Commissioner of Internal Revenue v. APC Group, Inc.

TWELFTH DIVISION [CA-G.R. SP No. 69869. November 29, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . APC GROUP, INC. , respondent . D E C I S I O N REYES, B. , J p : This is an appeal from the Decision of the Court of Tax Appeals dated March 11, 2002 in CTA Case No. 6155, entitled "APC Group, Inc. vs. Commissioner of Internal Revenue", the dispositive portion of which reads: "ACCORDINGLY, premises considered, the Petition for Review is hereby GRANTED. Assessment No. ST-DST-97-0123-99 imposing deficiency documentary stamp tax in the amount of P10,714,545.57 for taxable year 1997 is CANCELLED AND SET ASIDE. SO ORDERED." ( Rollo , p. 29) FACTS The facts are undisputed. On July 27, 1998, Commissioner of Internal Revenue, ("Commission" for brevity) served a Letter of Authority No. 000018598 ( Rollo, p. 35) on APC Group, Inc. (Corporation for brevity) authorizing the examination of respondent Corporation's books of accounts and other accounting records for "all internal revenue taxes" for "1997 and unverified prior years." In the course of the examination, documents requested by petitioner Commission were submitted by Corporation and formed part of BIR records. On November 22, 1999, Commission issued an assessment notice (Rollo, p. 36) with an accompanying demand letter ( Rollo , p. 37) and an explanation of the deficiency documentary stamp tax ( Rollo , p. 38), which Corporation received on December 24, 1999. The assessment notice indicates a deficiency documentary stamp tax in the amount of P10,714,545.57, inclusive of increments, as follows: Particulars Basic Tax Surcharge Total Deficiency Documentary P8,571,636.46 P2,142,909.11 P10,714,545.57 Stamp Tax As set out in the foregoing documents, Commission based the assessment of the deficiency documentary stamp tax on BIR Ruling No. 108-99 dated July 15, 1999 which states, "that inter-office memo covering the advances granted by a corporation affiliate company, i.e. or inter-office memo evidencing lendings/borrowings is in the nature of a promissory note subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997." In a letter dated January 24, 2000, received by Commission on even date, Corporation protested the said assessment by requesting for cancellation and/or withdrawal thereof, citing the following reasons: 1) the basis of Commissioner of Internal Revenue in issuing the assessment is BIR Ruling 108-99 issued on July 15, 1999 which, by law, cannot be given retroactive effect to apply to Corporation's inter-company advances made in 1997; and 2) Corporation's inter-company advances fall squarely under BIR Ruling No. DA-666-A-99, issued on December 3, 1999 which held: "In reply, please be informed that since the inter-company advances are not covered by loan agreements, promissory notes, debit and credit memos nor by inter-company loan memos and since the only documents relating to the inter-company advances are the board resolutions of the lenders and the cash vouchers issued by the lenders which are acknowledged by the borrowers, the said inter-company advances are not subject to documentary stamp tax. Such board resolutions of the lenders and the cash voucher acknowledged by the borrowers are not in the nature of promissory note subject to documentary stamp tax under Section 180 of the Tax Code of 1997." In a letter dated March 24, 2000, which was received by Commission on even date, Corporation manifested that its protest dated January 24, 2000 and those documents submitted to the BIR examiners which formed part of the BIR Records, as constituting all relevant documents of the protest in compliance with Section 228 of the Tax Code. To date, the Commission has made no decision on the protest notwithstanding the lapse of the one hundred eighty (180) day period since the filing of the protest on January 24, 2000. Consequently, to be well within the 30-day period from the earlier 180-day period given to Commission to decide the protest, the Corporation filed a Petition for Review with the Court of Tax Appeals for the purpose of having the assessment cancelled and/or withdrawn. On March 11, 2002, Court of Tax Appeals promulgated the assailed decision finding merit in the Corporation's Petition for Review. Dissatisfied therewith, Commission filed this instant Petition for Review asserting that the tax court erred in holding that respondent Corporation's advances to its affiliates covered by inter-office memo are not subject to Documentary Stamp Tax under Section 180 of the Tax Code. Issue WHETHER OR NOT RESPONDENT CORPORATION IS LIABLE FOR THE AMOUNT OF P10,714,545.57 AS DEFICIENCY DOCUMENTARY STAMP TAX (DST) FOR TAXABLE YEAR 1997. Discussion Petitioner Commission averred that although the loan advances that were extended to affiliates of respondent Corporation were not embodied in any formal document but only evidenced by a board resolution and cash vouchers, nevertheless, respondent Corporation is still liable to pay documentary stamp tax for the taxable year 1997 because such advances covered by inter-office memo such as board resolutions and cash vouchers are in the nature of promissory notes under the purview of Section 180 of the NIRC, which is interpreted in BIR Ruling No. 108-99, to wit: "After a careful restudy of the aforementioned ruling, this Office is of the opinion as it hereby holds that inter-office memo covering the advances granted by a corporation affiliate company, i.e. or inter office memo evidencing lendings/borrowings is in the nature of a promissory note subject to the documentary stamp tax imposed Section 180 of Tax Code of 1997 ." (Emphasis supplied.) Petitioner Commission further ratiocinated that inter-company loan advances no matter whatever form it partakes is still subject to documentary stamp tax because it is a fundamental precept in taxation that what governs taxation of a transaction is not its form, but its economic substance. On the other hand, respondent corporation submits that it cannot be held liable for documentary stamp tax because there is nothing in Section 180 of the New Internal Revenue Code (NIRC) that provides that inter-office memo are subject to documentary stamp tax. It is only BIR Ruling No. 108-99 that subjects inter-office memo liable to documentary stamp tax contrary to Section 180 of NIRC. We are constrained to agree with the decision of the Court of Tax Appeals which, by the very nature of its function has necessarily developed an expertise on the study and consideration of tax problems. The case at bar involves an interpretation of Section 180 of the NIRC, which provides the following: SEC. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or not: . . . . BIR Ruling No. 116-98 was issued by Bureau of Internal Revenue (BIR) in 1998 to interpret the foregoing section, the pertinent parts of which are quotes as follow: On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings/borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are more or less categorized as "securities", is not subject to documentary stamp tax imposed under Sections 180, 174, and 176 of the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the corporate affiliates . (Italics and emphasis supplied) However, BIR Ruling No. 108-99, which is a later ruling provides that inter-office memo are subject to documentary stamp tax, and which ruling was made to apply retroactively to the loan advances extended by respondent Corporation to its affiliates for the taxable year of 1997. In fine, both rulings are interpretative of Section 180 of NIRC. However, a careful perusal of Section 180 reveals that BIR Ruling 116-98 is more in accordance with the law than BIR Ruling 108-99. As correctly pointed out by the Court of Tax Appeals, what the law seeks to tax are merely loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities or certificates of deposits drawing interest and others not payable on sight or demand. Clearly, board resolutions and cash vouchers were not included in the list. Moreover, it is erroneous to contend that documentary stamp tax is imposed on the transaction and not really on the document evidencing the transaction. It must be stressed that documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments. ( Philippine Home Assurance Corporation, et al. vs. Court of Appeals, G.R. No. 119446, January 21, 1999 ) It is a tax on documents, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right, or property incident thereto. As such the liability to the tax and the amount thereof are determined from the fact of the document itself, i.e., by the form and face thereof, and cannot be affected by proof of facts controlling. Thus, it must be paid upon the issuance of said instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. ( Ibid. ) Since, board resolutions and cash vouchers do not partake the nature, the elements and the form of any of the specific instruments mentioned in the law, they are not therefore subject to documentary stamp tax. While rulings issued by the Commissioner of Internal Revenue command respect and weight, such ruling, however, are not judicially binding if found to be erroneous. "As a matter of power a court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the interpretative rule." ( Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary, 238 SCRA 63 ) In this instant case, BIR Ruling 108-99 clearly goes beyond the terms of the law it seeks to interpret. Thus, we are constrained to override such ruling and exempt such board resolutions and cash vouchers from documentary stamp tax consistent with Section 180 of NIRC and with the well settled rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. WHEREFORE, premises considered, the instant appeal is hereby denied. Accordingly, the decision of the Court of Tax Appeals, dated March 11, 2002 in CTA case No. 6155 is hereby AFFIRMED. SO ORDERED. Brawner and Pine * , JJ . , concur. Footnotes * Acting Junior Member