Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc.

SPECIAL FOURTEENTH DIVISION [CA-G.R. SP No. 59282. March 23, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . AGENCIA EXQUISITE OF BOHOL, INCORPORATED , respondent . D E C I S I O N DACUDAO , J p : Petition for Review of the Decision of the Court of Tax Appeals (CTA for short) in C.T.A. Case No. 5774, declaring Assessment Notice No. 84-PT-18-95-98-5-0-63, dated April 20, 1998, as cancelled, withdrawn, and with no force and effect. As found by the Tax Court, the undisputed facts are as follows: On March 11 and May 27, 1994, the then Commissioner of Internal Revenue Jose U. Ong issued Revenue Memorandum Ord er No. 1 5-91 and Revenue Memorandum Circu lar No. 4 3-91, respectively subjecting all pawnshops to the 5% lending investors tax as prescribed under Section 116 of the T ax Co de, as amended, together with the corresponding documentary stamp tax. Prior thereto, pawnshops were only subjected to a fixed tax of P1,000.00, but upon a restudy of Presidential De cree No. 1 14, the law regulating their establishment and operation, their principal activity was found to entail lending money at interest, a business activity akin to that of lending investors. This new interpretation by the Commissioner effectively revoked BIR Ruli ng No. 6-9 0 and VAT Ruling N os. 06 7-90, 02 2-90 and 2 26-90 which have previously ruled that pawnshops were not subject to VAT and percentage taxes. "Pursuant thereto, Respondent Regional Director, through its Assessment Division, issued against Petitioner a Pre-Assessment Notice, dated April 02, 1998, with an attached Computation of Business Tax Deficiency, for the year ended 1995 representing the 5% lending investors' tax. As can be gathered from Petitioner's letter, dated April 29, 1998, made through its legal counsel (BIR records, p. 77), a conference was held over such pre-assessment as well as on the verification of Respondent's computations of the tax deficiency. "On May 22, 1998. Petitioner received a copy of Assessment Notice No. 84-PT-18-95-98-5--0-63, dated April 20, 1998, together with an attached letter of even date containing the following matters, viz a computation of Petitioner's tax liability in the total amount of P106,538.59, inclusive of interest, surcharge and compromise penalty, an explanation that the decision of the Court of Tax Appeals, dated December 23, 1993, holding a pawnshop to be different from a lending investor is not yet final and executory, the same having been appealed to the Supreme Court an information that pursuant to Section 223(a) of the T ax Co de, as amended, tax liability may be assessed at any time within ten years after the discovery of the omission to file a return; and lastly, a request that tax liability be paid within thirty (30) days from receipt of the letter. "In a letter, dated June 17, 1998 and received by Respondent Revenue Regional Director on June 19, 1998. Petitioner duly protested the above assessment, thus: xxx xxx xxx "Your letter opinions about a Court of Appeals case. pending an Administrative notice that the case you are referring to is entitled and docketed as Commissioner of Internal Revenue vs. Honorable Andres B. Reyes, Jr., et al., CA-GR Sp. No. 28824 (sic), Court of Appeals, Metro Manila. It is correct to state that in such Decision the Court of Appeals ruled that a Pawnshop is not a lending Investor and a Pawn Ticket is not liable to pay documentary stamp tax. On the basis of such ruling, RMO No. 1 5-91 and RMC No. 4 3-91 providing liabilities for payment of these taxes were considered null and void. This Formal Tax Protest is made therefore on the basis of the arguments submitted by the aggrieved taxpayer in that case as well as the findings of facts and law cited in such Decision. Our clients adopts substantially all arguments presented thereat to wit: '1. Lending Investor specified and defined under the t ax co de is not a pawnshop. Neither is a Pawnshop defined to include a Lending Investor. This fact is clearly established in Section 192 of the National Int ernal Reve nue Code, as amended by Presidential Investor is treated separately from Pawnshop in the assessment of Other Fixed Taxes.' It is undisputed that Pawnshops are not mentioned under Section 209 of the N IR C, as amended by President (sic) Decr ee No. 17 39, when said proviso imposed Percentage Taxes on Dealers in Securities and Lending Investors. Not being mentioned, Pawnshops are therefore not subject to percentage taxes now sought to be collected in the aforecited Assessment Notice and Demand. The reason that Pawnshop is treated differently from a lending investor certainly lies on the fact that Pawnshop Operations are regulated, monitored and supervised strictly by the Central Bank pursuant to Pawn shop Regulatory A ct which is Presidential Dec ree No. 1 14. What surely prompted the law to hold a tight protective grip on the lending public from pawnshop operations could be the fact that mostly only small borrowers are the clients of these pawnshops. Conversely there is no law applicable at the moment governing Lending Investors. Lending Investors' rates of interests are not fixed or pegged by the Central Bank and their transactions enjoy so much freedom and flexibility. '2. The Internal Revenue Commissioner has no authority to create and impose whatever taxes. Only the Legislative Branch of the Government is empowered to do so. If the Commissioner does so, it usurps an authority which belongs to another instrumentality of the government. cDIHES BIR Circulars are supposed to be issued to implement and enforce and these ONLY tax laws duly mandated by Congress. Unfortunately, Revenue Circulars Nos. 1 5-91 and 4 3-91 no longer simply enforce or implement a tax law. These questioned Circulars actually have illegally created a New and/or Additional Tax Law Imposing tax liabilities on Pawnshops. '3. That decision on the case of Commissioner of Internal Revenue vs. Honorable Reyes, supra, being a Decision rendered by the Court of Appeals a collegiate or superior court partakes of the nature of a law of the land. Thus, said decision, unless reversed by the Supreme Court, has the effect of nullifying the questioned Revenue Memorandum Circulars under which the Bureau is imposing the tax.' "In reply to said protest, Respondent Revenue Regional Director denied the same in a letter decision, dated February 4, 1999, a copy of which was received by Petitioner on February 25, 1999. Therein, Respondent explained that under BIR Rul ing No. 2 21-91 dated October 30, 1991, the definition of the term 'lending investors' as provided in then Section 194 (u) of the Ta x Co de, as amended, [should be Section 157 (u)], encompasses the activity of a pawnshop operator as it includes all persons who make a practice of lending money for themselves or others at interest." "With the denial of its protest, Petitioner seasonably filed the instant Petition for Review on March 26, 1999." 1 On June 7, 2000, the CTA handed down the assailed decision, decretally disposing of the controversy, thusly "WHEREFORE, in view of the foregoing the instant Petition for Review is hereby GRANTED. Revenue Memorandum Circular No. 4 3-91 and Revenue Memorandum Order No. 1 5-91, in so far as they classify pawnshops as lending investors subject to the 5% lending investors tax under Section 116 of the T ax Co de, as amended, are hereby declared NULL AND VOID for being unconstitutional and contrary to law. ACCORDINGLY, Assessment Notice No. 84-PT-13-95-98-5-0-63, dated April 20, 1998 is hereby declared CANCELLED WITHDRAWN and WITH NO FORCE AND EFFECT. "SO ORDERED" 2 Hence, this petition for review of the petitioner Commissioner of Internal Revenue maintains that: "The Tax Court erred in holding that pawnshops are not subject to the lending investor's tax under then Section 116 of the Ta x Co de." 3 There is merit in the petition. In support of its thesis that the Tax Court erred in holding that pawnshops are not subject to the lending investors' tax, the petitioner adverts to then Section 116 of the Tax Code, which provides that: "SECTION 115. Percentage tax on dealers in securities lending investors . Dealers in securities shall pay a tax equivalent to six (6%) per cent of their gross income. Lending investors shall pay a tax equivalent to five (5%) per cent of their gross income." vis-a-vis then Section 157 (u) of the Tax Code (before amendment by Executive Order No. 273) which defined "lending investors" in this manner. "(u) Lending Investors include all persons who make a practice of lending money for themselves or others at interest." Hence, the definition of the term "pawnshop" under Section 3 of Presidential Decree No. 114 [otherwise known as the "Pawnshop Regulation Act" issued by President F.E. Marcos on 29 January 1973], thusly "Pawnshop shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably with pawnbroker or pawnbrokerage." is broad enough to encompass lending investors. Reason: Its principal business activity is actually lending money at interest; its accepting of pawned personal property as security for the loan is merely incidental to its main business activity. So much, in fact, is embodied in Revenue Memorandum Order No. 15-91, dated March 11, 1991, to wit: "A restudy of P. D. 1 14 shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a pawn of personal delivered by the pawner to the pawnee as security for the loan. Clearly, this makes pawnshop business akin to lending investor's business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor's tax based on their gross income pursuant to Section 116 of the T ax Co de, as amended." It will be recalled that in the implementation of then Section 116 and Section 157(u) of the Tax Code, the Bureau of Internal Revenue had issued several rulings relative to the coverage of the pawnshops under the lending investor's tax. The first of these rulings was an unnumbered BIR Ruling bearing the date 2 March 1968, wherein it was held that "lending investors," as contemplated under then Section 194(u) of the Tax Code, do not comprehend persons engaged in pawnshop business. This rule was reiterated, in amongst other, BIR Ruling No. 135-82, dated 22 April 1982; BIR Ruling No. 001, dated 3 January 1983; and BIR Ruling No. 06-90 dated 23 January 1990. Complementary to the above, on March 11, 1991, herein petitioner issued RMO No. 15-91. This RMO No. 15-91 stated that according to BIR Ruling No. 06-90, as well as VAT Ruling Nos. 067-90, 022-90, and 226-90, pawnshops are not subject to any business tax, that is, the value added tax, the lending investor's tax, or the percentage tax imposed on non-banking financial intermediary for the reasons therein set forth, amongst which, is that "Pawnshops are not subject to the 5% lending investor's tax under 116 of the Ta x Co de because, citing BIR Ruling dated March 2, 1968 and 1 35-8 2 dated April 22, 1982, lending investors as contemplated under then Section 194(u) of the Ta x Co de, do not include persons engaged in pawnshop business." Later, however, on March 27, 1991, the petitioner issued RMC No. 43-91 clarifying, amongst other, RMO No. 15-91, in this tenor. "This Circular subjects to the 5% lending investor's tax the gross income of pawnshops pursuant to Section 116 of the Ta x Co de, and it thus revokes BIR Ruling N os. 6-9 0, and VAT Ruling Nos. 2 2-90 and 6 7-90. In order to have a uniform cut-off date, avoid unfairness on the part of taxpayers if they are required to pay the tax on past transactions, and so as to give meaning to the express provisions of Section 246 of the T ax Co de, pawnshop owners or operators shall become liable to the lending investor's tax on their gross income beginning January 1, 1991. Since the deadline for the filing of percentage tax return (BIR Form No. 2529A-0) and the payment of the tax on lending investors covering the first calendar quarter of 1991 has already lapsed, taxpayers are given up to June 30, 1991 within which to pay the said tax without penalty. If the tax is paid after June 30, 1991, the corresponding penalties shall be assessed and computed from April 21, 1991. "Since pawnshops are considered as lending investors effective January 1, 1991, they also become subject to documentary stamp taxes prescribed in title VII of the T ax Co de. BIR Ruling N o. 3 25-88 dated July 13, 1998 is hereby revoked." In other words, RMO No. 15-91 and RMC No. 48-91, both expressly revoked previous BIR rulings to the effect that pawnshops are not subject to the five percent lending investor's tax. More importantly, RMC No. 48-91 revoked BIR Ruling No. 325-88, dated July 13, 1988, which held that a pawnshop broker is not subject to the documentary stamp tax. And, this revocation of prior or previous, rulings is allowed under Section 246 of the Tax Code, to wit: "SECTION 246. Non-retroactivity of rulings . Any revocation, modifications or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application . . .." Undoubtedly, petitioner's later subsequent stance finds support in Hilado v. Collector of Internal Revenue, 100 Phil. 288, which effectively held that the incumbent is not bound by the previous ruling or opinion of his predecessor, if he is satisfied that a different construction of the statute should be adopted. With such course of action, we are in full accord. For, as the Supreme Court itself held in Que v Intermediate Appellate Court, 169 SCRA 137, even judicial decisions are by no means immutable or infallible. Which is as it should be. For time works changes and brings into existence new conditions and purposes. And the law as an expression of social needs, whilst it is desirable that it should be stable, yet it cannot and must not stand still. It should ever be borne in mind that taxes are what we pay for civilized society, taxes, indeed, are the lifeblood of the nation. Not much unlike an army, which, to borrow the picturesque prose of Napoleon, marches on its stomach, the prosperity and economic well-being of the country rises or falls on the effectiveness or lack of it of the tax-collection efforts of the Government. Which explains why, as a matter of policy, the law frowns against exemptions in taxes. So much so that, statutes granting tax exemptions have been held to be strictissimi juris against taxpayer, and liberally in favor of the taxing authority, viz ... the State, or its instrumentality or agencies. 4 About the only exemption to this rule (that the tax exemption may be withdrawn at the pleasure of the taxing authority) is where the exemption was granted to private parties based on material considerations of a mutual nature, in which event it becomes contractual, and is thus protected by the non-impairment clause of the Constitution. 5 Indeed, it is the constant teaching of unrelenting case law that rules for the allowance of tax creditors, as well as claims for tax exemptions, must be expressly granted in a statute, and couched or stated in language too plain to be misunderstood or mistaken. 6 Here, respondent pawnshop cannot point to any specific provision in P.D. 114, from which it draws its breath of life, that explicitly exempts it from the coverage of RMO No. 15-91 and RMC No. 48-91. In sum, since the respondent in the case at bench is a pawnshop operator, it must follow, as night follows day, in the elegant poetry of Shakespeare, that it is subject to the five percent lending investor's tax; hence, liable for the amount of Pesos; One Hundred Six Thousand Five Hundred Thirty Eight and Fifty-nine Centavos (P106,538.59), by way of deficiency percentage tax for the year 1995. UPON THE REVIEW WE TAKE OF THIS CASE, THEREFORE, we vote to grant the Petition. Accordingly judgment is hereby rendered to wit: (1) REVERSING AND SETTING ASIDE the Decision of the Tax Court in CTA Case No. 5774; and (2) Condemning the respondent to pay the amount of Pesos: One Hundred Six Thousand Five Hundred Thirty Eight and Fifty-nine Centavos (P106,538.59), in concept of deficiency percentage tax/lending investor's tax for the year 1995. IDcTEA Without costs in this issuance. SO ORDERED. Reyes and Tria Tirona, JJ . , concur Footnotes 1. Rollo , pp. 20-23. 2. Ibid ., p. 29. 3. Ibid ., p. 12. 4. Vide Mactan Cebu International Airport Authority v. Marcos , 261 SCRA 667. 5. Op. cit., p. 281, citing Sinco, V.G., Philippine Political Law, 1954 Ed., p. 587. 6. Magsaysay Lines, Inc. v. Court of Appeals , 260 SCRA 513; Citibank, NA v. Court of Appeals , 280 SCRA 459; Commissioner of Internal Revenue v. Court of Appeals , 298 SCRA 83; Afisco Insurance Corp. v. Court of Appeals , 302 SCRA 1.