Commissioner of Internal Revenue v. Michel J. Lhuiller, Pawnshop, Inc.

FIRST DIVISION [CA-G.R. SP No. 62463. November 20, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. MICHEL J. LHUILLER, PAWNSHOP, INC. , respondent . D E C I S I O N CRUZ , J p : On September 11, 1997, Assessment Notice No. 81-PT-13-94-97-9-118 was issued by the Bureau of Internal Revenue (or "BIR") against Michel J. Lhuillier Pawnshop, Inc. (or "respondent") demanding payment of deficiency percentage tax in the sum of P3,360,335.11 for the year 1994, inclusive interest and surcharge. The assessment was made pursuant to Revenue Memorandum Order No. 15-91 (or "RMO No. 15-91") and Revenue Memorandum Circular No. 43-91 (or "RMC No. 43-91") dated March 11, 1991 and May 27, 1991, respectively, issued by then Commissioner of Internal Revenue Jose U. Ong. RMO No. 15-91, as clarified by RMC No. 43-91, subjects pawnshops to a 5% lending investor's tax upon authority of Sec. 116 of the Tax Code which, as of 1994, provided that "(l)ending investors shall pay a tax equivalent to five (5%) percent of their gross income." On October 3, 1997, respondent filed an administrative protest with the Office of the Revenue Regional Director contending that neither the Tax Code nor the VAT Law expressly imposes percentage tax on pawnshops; that pawnshops are different from lending investors; that RMO 15-91 is a new and additional tax on pawnshops which only Congress can enact; and that RMO No. 15-91 is taxation by implication as it impliedly amends the Tax Code. On November 11, 1998, respondent filed a petition for review with the Court of Appeals (or "CTA") on the ground of inaction of the BIR Commissioner on its administrative protest. The CTA assumed jurisdiction over the petition via a resolution dated June 30, 1999. Answering the petition, petitioner raised the defenses that respondent did not allege that the questioned tax assessment is invalid or incorrect even as it is presumed valid and correct; and that said assessment was issued in accordance with law and regulations. On December 13, 2000, the CTA rendered a decision, the decretal portion of which reads: "WHEREFORE, in view of the foregoing the instant Petition for Review is hereby GRANTED. Revenue Memorandum Order No. 1 5-91 and Revenue Memorandum Circular No. 4 3-91, in so far as they classify pawnshops as lending investors subject to the 5% lending investor's tax under Sec. 116 of the T ax Co de, as amended, are hereby declared NULL and VOID. Accordingly, Assessment Notice No. 81-PT-13-94-97-9-118, dated September 11, 1997 is hereby declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT. SO ORDERED." Hence, this petition for review, faulting the CTA "in holding that pawnshops are not subject to the lending investor's tax under then Section 116 of the Tax Code." Petitioner asserts that pawnshops are covered by the legal definition of "lending investors"; that RMO No. 15-91 is not a new tax measure but a ruling expressly revoking previous rulings implementing Secs. 116 and 157(u) of the Tax Code. On the other hand, respondent contends that pawnshops are not lending investors and, therefore, not liable for percentage tax; and that RMO No. 15-91 and RMC No. 43-91 are new tax measures. The petition is devoid of merit. RMO No. 15-91 reads, as follows: "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 property delivered by the pawner to the pawnee as security for the loan. (Sec. 3, ibid) 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 Ta x Co de, as amended." On the other hand, RMC No. 43-91 provides: "1. R MO 1 5-91 dated March 11, 1991: "This Circular subjects to the 5% lending investor's tax the gross income of pawnshops pursuant to Section 116 of the Ta x C ode, and it thus revokes BIR Ruling No s. 6-9 0, and VAT Ruling No s. 2 2-90 and 67-90. 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 C ode, pawnshop owners or operators shall become liable in 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 Ta x Co de. BIR Ruli ng No. 3 25-88 dated July 13, 1998 is hereby revoked." Lending investors are defined as persons "who make a practice of lending money for themselves or others at interest" (Sec 157 [u], Tax Code), while a pawnshop is "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" (Sec. 3, Pres. Decree No. 114 [Pawnshop Regulation Act]). Lending investors lend money secured by either real or personal property or with no security at all; while pawnshops lend money upon security of personal property. Moreover, there is no limitation on interest rates which lending investors may charge; whereas, pawnshops may not charge "any higher rate or greater sum or value for any loan or forbearance than the rate allowed by the Usury Law for such transactions." (Sec. 10, Pres. Decree No. 114) Furthermore, Sec. 161(3) of the Tax Code names those subject to fixed taxes, among which are "(dd) Lending Investors" and "(ff) Pawnshops". The fixed taxes on lending investors range from P250.00 to P1,000.00, depending on the situs of its business. On the other hand, pawnshops are imposed a fixed tax of P1,000.00 The CTA, therefore, correctly ruled that pawnshops and lending investors are two distinct tax subjects which are treated differently under the Tax Code. The Tax Code imposes percentage tax on lending investors, but not on pawnshops. And the BIR may not, in the guise of exercising its authority to make rulings or opinions in connection with the implementation of the Tax Code and to revoke, modify or reverse the same (Secs. 245 and 246, Tax Code), impose percentage tax on pawnshops, via RMO No. 15-91, which is a new and additional tax measure only Congress can enact. Thus, in Commissioner of Internal Revenue vs. Hon. Andres B. Reyes, Jr. et al . (CA-G.R. SP No. 28824, December 23, 1993), this Court held as follows: ". . . Revenue Circulars Nos. 15-91 and 43-91 are not implementing rules but are new and additional measures which only congress is empowered to impose. Section 245 of the T ax Co de has limited or confined petitioner's power to issuing rules and regulations to implement or carry into effect the provision of the Code in the enforcement of taxes provided therein, and petitioner cannot impose additional taxes not provided therein. Under the Constitution, the power to tax is solely vested in Congress. In issuing subject Revenue Circulars imposing new taxes against pawnshop, petitioner arrogated unto himself legislative powers, with grave abuse of discretion and in excess of jurisdiction." Nevertheless, petitioner invites Our attention to the Decision dated March 23, 2001 of this Court (Special Fourteenth Division) in CA-G.R. SP No. 59282, entitled "Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Incorporated." Petitioner asserts that this Court ruled in said case that "pawnshops are subject to the 5% investor's tax imposed under then Section 116 of the Tax Code." A close examination of the Agencia Exquisite decision, however, shows that it was anchored on the failure of the respondent pawnshop to "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. 43-91". In other words, Agencia Exquisite does not support the proposition that pawnshops are embraced in the term "lending investors". Parenthetically, in 1994, the House of Representatives sought to amend Sec. 116 of the Tax Code thru House Bill No. 11197 ("An Act Restructuring the Value-Added Tax [VAT] System to Widen its Tax Base and Enhance its Administration") by way of including "owners of pawnshops" among those subject to percentage tax. However, the Bicameral Conference Committee version, which eventually became the law, did not incorporate such provision. Certainly, there would have been no need for the proposed amendment if the percentage tax treated in Sec. 116 of the Tax Code were applicable to pawnshops. WHEREFORE, the petition is DISMISSED while the appealed decision AFFIRMED. SO ORDERED. Austria-Martinez and Aquino, JJ., concur .