Commissioner of Internal Revenue v. Special Services Corp.

NINTH DIVISION [CA-G.R. SP No. 24475. April 17, 1991.] (C.T.A. Case No. 2815) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .SPECIAL SERVICES CORPORATION and THE COURT OF TAX APPEALS , respondents . D E C I S I O N GUINGONA , J p : We have before us, by way of a referral from the Honorable Supreme Court, a petition filed on November 3, 1980 for a review on certiorari of the decision dated May 22, 1980 of the Court of Tax Appeals in C.T.A. Case No. 2815 declaring petitioner's assessment for 3% deficiency contractor's and fixed taxes, inclusive of surcharge and penalty for 1965 in the amount of P61,323.69 invalid and of no effect on the ground that the right of the Commissioner of Internal Revenue to assess the taxpayer had already prescribed. The instant petition came about as a result of a petition for review filed by the Special Services Corporation (herein private respondent) in which petition the afore-cited corporation sought to have the assessment of the Commissioner of Internal Revenue declared "null, void and without basis, and/or that the same has been barred by prescription",thereby absolving the petitioner from any and all liabilities under the aforesaid assessment. On May 22, 1980, the Court of Tax Appeals rendered its decision, the dispositive portion of which reads thus: "WHEREFORE, respondent's assessment subject of this proceeding is hereby declared invalid and of no effect. Without pronouncement as to costs." (Rollo, pp. 49-50) ANTECEDENT FACTS This Court hereby adopts the following statement of facts contained in the challenged decision of the above-mentioned Court of Tax Appeals: The records reveal that petitioner is a corporation existing under and by virtue of the laws of the Philippines, with office and postal address at Insular Life Building, Ayala Avenue, Makati, Rizal. During the year 1965 it derived income from management service, leasing office equipment, data processing, agency placement and tuition fees. On May 13, 1971, petitioner received from respondent's then Revenue Region No. 6 (now Revenue Region 4-B),Quezon City, a demand letter dated April 12, 1971 assessing and demanding from it alleged 1965 deficiency contractor's and fixed taxes, inclusive of surcharge, computed as follows: Total taxable sales/ receipts per field audit P1,167,689.31 3% tax due thereon 35,030.68 Less: Tax already paid Deficiency tax due 35,030.68 75% surcharge thereon 26,273.01 Fixed Tax (PTR) C-4 (53) 20.00 TOTAL AMOUNT DUE 61,303.69 =========== In addition, petitioner was requested to pay the amounts of P20.00 and P300.00 as compromise penalties for alleged late payment of fixed tax (PTR) and percentage tax, respectively. xxx xxx xxx The records show that on May 24, 1971, after eleven (11) days from petitioner's receipt of the assessment, its auditors disputed the said assessment on the merits and on the ground of prescription, by filing a written protest with respondent. However, on April 10, 1976 respondent, without categorically deciding petitioner's protest, caused to be filed in the Court of First Instance of Manila Civil Case No. 101999 for collection of the amount assessed. After summons with a copy of the verified complaint were served on petitioner on May 10, 1976, it filed a motion to dismiss the case, which motion is still pending before the Court of First Instance of Manila. With the institution of such action for collection of the taxes assessed against petitioner at the instance of respondent, petitioner appealed to this Court, raising, besides the illegality of the assessment, the defense of prescription of the right of respondent to make the said assessment. (Rollo, pp. 38-40) Petitioner Commissioner of Internal Revenue has submitted for the consideration of this Court the following specification of errors: (a) Respondent court erred in holding that respondent corporation is not liable to 3% contractors tax from its income derived from management services as "other independent contractor" under paragraph (18) of Section 191 (Now 205) of the tax code; (b) Respondent court erred in holding that the right of petitioner to assess the corporation has prescribed; (c) Respondent court erred in not declaring that the tax assessment has become final and for failure of respondent corporation to seasonably appeal petitioner's decision to respondent court. (Petition for Review, p. 6) As to the first specified error The petitioner would hold the private respondent liable for having engaged "in dispensing management services" which include, as stated in the appealed decision of the Court of Tax Appeals, the following; "1. To furnish technical guidance on labor and union relations, collective bargainings; "2. To standardize personnel procedures, job and personnel evaluation methods; "3. To undertake studies in work organization, work flow, and work simplification; "4. To maintain a system of form improvement program; "5. To plan and implement promotional undertakings and public relations, etc." (C.T.A. Decision, p. 9) It is the petitioner's contention that the above-specified activities would be covered in the enumeration found in the then Section 191 of the National Internal Revenue Code specifically, in the words "independent contractors" found therein. Under the aforesaid section, the following are to pay a tax equivalent to three per centum of their gross receipts: Percentage tax on road, building, irrigation, artesian well, waterworks, and other construction work contractors, proprietors or operators of dockyards, and others Road, building, irrigation, artesian well, waterworks, and other construction work contractors; filling contractors; demolition and salvage work contractors; arrastre contractors, persons engaged in the installation of gas or electric light, heat, or power; persons selling water, light, heat, or power, except those paying a franchise tax; proprietors or operators of dockyards, mine drilling apparatus, smelting plants engraving plants, plating establishments, plastic lamination establishments, vulcanizing and recapping establishments, establishments for washing and/or greasing of motor vehicles, battery charging, planning or surfacing and recutting of lumber; sawmills under contract to saw and/or cut logs belonging to others; dry-cleaning or dyeing establishments, steam laundries, laundries using washing machines; photographic studies, telephone or telegraph lines or exchanges, broadcasting or wireless stations; funeral parlors; shops for the construction or repair of bicycles or vehicles of any kind, mechanical devices, instruments, apparatus, or furniture of any kind, shoe repairing by machine or any mechanical contrivance, and tailor shops, beauty parlors, dressmakers, milliners, hatters, keepers of hotels, lodging houses, stevedores, warehousemen; plumbers, smiths; house or sign painters; lithographers, publishers, except those engaged in the publication or printing and publication of any newspaper, magazine, review or bulletin which appears at regular intervals, with fixed prices for subscription and sale, and which is not devoted principally to the publication of advertisements; printers and bookbinders, business agents and other independent contractors , shall pay a tax equivalent to three per centum of their gross receipts. (Sec. 191 The National Internal Revenue Code, emphasis supplied) On the above point, the petitioner had made the following averments: Carefully perusing said Section 191, conditions 2, 3 and 5 for ejusdem generis to apply are wanting. Thus, the heading alone of the section Contractors, proprietors or operators of dockyards and others conveys the idea that the enumeration to follow includes such disparate and unrelated subjects because "contractors" and "proprietors' by themselves are dissimilar terms. Also, the words "and others" in the same heading give the impression that the enumeration contains various classes other than those falling under "contractors, proprietors or operators of dockyards".Verily one can readily perceive that the enumeration in the section contains such unrelated classes and subjects as building contractors, installers of water system and gas or electric light, operators of greasing of motor vehicles, proprietors of dry cleaning establishments, proprietors of tailor shops, operators of arrastre, printers, business agents. The rule of ejusdem generis cannot be applied where specific words enumerate subjects which greatly differ from each other nor can it be employed to restrict the operation or an act within narrower limits than was intended by the lawmakers (The Construction of Statutes by Crawford, p. 328). The conclusion therefore is ineluctable that the general words "other independent contractors" found towards the end of Section 191 must have a different meaning from that of the specific words. (Petition, pp. 10-11) This Court is of the view that the following observation of the public respondent, in its appealed decision, merits our approval: While respondent admits that "petitioner's income from management service fees does not fall under any of the activities mentioned from Nos. (1) to (17) of Section 191 of the Tax Code then in force (p. 98, CTA records), he contends that the above undertakings or services rendered by petitioner fall within the classification of "other independent contractors" under paragraph (18) of Section 191 and, therefore, subject to 3% contractor's tax provided therein (p. 99, CTA records). For its income or gross receipts derived from management services as specified above, is petitioner liable to pay 3% contractor's tax as "independent contractor" within the purview of section 191 of the then National Internal Revenue Code? Indeed the question is not one of first impression. In stock Transfer Service, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 2003, July 29, 1971, certiorari denied in L-34582, January 25, 1972, wherein the issue involved is whether a transfer agent whose business consists of registering transfers and issuance of certificates of stocks is an "independent contractor" within the purview of Section 191 of the National Internal Revenue Code then in force and, hence, liable to pay fixed and percentage taxes, this Court unequivocally ruled that the term "other independent contractors" at the end of the enumeration of persons who are subject to the contractor's tax should include only those who are engaged in businesses similar to those enumerated. Because of its controlling effects on the question under consideration, we will quote at length from the decision: xxx xxx xxx The argument that the addition of "other independent contractors" to the list of businesses taxable under Section 191 was intended to tax any and all independent contractors is not justified by the wording of the law. It will be noted that the term "other independent contractors" was added to the list of taxable businesses under Section 191 of the Revenue Code by Section 11 of Republic Act No. 1612, which became effective on August 24, 1956. Said amendatory Act added the following businesses to those previously taxable under Section 191, along with "other independent contractors": (1) demolition and salvage work contractors; (2) arrastre contractors; (3) persons selling water; (4) plastic lamination establishments; (5) vulcanizing and recapping establishments; (6) establishments for washing and/or greasing of motor vehicles; (7) battery charging; (8) planing or surfacing and recutting of lumber; (9) sawmills under contract to saw and/or cut logs belonging to others; (10) laundries using washing machines; (11) shoe repairing by machine or any mechanical contrivance; and (12) business agents. If as alleged, Congress intended to tax all independent contractors irrespective of the nature or kind of the business engaged in, there was absolutely no need for the addition of the twelve businesses mentioned above. That Congress saw fit to add particular kinds of businesses to the taxable list along with "other independent contractors" is an eloquent proof that it was intended to limit the application of the general words to businesses of the same kind and category as those enumerated. (C.T.A. Decision, pp. 10-12) The herein petitioner seeks to construe the term "other independent contractors" beyond what appears to be the legislative intent in enacting the above-quoted provision of the Tax Code. The afore-cited provision of the Tax Code does not justify the conclusion that the addition of the words "other independent contractors" to the enumeration was intended to include all persons whose activities consist essentially of the dispensing of all kinds of services for a fee, regardless as to whether such services entail manual/physical or mental effort. When the legislature included "other independent contractors" at the end of the enumeration above stated, the said inclusion should be construed to include only those persons who are engaged in similar activities. A close scrutiny of the contractors named under Section 191 of the Tax Code shows that the services performed by them relates to matters of manual and/or mechanical execution. Thus, it has been pointed out in the case of Moreland vs. Mason, 260 P. 1035, 45 Idaho 142, cited in Araas, Annotations and Jurisprudence on the National Internal Revenue Code ,1970 ed.,p. 372. "The normal function of an independent contractor is the performance of work predominantly physical in nature." While it is true that the aforementioned Section 191 of the Tax Code was subsequently amended (by Presidential Decree No. 69, which took effect on January 1, 1973) where the term "independent contractor" was defined to mean persons "whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors", such definition became part of the law of the land only after the year during which the private respondent was being held liable to pay the percentage and fixed taxes as an "independent contractor", which is eight years before the aforesaid amendment was enacted into law. The statutory change in 1973 cannot retroact to 1965. As a matter of fact, the afore-cited amendment in 1973 would bolster the assertion that the legislature, prior to the 1973 amendment, did not intend to include services which require the exercise of the mental faculties. The allegation that, even before the amendment, "other independent contractors" would include those persons performing mental work, would render the need to introduce such amendment nugatory. The amendment would have been unnecessary and meaningless. As to the second specified error Supporting his contention vis-a-vis this specified error, the petitioner argues as follows: Respondent corporation theorizes that petitioner's right to assess has prescribed, relying on Section 331 of the old Tax Code, which provides that the government may assess a tax within five (5) years after the corresponding tax return is filed. This section, however, does not apply to cases where no return at all has been filed or where the return filed is false or fraudulent, as in this case. What is applicable is Section 332 of the old Internal Revenue Code (now 319), which reads as follows: "SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission: ..." (Petitioner for Review, p. 13). If Section 332 of the Tax Code indeed were to be applied, then there has been no lapse of time that would sustain a finding that petitioner's right to assess has prescribed. However, if instead of Section 332, it should be Section 331 that should be held applicable (as We do hold in the instant case), then there could be no dispute that the assessment issued by the petitioner was made beyond the five-year period provided for under the said Section 331 of the Code. The assessment for alleged deficiency contractor's tax, 1965 fixed tax, surcharge and compromise penalties bears the date April 12, 1971. It was registered and mailed in Cubao, Quezon City on May 7, 1971. The herein petitioner had up to January 20, 1971 within which to issue his deficiency assessments regarding the private respondent's contractor's tax for 1965 to comply with the five-year period specified in Section 331. But, as earlier stated, the assessment was sent only on May 7, 1971. It has been held in a number of cases that for purpose of the prescriptive period, an assessment is deemed made only when the same is sent. Thus, in Collector of Internal Revenue vs. Bautista, G.R. NO. L-12250, May 27, 1959, the ruling was that, Section 331 of the Tax Code provides that the deficiency assessment must be made within five (5) years after the return was filed, and the assessment is deemed made when the notice to this effect is released, mailed or sent by the Commissioner of Internal Revenue to the tax payer, for the purpose of giving effect to said assessment .Said Section 331 does not require that the notice be received by the taxpayer within the aforementioned period of five (5) years. (Emphasis supplied). The petitioner contends that the herein private respondent had failed to file its monthly percentage Tax returns for 1965. As aptly observed by the Court of Tax Appeals in its questioned decision, Contrary to the contention and allegations of respondent, the evidence on record, both oral and documentary, definitely and clearly show that petitioner had filed its monthly percentage tax returns for 1965 pursuant to Section 183 in relation to Section 191 of the former Revenue Code (Exhibits "GG", "DD", "BB", "Y", "W", "T", "Q", "N", "K-2" and "G", Petitioner's Folder of Exhibits); and had paid the annual privilege tax receipt of contractor, one as "printer" under Schedule C-4-20 and another as "business agent" under Schedule C-4-52 (Exhs. "C" & "D", Petitioner's Folder of Exhibits). As a matter of fact, for these two activities which petitioner considered itself as subject to the 3% contractor's tax, it paid the corresponding monthly percentage tax based on its actual gross receipts as "printer" and as "business agent". (t.s.n., pp. 49-51, hearing of November 10, 1978; Exh. "F", Petitioner's Folder of Exhibits.) All of these payments of taxes, which were made within the time prescribed by law, were duly documented with the corresponding revenue official receipts, xerox copies of which were admitted as evidence without objection of respondent after comparison with the originals during the hearing of the case. ("E", "H", "I", "J", "K", "L", "M", "O", "P", "R", "S", "U", "V", "X", "Z", "AA", "CC", "EE" & "FF", Petitioner's Folder of Exhibits.) Absent proof, or even allegation, that the 1965 returns filed by petitioner for contractor's percentage tax purposes pursuant to Section 183 in relation to Section 191 of the Revenue Code then in force were false or fraudulent, it is thus abundantly clear, in the face of the indubitable fact that petitioner had actually filed returns and paid both the percentage and fixed taxes due from it in the year 1965, that respondent's right to issue the assessment in question is barred by prescription, in accordance with Section 331 of the Cod. (C.T.A Decision, pp. 6-8) Furthermore, an incomplete return may start the running of the prescriptive period. In Collector of Internal Revenue vs. Central Azucarera de Tarlao (G.R. Nos. L-11760-61) promulgated on July 31, 1958, the Supreme Court held, The returns filed, altho incomplete, operate as sufficient notice to the Collector of Internal Revenue to make his assessment and start the running of the period of limitation (Florsheim Bros. Drygoods Co. vs. United States, 280 U.S. 463-465; 74 L. Ed. 542-548).(Decision, p. 5). As to the third specified error On this point, the petitioner asserts as follows: Assuming, for purposes of argument, that private corporation's letter dated November 27, 1975, turning down petitioner's offer that it avail of LOI 308, be considered private corporation's protest against the assessment; nevertheless, said assessment has become final and executory. As a result of the failure of respondent corporation to avail of the benefits under the aforesaid LOI 308, petitioner filed on April 10, 1976, a complaint for collection of the tax involved herein with the Court of First Instance of Manila, docketed as Civil Case No. 101999. The filing of the said complaint is tantamount to a denial of respondent's protest (Lim Tian Teng Sons & Co., G.R. No. L-21731 Mar. 31, 1966 16 SCRA 584). Private respondent had thirty (30) days from April 10, 1976 within which to appeal to the Court of Tax Appeals petitioner's decision denying private respondent's protest. (Petition for Review, pp. 14-15). Still on the same point, the herein private respondent has made the following averments in its Comments (dated December 19, 1980) to the Petition for Review originally filed with the Supreme Court: Petitioner, however, has created a misrepresentation when it stated in its petition for review that "Private respondent had thirty (30) days from April 10, 1976 within which to appeal to the Court of Tax Appeals petitioner's decision denying private respondent's protest" (page 15, Petition for Review). Petitioner failed to appreciate the established fact that the summons and complaint of petitioner filed before the Court of First Instance of Manila in Civil Case No. 101999 were duly served on respondent taxpayer only on May 10, 1976 .Thus, the filing of the petition for review with the respondent Court of Tax Appeals on May 28, 1976 was within the prescriptive period provided for under Section 11 of Republic Act 1125 quoted as follows: "Section 11. Who may appeal, Effect of Appeal Any person, association, or corporation adversely affected by a decision or rulings of the Collector of Internal Revenue, the Collector of Customs or necessary provincial or city Board of Assessment Appeal may file an appeal in the Court of Tax Appeals within thirty (30) days after the receipt of such decision or rulings .(Emphasis supplied),(Comment, pp. 4-5; Rollo, pp. 77-78). Even if one were to concede, as asserted by the petitioner, that the filing of the complaint by the said petitioner on April 10, 1976 in the then Court of First Instance of Manila (in Civil Case No. 10199) of collection of alleged tax liabilities of the private respondent "is tantamount to a denial of the respondent's protest" (a protest which was made way back on May 24, 1971 or eleven days after receipt of the assessment C.T.A. Decision, p. 3),the fact remains that, as averred by the private respondent in its afore-cited Comment, the summons and complaint were received only on May 10, 1976. On May 28, 1976, less than thirty days thereafter, the petition for review with the public respondent was filed. This Court also notes that the petitioner has cited the case of Lim Tian Tong & Sons & Co. (supra) but in that case, the taxpayer received a notice of the BIR's denial of its request for reinvestigation. In the case at bar, the BIR did not, as stated by the Court of Tax Appeals in its decision (p. 3),categorically decide petitioner's protest. No notice of denial of private respondent's protest was ever sent to the latter. What was in fact sent was an invitation for the private respondent to avail of the benefits offered under LOI 308, which the said respondent turned down on the ground of prescription. PREMISES CONSIDERED, the herein petition for review is hereby DISMISSED. SO ORDERED. Javellana ,and Isnani * ,JJ., concur. Footnotes * In place of Mr. Justice Imperial who is on leave.