Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.

TWELFTH DIVISION [CA-G.R. SP No. 70479. August 16, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PHILIPPINE HEALTH CARE PROVIDERS, INC. , respondent . D E C I S I O N BUZON , J p : Before us is a petition for review of the decision of the Court of Tax Appeals (CTA), which cancelled and set aside the documentary. stamp tax assessment issued by petitioner Commissioner of Internal Revenue against respondent Philippine Health Care Providers, Inc. in the total amount of P124,196,610.92 for the taxable years 1996 and 1997. On January 27, 2000, respondent received from petitioner a formal letter of demand and four separate assessment notices demanding the payment of the aggregate sum of P224,702,641.18, representing deficiency value added tax (VAT) in the amount of P100,506,030.26 and documentary stamp tax (DST) in the amount of P124,196,610.92 for the taxable years 1996 and 1997. In a letter dated February 23, 2000, respondent protested the assessments made by petitioner who, however, did not act thereon. In view thereof, respondent filed a petition for review with the CTA seeking the nullity of the assessment for deficiency VAT and DST for the taxable years 1996 and 1997. On April 5, 2002, the CTA rendered a Decision, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. 361-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED." 1 Not satisfied, petitioner filed the instant petition for review on a lone assignment of error, to wit: "THE TAX COURT ERRED IN HOLDING THAT THE MEMBERSHIP AGREEMENT BETWEEN RESPONDENT AND ITS MEMBERS IS NOT A CONTRACT OF INSURANCE, HENCE, NOT SUBJECT TO THE DST UNDER SECTION 185 OF THE TAX CODE." Petitioner takes exception to the following findings of the CTA: "A contract of insurance, in legal parlance, is defined as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event (Section 2 (1), Insurance Code). HDTCSI It must be underscored that what differentiates an insurance contract from the other contract is the undertaking on the part of the insurer to indemnify the insured against loss, damage and liability. As can be inferred from the membership agreement, an enrolled member may avail of the medical/hospital/dental benefits anytime, even on ( sic ) the absence of peril on their part. This is true since a member may take advantage of the laboratory services, x-ray, routine examination and consultation anytime he wants. The inclusion of emergency care available to the members, on the onset of sudden, unexpected illness or injury is merely incidental to the list of services available. Thus, the shouldering of' the expense by the petitioner is not confined merely on the happening of a contingency but likewise includes other incidents even in the absence of illness or injury. As the Court of Appeals held, `An examination of the subject Health Care agreement leads us to conclude that it is not an insurance contract within the context of our existing Insurance Code. It is of foremost importance that a member may take advantage of the benefits under the Health care agreement even in the absence of any loss, damage on his part. At any given time, he may avail of physical examinations, laboratory tests, medical consultations, vaccine administration as well as family planning counseling, among others' ( Philippine National Bank vs. Commissioner of Internal Revenue, C.A. GR No. Sp-53301, June 18, 2001 ) The membership contract of the petitioner is in reality designed to safeguard the economic interest of their members as far as their health needs are concerned. Practically speaking, contracts of this nature merely aim to spare their enrolled members from exposure to the high cost of hospitalization and other medical expense brought about by the fluctuating economy. To our mind, this is not one of indemnity since the reimbursement made to Petitioner is not by reason of loss, damage or liability in the strictest sense of the word, but by virtue of the actual expenses incurred, which is more or less dependent on the will of the member if he chose to avail of the listed services. It does not intend to compensate against the peril or hazard of loss or damage. The petitioner only relieved the member of the obligation of shelling out money from their pockets by shouldering the actual expenses incurred or in some cases, advanced by their members. American jurisprudence is also replete with cases holding that health care agreement is not an insurance contract. `Generally speaking, a corporation, whether or not organized for profit, the object of which is to provide the members of a group with medical services and hospitalization, is considered not engaged in the insurance business and hence not subject to insurance laws. Thus, it has been stated that is ( sic ) there is no hazard or peril as contemplated by a statute defining insurance, but a mere contract entitling certificate holders to medical services or supplies free or at a reduced rates ( sic ), the contract is not one of insurance ( 43 Am Jur 2d 11, citing California Physicians' Service vs Garrison, 28 Cal 2d 790 and Michigan Hospital Service vs. Sharpe, 339 Mich 357 ). As it is generally recognized that the business of insurance is one that is impressed with public interest, it is just proper that they are subject of ( sic ) control and regulation by the state acting through the Insurance Commission. And considering the fact that the government agency tasked to supervise and regulate the operation of Health maintenance Organizations is the Department of Health (pursuant to Executive Order No. 119) and not the Insurance Commission, we are of the view, that herein Petitioner, in its strict sense is not engaged in the business of insurance." 2 Petitioner insists that the Agreement between respondent and its members, a certified true copy of which is attached to the petition, is a contract of insurance and, therefore, subject to documentary stamp tax. Petitioner further argues that the ruling of this Court in Philippine National Bank vs. Commissioner of Internal Revenue that a health care agreement is not an insurance contract is binding only on the parties to said case and are at best persuasive on non-parties. Respondent contends that the issue raised by petitioner has already been passed upon by this Court in the above-cited case. In its comment on the petition, respondent stated that the membership agreement subject of the PNB case was issued by Philamcare Health Systems, Inc. (Philamcare, for brevity). 3 It is interesting to note that in Philamcare Health Systems, Inc. vs. Court of Appeals , 4 which was an action filed by the widow of a deceased member of Philamcare against the latter for damages, Philamcare raised the same argument that a health care agreement is not an insurance contract. The Supreme Court rejected said argument and ruled as follows: "In the case at bar, the insurable interest of respondent's husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract." In view of the ruling of the Supreme Court that a health care agreement is in the nature of a non-life insurance, which is primarily a contract of indemnity, respondent is obliged to pay documentary stamp tax, as provided for in Section 185 of the Tax Code, which reads: "Section 185. Stamp tax fidelity bonds and other insurance policies . On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity employer's liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), . . . , which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of Fifty centavos (P0.50) on each Four pesos (P4.00), or fractional part thereof, of the premium charged." WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. CDaTAI Respondent is ordered to pay the amounts of P55,746,352.19 and 168,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED. Guaria III and Javier Ranada, JJ ., concur. Footnotes 1. Rollo , p. 47. 2. Id ., at 44-46. 3. Id ., at 135. 4. 379 SCRA 356, 363 (March 18, 2002).