Commonwealth Management and Services Corp. v. Commissioner of Internal Revenue

EIGHTH DIVISION [CA-G.R. SP No. 34032. December 21, 1995.] (C.T.A. Case No. 4423) COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION , petitioner , vs. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS , respondents . D E C I S I O N LANTIN , J p : Before us is a petition for review filed by petitioner Commonwealth Management and Services Corporation (COMASERCO, for short), of the Decision of April 5, 1994 of the Court of Tax Appeals in C.T.A. Case No. 4423, the dispositive portion of which reads as follows: "WHEREFORE, judgment is hereby rendered ordering the petitioner to pay the amounts of P506.08 and P201,627.23 representing deficiency fixed and percentage taxes, respectively, for the year 1986 plus 20% interest from March 15, 1989 until fully paid." On June 2, 1994, the Court, without necessarily giving due course to the petition, ordered respondents Commissioner of Internal Revenue and the Court of Tax Appeals to comment on the petition. On July 22, 1994, respondent Commissioner of Internal Revenue, filed his comment, praying that the petition be dismissed and that the decision of the Court of Tax Appeals be affirmed in all respects. We consider the comment as answer, and decide the petition on the merits. The present case stemmed from the petition for review filed by petitioner COMASERCO against respondent Commissioner of Internal Revenue (Commissioner, for short), on February 7, 1990, with the Court of Tax Appeals. The petition, which was docketed as C.T.A. Case No. 4423, alleged, among other things, that petitioner is a corporation organized and existing under the laws of the Philippines; that on February 15, 1989, petitioner received a pre-assessment notice from respondent, charging the former for deficiency percentage and fixed taxes for the year 1986 amounting to P141,322.65; that petitioner is not liable for either percentage or fixed tax because it is not engaged in business; that the pre-assessment notice was prepared and issued by respondent Commissioner without the requisite investigation and examination of, and inquiry into the records and books of petitioner; that on February 24, 1989, petitioner protested the pre-assessment on the ground that it lacks factual and legal basis, and demanded the withdrawal and cancellation of the assessment by respondent; that on March 15, 1989, petitioner received a letter from respondent, informing petitioner that deficiency fixed tax was found to be due from petitioner in the amount of P506.08, and another letter stating that percentage tax in the amount of P201,627.23 was found to be also due and owing from petitioner; that on April 13, 1989, petitioner made a timely administrative protest against the assessments; that on January 23, 1990, or about ten (10) months from the date petitioner lodged a protest against the assessments, petitioner received a collection letter from respondent; that respondent has yet to decide or rule on the protest filed by petitioner, so that the act of respondent in sending a collection letter is irregular and in violation of the law; and that petitioner was constrained to seek relief from the court so that the contested assessments be set aside and ordered withdrawn and cancelled. Petitioner prayed that a judgment be rendered: finding that petitioner is not liable for fixed and percentage taxes; ordering the assessment notices cancelled and withdrawn; finding that the collection letter is illegal; and ordering respondent to pay petitioner attorney fees. Respondent Commissioner filed his answer on June 8, 1990, admitting the assessments made on petitioner for fixed and percentage taxes, but alleged, among other things, as special and affirmative defenses that petitioner is a domestic corporation with a capital stock of P2,000,000.00 divided into 20,000 shares with a par value of P100.00 per share; that petitioner, during the year 1986, was engaged in management and audit services and received substantial income in the amount of P2,802,453.00 which is subject to fixed and percentage (contractor's) taxes; that petitioner, during the year 1986, was likewise engaged in business as a lending investor by granting salary and car loans to its employees; that petitioner derived interest income therefrom for which it was taxed 6%; that petitioner is liable for fixed tax of P506.08 and percentage (contractor's) tax of P201,627.23 for the year 1986 or a total of P202,133.31; that the deficiency fixed and percentage tax assessments are all in accordance with law and pertinent implementing BIR Rules an Regulations; that all presumptions are in favor of the correctness of the tax assessment; that the Republic of the Philippines represented herein by respondent could not be held liable for damages, legal fees, costs of suit as well as attorney's fees in the performance or exercise of his legal and legitimate official functions. Respondent prayed that an order be issued dismissing the petition for lack of merit and ordering petitioner to pay respondent the amount of P506.08 and P201,627.23 representing deficiency fixed and percentage taxes for 1986, respectively, plus 20% interest from March 15, 1989, until the same is fully paid pursuant to Section 283(b) of the Tax Code, as amended by P.D. No. 1994, which took effect on January 1, 1986; and the costs of suit. After the parties have presented their evidence, they filed their respective memorandums. On April 5, 1994, the tax court rendered its decision against petitioner. Not satisfied with said decision, petitioner COMASERCO filed with this Court a petition for review, contending that: 1. Respondent Court erred in failing to determine first whether petitioner is engaged in business or not. 2. Respondent Court misappreciated the evidence adduced by petitioner. 3. It was an error for Respondent Court to find petitioner liable to pay business tax only because it is a stock corporation, because the Tax Code does not impose business tax on the basis of whether a corporation is stock or non-stock, but on whether it is engaged in business. 4. Respondent Court erred in finding petitioner liable to pay the amounts being assessed on the ground that petitioner's activities benefited its affiliates which are engaged in business. 5. It was error for Respondent Court to find petitioner liable for the amounts being assessed on the ridiculous ground that it can cite no law exempting it from taxation, and even more ridiculously citing Section 26 of the Tax Code. Section 26 enumerates exemptions from income tax. The facts are : Petitioner COMASERCO is a domestic corporation organized and existing under and by virtue of Philippine laws. Its primary purpose is as follows: "To perform collection, consultative and similar and related technical services only for The Philippine American Life Insurance Company. The Philippine American General Insurance Company, Inc., American International Underwriters (Philippines), Inc., The Philippine Home Assurance Corporation, and their respective affiliates, and only on reimbursement-of-cost basis, without any profit." ( Exhibit G. Amended Articles of Incorporation ) Pursuant to its primary purpose, petitioner provided technical assistance to its affiliated companies and maintained its subsistence by receiving plain reimbursements from them consisting of the exact costs and expenses it had incurred, such as salaries and allowance of its professional staff, office rentals, cost of power, water and telephone, and other miscellaneous expenses such as transportation (Exhibits V-3, V-4, V-5, W, W-1, W-2, X, X-1, X-2, X-3, Y, Y-1 to Y-59, Z, Z-1 to Z-24). The interest income it derived from salary and car loans it extended to its employees, was first applied to and used to defray its expenses before billing its affiliates. On February 22, 1989, petitioner received a pre-assessment notice from respondent Commissioner assessing it for deficiency. percentage taxes (contractor's) in the amount of P141,322.65 and fixed taxes in the amount of P350.00 inclusive of increments, for taxable year 1986 (Exhibit A). On February 27, 1989, petitioner sent a written protest to respondent, questioning the assessments contending that fixed and contractor's taxes should only be assessed on persons or entities that are engaged in business and for profit; that inasmuch as it did not earn any profit from its transactions of providing its affiliates with auditing, collection, management and technical services, it was not liable to pay the amount being assessed by respondent (Exhibit B). On March 22, 1990, petitioner received demand letters from respondent, confirming its liability for deficiency fixed and contractor's taxes in the increased amounts of P506.08 and P201,627.23, respectively (Exhibits C and D). On April 13, 1989, petitioner filed another protest to the assessments (Exhibit E). On January 23, 1990, petitioner received a notice for payment of the assessed fixed and contractor's taxes under the threat of enforcing collection through warrants of distraint and levy (Exhibit F). The primary issue to be resolved in the present case is whether or not petitioner COMASERCO which subsisted on a reimbursement-of-cost basis and therefore. did not derive any profit from its operations, was liable to pay the fixed and contractor's taxes under Sections 161 and 170 of the National Internal Revenue Code (NIRC). 1. Section 161 and Section 170 of NIRC read as follows: Sec. 161. Fixed taxes (1) Persons subject to percentage tax . Unless otherwise provided. every person engaging in a business on which the percentage tax is imposed shall pay a fixed annual tax of two hundred pesos. (As amended by PD 1994) (Emphasis ours) Sec. 170. Contractors, proprietors or operators of dockyards, and others . A contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation: xxx xxx xxx (q) Other independent contractors. The term independent contractors includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under the Local Tax Code 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 or their employees. It does not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates. subsidiaries or branches in the Asia-Pacific Region. (Emphasis ours) Said provisions of the tax code fall under Chapter II on Taxes on Business. Their wordings are clear and precise. The taxes prescribed therein are to be imposed specifically on persons or entities who engage in the activities mentioned or classified therein for business purposes. The test for the determination of whether or not a corporation is engaged in business is whether its business is operated or profit or not (Collector of Internal Revenue vs. Convention of Philippine Baptist Churches. 1 SCRA 114, 118). As early as the case of Collector of Internal Revenue vs. Manila Lodged No. 761 of the Benevolent and Protective Order of Elks and the Court of Tax Appeals, 105 Phil. 983, 987, 988 (1959) , the term "business" was already defined. thus: "From the foregoing definitions, it is evident that the plain, ordinary meaning of 'business' is restricted to activities or affairs where profit is the purpose, or livelihood is the motive . The term 'business' being used without any qualification in section 193 of the Tax Code in relation to section 178 of the same, should therefore be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. xxx xxx xxx Where the corporation handled no money except such as was necessary to cover operational expenses, conducted no business for itself, and engaged in no transactions that contemplated a profit for itself such a corporation is considered not organized for profit under the General Corporation Law. (Read v. Tidewater Coal Exch., 116 A 898, 904. cited in Vol. 34, Words & Phrases, p. 220. defining profits;" (Emphasis ours) In assessing the subject taxes on petitioner, respondent Commissioner merely considered the definition of an "independent contractor" under Section 170(q) of the NIRC without taking into account that said provision of the tax code applies to those persons or entities engaged in business. The facts of the case show that petitioner operated not for profit but to provide technical assistance solely to its affiliates mentioned in its amended articles of incorporation on a reimbursement-of-cost basis. Without any intention of realizing profit. While it may be true, as respondent contends, that petitioner imposed interests on salary and car loans it extended to its employees, said interest income was first applied to and used to defray its operational expenses and costs before billing its affiliates. Hence, the same did not have the effect of increasing the founds of petitioner. 2. The Court of Tax Appeals stated that the cases of Collector of Internal Revenue vs. Sweeney (G.R. No, L-12178. August 21, 1959) where it was held that: "It is true that for a time it made a little profit on such scale, that is to say, the little overprice put on the liquor dispensed, presumably intended to cover expenses, but said profits never went to the members of the Club, but were used in the operation of the Club, which as a matter of fact incurred a loss, so that it may not be said that in the operation of the bar and in dispensing liquor to its members or families and their guests, the International Club of Iloilo, Inc. was engaged in business and that it was organized for profit." and Collector of Internal Revenue vs. Club Filipino de Cebu (5 SCRA 321) where a similar ruling was made. to wit: "The Club Filipino. Inc. de Cebu was organized to the healthful recreation and entertainment of its stockholders and members: that upon its dissolution, its remaining assets, after paying debts shall be donated to a charitable Philippine Institution in Cebu: that it is operated mainly with funds derived from membership fees and dues: that the Club's bar and restaurant catered only to its members and their guests: that there was in fact no dividend distributed to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business as an operator of bar and restaurant." could not be applied to the case at bar. Thus, the Court of Tax Appeals held: "However, a thorough analysis of the above ruling indicates that they cannot be applied to the case at bar. It is worthy to stress that the respondent, in the cases abovementioned, seeks to impose a percentage on the operation of the bar-restaurants of non-stock. non-profit establishments principally and solely organized to promote sports, recreation. and entertainment to its respective members. These bar-restaurants cater exclusively to the members of their respective sports club which are not by themselves engaged in business or profit-making ventures. As pointed out in the case of Collector of Internal Revenue vs. Club Filipino de Cebu (ibid.). the 'bar-restaurant was a necessary incident to the operation of the club'. The same cannot be said of COMASECO. Its existence is not merely incidental to the operation of tax-exempt entities. It was specially formed and organized primarily to provide technical and consultative services to its affiliate insurance companies, which undeniably, are conducting business with an end view of profit or livelihood . It can even be said that COMASECO is not undertaking a non-profit activity, but an essential, if not a necessary function of the insurance business. Thus, while it may be admitted that it was organized for 'operational orderliness and administrative efficiency. it is not for its own benefit but for the business conduct of its affiliate insurance companies." We do not agree. Whether petitioner is a stock or non-stock corporation is immaterial. In the case of Club Filipino. Inc. de Cebu supra , respondent firm therein was a stock corporation but the Hon. Supreme Court exempted it from paying the contractor's tax for the reason that it was not engaged in activities or affairs where profit was the purpose. As to the pronouncement of the Court of Tax Appeals that the entities in the two cases cater solely to its members hence exempted from paying fixed and percentage taxes, by analogy, the same can be said of petitioner COMASERCO. Its articles of incorporation specifically state that it would provide technical assistance exclusively to its affiliates named therein and not to any firm which might need its services. With respect to the fact that petitioner's affiliates are profit oriented, the same should not be taken against petitioner because it is an entity separate and distinct from its affiliates and whatever profit the affiliates may derive from its operations does not merge into the retained earnings of petitioner. 3. Respondent takes issue on the fact that in the books of petitioner, the amount of P2,802.453.00 is declared by petitioner as revenue and not expenses. Respondent's position is untenable. What is material is the nature of said revenue. While it is true that the term "REVENUE" appears on petitioner's books said revenue was the expenses or cost attendant to petitioner's operation which was billed to its affiliates. WHEREFORE, the Decision of April 5, 1994 of the Court of Tax Appeals in C.T.A. Case No. 4423 is hereby REVERSED and SET ASIDE. The assessments for fixed and contractor's taxes made on petitioner COMASERCO by respondent Commissioner is ordered WITHDRAWN AND CANCELLED, for lack of legal and factual basis. No costs. IT IS SO ORDERED. Montenegro and Dela Rama , JJ ., concur.