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

SIXTEENTH DIVISION [CA-G.R. SP No. 68180. February 10, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . AGENCIA EXQUISITE OF BOHOL, INC. , respondent . D E C I S I O N COSICO , J p : This is an appeal, filed under Rule 43 of the 1997 Rules of Civil Procedure, from the Decision, 1 dated November 26, 2001, of the Court of Tax Appeals in CTA Case No. 6219, entitled: "Agencia Exquisite of Bohol, Inc. vs. Jaime B. Santiago, in his capacity as Revenue Regional Director, Revenue Region No. 13 of the Bureau of Internal Revenue and the Commissioner of Internal Revenue," canceling the assessment issued against herein respondent in the amount of P180,404.49 as deficiency value-added ("VAT" for brevity) for the year 1998. The dispositive portion of the assailed decision reads: "WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby GRANTED. DA-297-97 issued by Sixto S. Esquivias IV on September 1, 1997, which subjected the pawnshop operators to the 10% VAT, is hereby declared NULL and VOID. Accordingly, Assessment Notice No. 84-VAT-13-98-2000-4-098 dated April 18, 2000 is hereby declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT. SO ORDERED." 2 The undisputed facts are as follows: Respondent, Agencia Exquisite of Bohol, Inc., is a domestic corporation organized and existing under the laws of the Philippines, and a pawnshop owner and operator with principal office address at NDI Complex, A.S. Fortuna St., Mandaue City. It is also the owner and operator of Agencia Exquisite of Bohol, Inc., located at M.H. Del Pilar St., Tagbilaran City. On May 4, 1994, Republic Act ("R.A." for brevity) No. 7716, otherwise known as "The Expanded Value-Added Tax Law", was enacted, amending certain provisions of the National Internal Revenue Code. Under R.A. No. 7716, any person, who in the course of trade or business, sells, barters or exchanges goods, or properties, renders services and any person who imports goods shall be liable to the value-added tax imposed in Sections 100 to 102 of the NIRC. On December 11, 1995 and December 9, 1995, Revenue Regulations Nos. 6-95 and 7-95, respectively, were issued to implement the provisions of R.A. No. 7716. On January 1, 1997, R.A. No. 8241 took effect, further amending certain provisions of R.A. No. 7716. The said law, R.A. 8241, while still subjecting to VAT all kinds of services rendered in the Philippines for a fee, remuneration or consideration, made some additions to those transactions exempt from VAT. The following day, January 2, 1997, Revenue Regulations No. 6-97 was issued to implement R.A. No. 8241. On September 1, 1997, Sixto S. Esquivias IV issued the questioned DA-297-97, 3 subjecting pawnshop operators to the 10% VAT pursuant to Section 102(a) of the tax code, as amended by R.A. No. 7716 and further amended by R.A. No. 8241, beginning year 1996. On January 1, 1998, R.A. No. 8424, otherwise known as the "National Internal Revenue Code of 1997", took effect, to which were incorporated all the aforementioned amendments. Thus, on April 18, 2000, pursuant to Section 108 of the NIRC, as amended by R.A. No. 8424, and by virtue of DA-297-97 issued by Sixto S. Esquivias IV, Regional Director Crispino B. Vallejo, Jr. sent herein respondent a formal offer of demand 4 with details of discrepancies 5 attached thereto and assessment notice 6 no. 84-VAT-13-98-2000-4-098, demanding payment of VAT for the year 1998, in the sum of P180,404.49, inclusive of interest, surcharge and compromise penalty. On May 24, 2000, herein respondent filed with the Assessment Division of the Bureau of Internal Revenue ("BIR", for brevity) Revenue Region No. 13, Cebu City, an administrative protest 7 on the ground that, viz : 1) Section 108 of the National Internal Revenue Code as amended by R.A. 8424 does not include pawnshops as among those entities subject to a ten percent (10%) VAT; 2) Revenue Memorandum dated September 1, 1997 issued by OIC Assistant Commissioner Sixto S. Esquivias IV, is null and void; 3) The business operations of pawnshops are widely different from that of lending investors; and 4) The Court of Tax Appeals has already declared RMO No. 15-91 and RMC No. 43-91, which imposed five percent (5%) lending investors tax on pawnshops, null and void. ISHaCD Through a letter dated November 15, 2000 which was received by counsel for herein respondent on December 11, 2000, petitioner denied respondent's protest and reiterated its demand for payment of VAT liability. On January 8, 2001, respondent filed before the Court of Tax Appeals ("CTA", for brevity) a petition for review seeking nullification of DA-297-97 and assessment notice no. 84-VAT-13-98-2000-4-098, demanding payment of the sum of P180,404.49. On November 26, 2001, the CTA promulgated its assailed decision, declaring null and void DA-297-97 and canceling assessment notice no. 84-VAT-13-98-2000-4-098. The CTA held that pawnshops are not subject to 10% Vat, since pawnshops are not included in those covered by VAT, and citing the case of Commissioner of Internal Revenue v. Hon. Andres B. Reyes, et al. , 8 the CTA declared that pawnshops are not lending investors. 9 On December 18, 2001, dissatisfied with such decision of the CTA, petitioner filed the instant petition for review on the sole ground that "the tax court erred in holding that pawnshops are not subject to VAT on sale of services imposed under Section 108(a) of the tax code." 10 Petitioner contends that under Section 108 (A) of the Tax Code, the sale or exchange of services is subject to 10% VAT. The enumeration of persons under Section 108 (A) of the Tax Code, performing services for others for a fee is not exclusive, which means that other persons performing services for a fee, who are not expressly mentioned in the enumeration, are also subject to VAT. The enumeration is merely intended to give examples of businesses performing services that are subject to VAT. The legislative intent is not to limit the application of the law to those enumerated therein because Section 108 (A) of the Tax Code speaks of "all kinds of services". In the end, petitioner argued that since pawnshops engage in the business of lending money for a fee, pawnshops therefore are subject to VAT. 11 On the other hand, respondent opined that the law is clear. A pawnshop is not among those entities enumerated as subject to VAT, hence pawnshop is excluded from the coverage of the VAT, 12 and that pawnshops are not lending investors. 13 We find for petitioner. The value added tax is levied on the sale, barter or exchange of goods or properties as well as on the sale or exchange of services. As provided for in Section 105 of the National Internal Revenue Code of 1997, any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax imposed in Sections 106 to 108 of R.A. 8424. Section 108 (A) of R.A. 8424, provides, to wit: "SEC. 808. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors, transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. . . ." (emphasis supplied) A value-added tax is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. 14 In the case at bar, it has been the contention of respondent Agencia Exquisite of Bohol, Inc. that the business of a pawnshop is not similar to that of a lending investor. A pawnshop, according to respondent is principally engaged in the business of delivering money to another, secured by personal property, upon the condition that the latter shall pay the former, otherwise, the thing pawned shall be sold 15 for the payment of the principal obligation. Hence a pawnshop operator engages in a pledge transaction. THcaDA We are not convinced. The business of pawnshops are akin to that of lending investors. 16 Respondent itself admitted that a lending investor is a person who makes a practice of lending money for themselves or others at interest. It seems that respondent forgot that the business of a pawnshop is also to lend money for others at interest. The difference between lending investors and pawnshops lies only on the security given, that is, a lending investor may require both real and personal property as security for the loan; whereas a pawnshop can require only personal property as security for the loan. But in the end, a lending investor and a pawnshop both engage in the business of lending money for others at interest. Accordingly, a lending investor and a pawnshop are both subject to VAT, pursuant to the provision of the National Internal Revenue Code of 1997 which provides that "there shall be levied, assessed and collected, value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by . . . lending investors . . . ." 17 Even assuming arguendo that we do not classify pawnshops as lending investors, still pawnshops are subject to the 10% VAT imposed under Section 108 (A) of R.A. 8424. Pawnshops refer to persons or entities engaged in the business of lending money on personal property delivered as security for loans. 18 As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to value-added tax. 19 The personal properties delivered by clients of pawnshops as security for the loans which the former obtained from the latter are in the form of remuneration or consideration, for without such personal properties, pawnshops will not extend any loan to a borrower. Furthermore, the payment of interest imposed on a borrower by a pawnshop is equivalent to a fee in exchange of the service provided by the pawnshop in lending money to such borrower. Thus, the phrase "all kinds of services" as stated in the second paragraph of Section 108 (A) of R.A. 8424 is broad enough to cover the kind of service, that is, lending money in consideration of personal property delivered as security, which is provided by pawnshops to their borrowers. And the enumeration of sale or exchange of services under Section 108 (A) of R.A. 8424 does not limit nor exclude other kinds of services performed for a fee, remuneration or consideration. Rather, such enumeration even expanded the meaning of the phrase "all kinds of services" . Besides, pawnshops do not merely engage in the service of lending money to pawners. Rather, pawnshops also sells, at public auction, 20 personal properties pawned to them, in the event that the pawner fails to redeem the pawn within ninety days from the date of maturity of the obligation, the pawnbroker may sell or otherwise dispose of any article taken or received by him in pawn. 21 Thus, by selling properties, pawnshops shall be subject to VAT. Finally, respondent Agencia Exquisite of Bohol, Inc. reiterates that it is claiming exclusion from the coverage of the value-added tax law and it is not claiming exemption from payment thereof. 22 We are not persuaded. When a taxpayer claims exclusion from payment of the VAT, he is thereby claiming exemption from payment thereof. For what is the effect of exclusion from the VAT other than exemption from payment thereof? They have the same effect. That is, when a taxpayer claims exclusion or exemption from payment of the VAT, he is in effect claiming that he is not liable to pay a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services. It is settled that tax exemptions should be strictly construed against those claiming to be qualified thereto. 23 Any exemption from the payment of a tax must be clearly stated in the language of the law. 24 Pawnshops are not clearly stated in the National Internal Revenue Code of 1997 to be exempted from payment of the VAT. Hence, pawnshops shall be liable to pay ten percent (10%) of their gross receipts derived from sale or exchange of services as value-added tax. WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals in CTA Case No. 6219 is hereby REVERSED and SET ASIDE and in lieu thereof a new one is hereby rendered ordering respondent Agencia Exquisite of Bohol, Inc. to pay the amount of P180,404.49 25 as deficiency value-added tax for the year 1998. HTCISE SO ORDERED. De Guia-Salvador and Maambong, JJ . , concur. Footnotes 1. Penned by Associate Judge Amancio Q. Saga; concurred in by Presiding Judge Ernesto D. Acosta; and dissented by Associate Judge Juanito C. Castaeda, Jr. 2. Rollo, p. 24. 3. Annex "E", Rollo, pp. 8385. 4. Annex "F", Rollo, p. 86. 5. Annex "F-2", Rollo, p. 88. 6. Annex "F-1", Rollo, p. 87. 7. Annex "G", Rollo, pp. 8993. 8. CA-G.R. SP No. 28824, promulgated on December 23, 1993. 9. CTA Decision, Rollo , pp. 2122. See also dissenting opinion of Associate Judge Juanito C. Castaeda, Jr., Rollo , pp. 2536. 10. Petition for Review, Rollo , p. 5. 11. Petition, Rollo , pp. 710. 12. Comment, Rollo, p. 111. 13. Id. , at 133134. 14. Commissioner of Internal Revenue v. Court of Appeals , 329 SCRA 237 (2000). 15. This Court notes that respondent used the word "alienate" instead of the word "sell". Comment, Rollo , p. 133. 16. Commissioner of Internal Revenue v. Agencia Exquisite of Bohol, Inc. , CA-G.R. SP No. 59282, promulgated March 23, 2001. 17. Section 108 (A), R.A. 8424. 18. Section 3, Presidential Decree No. 114, otherwise known as the "Pawnshop Regulation Act". 19. Commissioner of Internal Revenue v. Court of Appeals, supra. 20. Section 15, P.D. 114. 21. Section 14, P.D. 114. 22. Memorandum, Rollo , p. 237. 23. Commissioner of Customs vs. Court of Tax Appeals , 328 SCRA 822 (2000). 24. Commissioner of Internal Revenue v. Court of Appeals, supra. 25. As stated in Assessment Notice No. 84-vat-13-98-2000-4-098, Annex "F-1", Rollo , p. 87.