (Ex h . "E", p . 6 9 , CTA records).. 'I'he veracity of t he above statements was not impugned by respondent . Re sponden t, however, i nsists that when petitioner conduc ted the aforementioned activit i es for a fee, it is 11 8

DECISION - CTA CASE NO. 3532 10 deemed to have eng aged i n business subject to the fixed and percentage taxes , regardless of whether p rofi t was reali zed or not . This is not tenable. The rule j, s we ll s~ltt le d that the plai_!'l and ordinary _,- me a n i ng of b usiness is re st r i c t ed to activities or aff a irs wher e prof it i s the purpose or livelihood is the mo tive and t he term "business" when used without qual i ficat ion, as i t is not qualif i ed in t L~ :.,1 stan t c ase , sh ould be construe d in its pla i n and ordinar y meaning, restricted t o ac t i vities for profit or livelihood. (Collector of Inte rnal Rev enLle vs�.' Mani l a Lodge No. 761 of t h e BPOE , L-1 11176 , J une 29, 1959, 105 Ph il. 983; CollectoL J f Internal Rev e n ue vs. Swe eney, et al, L-12178, Augu s t 21, 1959, lOG Phil. 59; Col l ector o f Internal Rev enue ve. Convention of Philipp ine Bapti st Churches, L-11807, Januar y 28 , 1961, 1 SCRA 114; Collecto r o f Inte r nal Revenue vs . Club F ilipino, Inc. de Ce bu, L-12719, May 3 1 , 1962, 5 SCRA 321 . ) Hav i ng e s t a bl ished that petitioner has not c onducted i ts c ont inuing ac tivities of s e l ling examination booklets a nd r enting t ype wr iting boo k s for the purpose of profit b u t - only in aid of its o perations as an e ducationa~ institution, it stands t o reason that petitioner did ne t so engage in busine ss in the year i n ques tion . Final ly , t o fu r ther strengthe n its position, peti- tioner offered in ev i dence the letters of forme r 11 9

DECISION - CTA CASE NO. 353 2 11 Commissioner Plana and respondent himself finding peti- tioner not liable for deficiency business � taxes after investigation by r evenue examine rs for the fiscal years ended March 31, 1977 and March 31, 1982, respectively. Both letters are r e produced below in full: (Exh. "C", petitioner's envelope; Exh. "D" 1 p. 68, CTA records . ) September 28, 1979 Manu el L. Qu ezon Educational Ins titution 916 R. Hidalgo Stre2t Quiapo, Manila Ge ntlemen: Please be informed that according to the rep~ r t submitted by the i nvestigating revenue examiners oi this office covering the period from April 1, 1976 to March 31, 1977, it appears that as private educational inst itu tion, you did not engage i n any taxable business. In view thereof , the business tax aspect of the inves- tigation refer red to above ma y now be considered closed and terminated. Very truly yours, (Signed) EFREN I. PLANA Acting Commissioner February 28, 1983 � Manuel L. Quezon Educational Institution 916 R. Hidalgo Street Quiapo, r>ianil a Gentlemen: Please be informed that upon investigation, ~o deficiency Susiness tax was found due from you for the 120

DECISION - CTA CASE NO. 3532 12 :. fiscal year ending March 31, 1982. Accordingly, we are filing this case for future reference. Very truly yours, (Signed) RUBEN B. ANCHETA Acting Ccimmi~sioner It is however maintained by r esp ndent that the abovementioned rulings of the Commissioners of Internal Revenue, particularly that o� L2 Spondent for the fiscal year 1982, are not applicable to petitioner's tax liability for the fiscal year 1978, inasmuch as rulings are made by respondent on a case to case basis. The records reveal that the circum s tances pLe~ail- ing in the fiscal years ended March 31 1 1977 and 1982 are substantially the same as in the year��in q1estion. The statements of income from sales of examination booklets and from ren tal s of typing books for t he school years 1976 to 1977 and 1981 to 1982 (Exhs. "C-1" and "E") ,. adverted to above, show that petitioner \vas engaged in the same activities as in the year i nvolved. Undoubtedly; petitioner can avail of the rulings con- tained in the letters cited. With all these considerations in mind, we find an d so hold that petitioner Manue l L. Quezon Educa tional Institution is not liable for the deficiency business taxe s in the total amount of Pl,737.61 for the fiscal 12 1

.. DECISION - CTA CASE NO. 3532 13 year ended March 31, 1978. WHEREFORE, the decision appealed from should be as it is hereby reversed. No costs. SO ORDERED. Quezon City, Me tro Manila; June 18, 1986. WE CONCUR: (On official l e ave) CONSTANT� C. ROAQUtN Associate Judge dh-v;l~ _,/~sociate Judge � 12 2