Commissioner of Internal Revenue v. Tambunting Pawnshop

FIFTH DIVISION [CA-G.R. SP No. 76131. October 3, 2007.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . TAMBUNTING PAWNSHOP, INC. , respondent . D E C I S I O N TIJAM , J p : This is a Petition for Review assailing the Court of Tax Appeals': (a) Decision 1 dated January 3, 2002 in CTA Case No. 5991 which declared petitioner's Revenue Memorandum Order No. 15-91 and Revenue Memorandum Circular No. 43-91 null and void, insofar as they classified pawnshops as lending investors subject to the 5% lending investor's tax under Section 116 of the Tax Code, as amended, and which cancelled petitioner's percentage tax assessment based on the aforesaid Revenue Memorandum Order and Circular; and (b) Resolution 2 dated March 17, 2003 which denied petitioner's Motion for Reconsideration 3 of the January 3, 2002 Decision . SECHIA The facts are as follows: On March 11, 1991, the Commissioner of Internal Revenue (or "petitioner") issued Revenue Memorandum Order (RMO) No. 15-91 4 imposing a 5% lending investor's tax on pawnshops, based on Section 116 of the Tax Code, as amended, which provides: "Sec. 116. Percentage Tax on Dealers in Securities; Lending Investors. Dealers in securities shall pay a tax equivalent to 6% of their gross income. Lending investors shall pay a tax equivalent to 5% of their gross income." On April 15, 1996, the Bureau of Internal Revenue (BIR) issued Assessment Notice No. 23-14-000573-92 against respondent, a corporation organized and existing under the laws of the Philippines and a duly licensed pawnshop operator. The Assessment Notice covered deficiency percentage taxes amounting to P1,405,852.25 5 and a deficiency income tax amounting to P66,902.03. The percentage tax assessment was based on RMO No. 15-91 which imposed the 5% lending investor's tax on pawnshops and Revenue Memorandum Circular (RMC) No. 43-91 6 which clarified RMO No. 15-91. TAacCE On May 7, 1996, respondent filed a formal protest with the BIR, contesting the validity of the assessment. On February 24, 1999, the BIR denied respondent's protest. Respondent moved for reconsideration but the motion was likewise denied. On January 6, 2000, respondent filed a Petition for Review 7 with the Court of Tax Appeals (CTA) on the grounds that: (a) the imposition of the 5% lending investor's tax on respondent had no legal basis, considering that "lending investors" and "pawnshops" were treated differently under the law; (b) RMO No. 15-91 was not a mere interpretation of the law but was a new tax measure on pawnshops, which only Congress could enact; (c) granting that the BIR may impose the 5% lending investor's tax, its assessment lacked factual basis; (d) the BIR had been enjoined from implementing RMO No. 15-91, by the Regional Trial Court of San Mateo, Rizal, in Civil Case No. 849-92 entitled Josefina Leal vs. Commissioner of Internal Revenue ; and (e) the assessment of deficiency income tax lacked factual basis. EScHDA In his Answer , 8 petitioner asserted that tax assessments by tax examiners are presumed correct and made in good faith, and the taxpayer has the burden to impugn its validity. Petitioner argued that the pawnshop business is akin to a lending investor's activity since pawnshops lend money at interest and accepts personal property as security merely as an incident; thus, pawnshops should be subjected to the 5% lending investor's tax. Petitioner likewise asserted that RMO No. 15-91 was issued merely to interpret a pre-existing law, particularly Section 116 of the Tax Code, as amended. Finally, petitioner argued that under Section 219 of the Tax Code, as amended, no court has the authority to restrain the collection of any national internal revenue tax, except the Court of Tax Appeals, thereby indicating the legislative policy to allow petitioner much latitude in the speedy and prompt collection of taxes. On January 3, 2002, the CTA rendered the assailed Decision , 9 the dispositive portion of which reads: IcCEDA " WHEREFORE , in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED . Revenue Memorandum Circular No. 43-91 and Revenue Memorandum Order No. 15-91, in so far as they classify pawnshops as lending investors subject to the 5% lending investors' tax under Section 116 of the Tax Code, as amended, are hereby declared NULL AND VOID . ACCORDINGLY , Petitioner is hereby ORDERED TO PAY the deficiency income tax in the amount of P60,902.07 plus 20% delinquency interest computed from May 15, 1996 until it is fully paid pursuant to Section 249 (c)(3) of the 1989 Tax Code. The Assessment Notice No. 23-14-000573-92, dated April 15, 1996 involving the assessed percentage tax is hereby declared CANCELLED and WITHDRAWN . SO ORDERED ." CHTcSE The CTA held that if pawnshops were lending investors, Congress would not have treated them separately under paragraphs (dd) and (ff) of Section 161 (3) of the Tax Code on the imposition of "Other Fixed Taxes." Furthermore, under Section 161 of the Tax Code, lending investors were imposed a graduated type of fixed taxes depending on the class of the city or municipality involved, while pawnshops were levied a flat tax rate. This, according to the CTA, showed that pawnshops are not similarly situated as lending investors. The CTA also noted that if pawnshops were to be considered lending investors, their above-cited dissimilarity in tax treatment would transgress the Constitutional policy of uniformity in taxation which requires that all subjects or objects of taxation similarly situated should be treated alike or put on equal footing both in privileges and liabilities. Congress, said the CTA, is presumed to have acted with full knowledge of this Constitutional limitation when it classified pawnshops apart from lending investors. ICAcTa The CTA also cited the case of Commissioner of Internal Revenue vs. Hon. Andres Reyes, 10 where this Court held that RMO No. 15-91 and RMC No. 43-91 were not implementing rules but new and additional tax measures which only Congress was empowered to impose. Petitioner moved 11 for reconsideration but the same was denied in the assailed Resolution 12 dated March 17, 2003, Hence, this petition, anchored on the following grounds: 2005jurcd "I THE COURT OF TAX APPEALS GRAVELY ERRED IN DECLARING CANCELLED AND WITHDRAWN THE 5% LENDING INVESTOR'S TAX ASSESSMENT ISSUED BY PETITIONER AGAINST RESPONDENT. II THE COURT OF TAX APPEALS GRAVELY ERRED IN DECLARING THAT THE ISSUANCE OR RMO NO. 15-91 AND RMC NO. 43-91 IS A USURPATION OF THE PREROGATIVE, POWER AND AUTHORITY OF CONGRESS." Petitioner averred that under Section 157 (U) of the Tax Code, as amended, the term "lending investors" was defined as including "all persons who make a practice of lending money for themselves or others at interest." Petitioner, thus, insisted that pawnshops should be subject to the 5% lending investor's tax because their business is akin to that of lending investors since both lend money at interest to the public, and the pawnshops' acceptance of pawned personal property is merely incidental to their lending business. Furthermore, the law allegedly does not distinguish between pawnshops and other lending investors for purposes of the 5% percentage tax on lending investors; hence, the CTA cannot distinguish them. HTCaAD Petitioner likewise argued that there is no law exempting pawnshops from the payment of the 5% lending investor's tax, or excluding pawnshops from the coverage of "lending investors" under Section 157 (U) of the Tax Code, as amended. Thus, the rule that tax exemptions should be construed strictly against the taxpayer and liberally in favor of the taxing authority should apply. Petitioner cited the case of Molo vs. Yatco 13 where the Supreme Court supposedly held that "a person who lent money to several persons with interest, without proving that said loans were made accidentally or due to certain peculiar circumstances, is presumed to be a lending investor . " Petitioner also cited the case of Bancom Group, Inc. vs. Commissioner of Internal Revenue , 14 where the CTA supposedly ruled that a corporation that borrowed money from banks for the purpose of re-lending the same to its subsidiaries is presumed a lending investor even if it incurred losses in the process. Petitioner, thus, argued that pawnshops, whose principal activity is lending money to the public at interest, should likewise be presumed, if not declared by the CTA, as lending investors. CDcHSa Petitioner also asserted that as Commissioner of Internal Revenue, he has the power to issue rulings and circulars and to revoke previous BIR rulings to rectify errors committed by his predecessors. He argued that the imposition of the 5% lending investor's tax on pawnshops was merely a corrective measure, and cannot be considered as a usurpation of the Congress' power. Finally, petitioner averred that the CTA's reliance on this Court's d ecisio n in the case of Commissioner of Internal Revenue vs. Andres B. Reyes, Jr. 15 was premature since the said decision was not yet final and executory. The petition lacks merit . The issue of whether pawnshops should be considered lending investors subject to the 5% lending investor's tax, has been settled in Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc. , 16 where the Supreme Court declared RMO No. 15-91 and RMC No. 43-91 null and void. 17 Section 157 (u) of the National Internal Revenue Code (NIRC) of 1986, as amended, defines the term "lending investor" as including "all persons who make a practice of lending money for themselves or others at interest," while Section 3 of P.D. No. 114 defines "pawnshop" as "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 pawn brokerage." 18 The Supreme Court held that while it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage tax 19 The High Court cited the following reasons: Pawnshops and lending investors were subjected to different tax treatments under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986; thus: SEDaAH "(3) Other Fixed Taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified: xxx xxx xxx (dd) Lending investors 1. In chartered cities and first class municipalities, one thousand pesos; 2. In second and third class municipalities, five hundred pesos; IHcTDA 3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos. xxx xxx xxx (ff) Pawnshops , one thousand pesos" 20 Furthermore, it was not the intention of Congress to treat pawnshops in the same way as lending investors. Section 116 of the NIRC of 1977, as renumbered and rearranged by E.O. No. 273, was basically lifted from Section 175 of the NIRC of 1986, 21 which treated both tax subjects differently. 22 Section 175 of the NIRC of 1986 reads as follows: "Sec. 175. Percentage tax on dealers in securities, lending investors. Dealers in securities shall pay a tax equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994)." ESTCHa While the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the Commissioner of Internal Revenue is found, both the NIRC of 1986 and the NIRC of 1977, as previously shown, dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects differently. Hence, the statute must be interpreted to conform to such legislative intent. 23 So also, Section 116 of the NIRC of 1977, as amended by E.O. No. 273, imposes the percentage tax only on dealers in securities and lending investors. It makes no mention of pawnshops. Under the maxim expressio unius est exclusio alterius , the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect. This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the human mind. 24 SECcIH Moreover, the BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC No. 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273. The Commissioner of Internal Revenue has even admitted this in RMO No. 15-91 itself. 25 Considering that Section 116 of the NIRC of 1977, as amended, was practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the interpretation thereof should not have been altered. 26 The Supreme Court likewise noted that pawnshops were sought to be included as among those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads: CSDcTA "Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: 'SEC. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS . Dealers in securities shall pay a tax equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross income."' 27 According to the Supreme Court, if pawnshops were covered by the term "lending investor," there would have been no need to introduce the said amendment to include owners of pawnshops. At any rate, the proposed amendment was not adopted. Instead, the approved bill, which became R.A. No. 7716, 28 repealed 29 Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91. 30 STECAc Finally, the Supreme Court held that RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. They would have been amendatory provisions applicable to pawnshops. Without these disputed issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In issuing RMO No. 15-91 and RMC No. 43-91, the Commissioner of Internal Revenue did not simply interpret the law. 31 When an administrative rule goes beyond merely interpreting the law or providing for the means that can facilitate or render least cumbersome the implementation of the law, but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. 32 Thus, in the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted, there must be a hearing. 33 In this connection, the Administrative Code of 1987 provides: ICAcTa "Public Participation . If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule. (2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two weeks before the first hearing thereon. (3) In case of opposition, the rules on contested cases shall be observed. In addition, such rule must be published." 34 Hence, the Commissioner of Internal Revenue's non-observance of the requirements of notice, hearing, and publication makes his issuances invalid. While the rule-making authority of the Commissioner of Internal Revenue is not doubted, like any other government agency, he may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers. 35 HSCAIT WHEREFORE, the instant petition is DISMISSED. The assailed Decision dated January 3, 2002 and Resolution dated March 17, 2003, rendered by the Court of Tax Appeals in CTA Case No. 5991, declaring petitioner's Revenue Memorandum Order No. 15-91 and Revenue Memorandum Circular No. 43-91 null and void, and canceling petitioner's Assessment Notice No. 23-14-000573-92 dated April 15, 1996 involving the assessed percentage tax, are hereby AFFIRMED. TADIHE SO ORDERED. Villarama, Jr. and Villon, JJ., concur. Footnotes 1. Rollo , pp. 41-54. Penned by Presiding Judge Ernesto D. Acosta, with Associate Judge Amancio Q. Saga concurring, and Associate Judge Juanito C. Castaeda giving a Concurring and Dissenting Opinion ( Rollo , pp. 55-62). 2. Id., pp. 63-65. 3. Id., pp. 69-79. 4. RMO No. 15-91 provides: "A restudy of P.D. No. 114 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 Tax Code, as amended." 5. Computed as follows: Taxable Sales/Receipt P13,147,658.24 5% Tax due thereon 657,382.91 Less: Allowable Tax Credits Deficiency Tax Due 657,382.91 Add: 25% Surcharge 164,345.73 20% Interest per annum 534,123.61 Compromise Penalty 50,000.00 TOTAL P1,405,852.25 ============ (Court of Tax Appeals' Decision dated January 3, 2002, p. 2; Rollo , p. 42.) 6. RMC No. 43-91 provides: "1. RM(O) 15-91 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 Tax Code, and it thus revokes BIR Ruling No. []. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of the 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 Tax Code, 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 the 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 Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked." 7. Rollo , pp. 80-87. 8. Id., pp. 88-92. 9. Supra , note 1. 10. CA-G.R. SP No. 28824. 11. Supra , note 3. 12. Supra , note 2. 13. 71 Phil. 645. 14. CTA Case No. 2977. 15. Supra , note 10. 16. 406 SCRA 178 (2003). 17. Id., p. 189. 18. Id., pp. 184-185. 19. Id., p. 185. 20. Ibid. Emphasis supplied. 21. The NIRC of 1977 as renumbered and rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended by P.D. Nos. 1991, 1994, 2006 and 2031. Id., p. 184. 22. Id., p. 185. 23. Id., p. 186. 24. Ibid. 25. Supra , note 4. 26. Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop, Inc., supra , note 16, p. 186. 27. Id., pp. 186-187. 28. Entitled An Act Restructuring the Value-added Tax (VAT) System, Widening Its Tax Base and Enhancing Its Administration, and for These Purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as amended, and for Other Purposes . 29. "SEC. 20. Repealing Clauses. The provisions of any special law relative to the rate of franchise taxes are hereby expressly repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed." 30. Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop , Inc., supra , note 16, p. 187. 31. Id., p. 189. 32. Id., p. 188-189. 33. Id., p. 188, citing Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary , 238 SCRA 63, 69 (2003). 34. Ibid. 35. Id., pp. 188-189.