Lhuillier v. Commissioner of Internal Revenue

EIGHTEENTH DIVISION [CA-G.R. SP No. 77899. May 27, 2005.] MICHEL J. LHUILLIER , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N GOZO-DADOLE , E.J p : This is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure, as amended, from the Decision ( Rollo , p. 45) promulgated on May 16, 2003 of the Court of Tax Appeals, Quezon City in C.T.A. Case No. 6533, the dispositive portion of which reads: "WHEREFORE, Assessment notice No. 81-VAT-13-99-2002-7-190 is hereby UPHELD. Accordingly, petitioner is ORDERED to PAY deficiency VAT in the amount of P1,480,371.51 plus 20% delinquency interest from August 22, 2002 until fully paid pursuant to Sections 248 and 249 of the Tax Code. SO ORDERED." The antecedent facts of the case are as follows: Michel J. Lhuillier (hereafter Lhuillier) is engaged in the pawnshop business with its principal place of business located at M. Lhuillier Bldg., Benedicto St., North Reclamation Area, Cebu City. On November 15, 2001, Lhuillier received a Post Reporting Notice from the Revenue District Officer (RDO), Revenue District No. 81 informing him that after an investigation of his income, Value Added Tax (VAT) and other internal revenue taxes for the taxable year 1999, there is still due from him the amount of P1,678,299.59 representing deficiency income and VAT including interest. Thereafter, in a letter dated November 25, 2001, Lhuillier notified the RDO that he is willing to talk with the latter regarding the deficiency income but he does not agree with the findings regarding the deficiency VAT. On July 22, 2002, the Regional Director of the Bureau of Internal Revenue (BIR), Revenue Region No. 13, issued upon Lhuillier a Formal Letter of Demand ( Rollo , p. 125) and Assessment Notice ( Rollo , p. 126) bearing No. 81-VAT-13-99-2002-7-190 finding him liable for deficiency VAT for the taxable year 1999, in the amount of P1,480,371.51 inclusive of 20% interest up to July 15, 2002. HCSEcI On August 8, 2002, Lhuillier filed a Motion for Reconsideration ( Rollo , p. 134) where he raised the following grounds: that Section 102 (a) {now Section 108 (a)} of the Tax Code does not subject pawnshop businesses to VAT; that the VAT on the sale of rematados should not be a tax against the pawnshop but that of the pawner; and that the penalties should not be imposed upon him because he did not commit tax evasion since the refusal of pawnshops to pay VAT is not unlawful for there is no law expressly subjecting them to pay VAT. In a Letter/Final Decision ( Rollo , p. 127) dated August 20, 2002, the Regional Director of the BIR denied Lhuillier's motion. Not satisfied, on September 10, 2002, Lhuillier filed a Petition for Review with the Court of Tax Appeals (CTA), Quezon City, against the Commissioner of Internal Revenue. The case was docketed as C.T.A. Case No. 6533. In his Memorandum of Petitioner ( Rollo , p. 67), Lhuillier argued that the pawnshop business is not engaged in the sale of services as contemplated under the law on VAT under Section 102 (a) {now Section 108 (a)} of the Tax Code. He averred that the phrase "all services" and "all similar services" used in the Code should not include pawnshops considering that the latter are not generically a service business but engaged in forbearance of money because the activity of pawnshops is only limited to lending money to financially distressed individuals. Moreover, Lhuillier asserted that pawnshops cannot also be treated as lending investors for they do not accept investments or placements from investors. In fact, he claimed that it has been the intention of the law to treat pawnshops and lending investors as distinct and separate tax subjects. Also, the reason why pawnshop is not made taxable under the VAT was in order not to unduly and unnecessarily burden the poor sector and financially strained segment of our society. Furthermore, Lhuillier contends that interest on pledge loans, past due loans and liquidated damages are not income arising from the sale or exchange of services for interest income are compensation on the forbearance of money while liquidated damages are mere indemnification or compensation for the damage suffered by him due to the delay incurred by his clientele to deliver or pay his borrowed money. On the imposition of VAT on the sale of rematados and charging the same to the pawnshop business, Lhuillier insisted that it is not sanctioned by the definition of gross receipts under Section 102 (now Section 108) of the Tax Code because said definition presupposes that the party issuing the receipt is a party to the contract. In the case of sale of rematados, the contract of sale is between the pawners and the auction buyers for unlike ordinary sale of goods, the auction sale is conducted under the mandate of the law, for and in behalf of the owner of the rematados the pawners, and not the pawnshops based on the express provision prohibiting pactum commissorium . On the other hand, in the Memorandum for Respondent ( Rollo , p. 102), the Commissioner of Internal Revenue (CIR) maintained that under Section 108 (a) of the Tax Code, the sale or exchange of services is subject to 10% VAT. And 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, and includes the all other services enumerated therein and similar services regardless of whether or not the performance calls for the exercise or use of physical or mental faculties. Moreover, the CIR contends that from the words of Section 108 (a), the legislative intent is not to limit the application of the law to those only enumerated therein because the law itself speaks of "all kinds of services." Likewise, the term "similar services" clearly indicates that the enumeration is not exclusive because services not specifically mentioned but similar to those mentioned are also covered by VAT. The CIR thus alleged that the principal activity of pawnshops is lending money at interest on the security of personal property. Hence, this act of lending money at interest constitutes performance of a service for a fee, remuneration or consideration. Therefore, the CIR insisted that pawnshops are engaged in the sale of services that is subject to VAT although they are not specifically mentioned in the law. In addition, the CIR narrated that the transactions of pawnshops are not among those enumerated in Section 109 of the Tax Code as exempt from VAT, which enumeration is exclusive in line with the principle that tax exemptions are strictly construed. Furthermore, the CIR argued that interest income on pledge loans and past due loans, liquidated damages and the proceeds from the auction sale of pawned items, being incidental to the pawnshop business, are all part of the gross receipts subject to VAT. The CTA in a Decision ( Rollo , p. 45) promulgated on May 16, 2003 ruled in favor of the CIR. In its decision, the CTA explained that Section 108 (a) of the Tax Code provides for the imposition of VAT on the sale of services, and the use and lease of properties. It emphasized that the phrase "sale or exchange of services" encompasses the performance of all services for others for a fee, remuneration or consideration. Moreover, the CTA stressed that the enumeration is not exclusive, meaning that other persons performing services for a fee, remuneration or consideration, who are not expressly mentioned in the enumeration are also subject to VAT. Likewise, Section 108 (a) did not limit its application to only those enumerated therein because the law speaks of "all kinds of services." As such, the CTA concluded that pawnshops like the other businesses enumerated in the law which are engaged in the sale of services for a fee, remuneration or consideration are subject to VAT. In fact, it accentuated that such conclusion finds support in the recent decisions laid down by this Court. Furthermore, the CTA pointed out that the principal activity of pawnshops is lending money at interest on the security of personal property, thus, the act of lending money at an interest constitutes performance of a service for a fee, remuneration or consideration. In other words, the liability of pawnshop operators to pay VAT does not depend on the classification of their business but on the services they rendered. For this reason, the CTA resolved that for as long as pawnshops are engaged in lending money on the security of personal property, they fall within the ambit of Section 108 (a). Also, Section 109 of the Tax Code enumerates the transactions that are exempt from VAT, and pawnshop transactions are not among the exempt transactions under said section and that, there are no express provisions of law exempting pawnshops from VAT. Accordingly, absent any clear provision of law exempting pawnshops from VAT, the CTA declared pawnshops as subject to the same. Finally, the CTA stated that interest income, liquidated damages and gains from the sale of rematados that form part of the gross receipts of the pawnshop business are subject to VAT because they are considered as payments which were actually or constructively received incidental to the pawnshop business and therefore, within the contemplation of Section 108 of the Tax Code. cISAHT Still not satisfied, Lhuillier, now petitioner, filed this Petition for Review under Rule 43 ( Rollo , p. 2) raising the following issues, to wit: "I. WHETHER THE PAWNSHOP BUSINESS IS ENGAGED IN A SERVICE BUSINESS SUBJECT TO VAT UNDER SECTION 102 (A). II. WHETHER THE SALE OF REMATADOS IS SUBJECT TO VAT AGAINST THE PAWNSHOP BUSINESS." ( Rollo , p. 16) Anent the first assigned issue, petitioner avers that the CTA erred in ruling that the activity of lending money at interest is a service business. He contends that the CTA should have considered the decisions of this Court in the cases of Commissioner of Internal Revenue vs. Trustworthy Pawnshop, Inc . 1 and Commissioner of Internal Revenue vs. Michel J. Lhuillier Pawnshop Inc . 2 wherein this Court categorically declared that pawnshop business cannot be subject to the Lending Investor's Tax because its business is not akin to that of a lending investor business. Also, petitioner maintains that the interpretation stating that the activity of lending money at interest is a service activity finds no support from Section 108 (a) of the Tax Code. He asserts that the imposition of VAT on the sale of services is confined to the activities of the listed businesses that honestly, truly and generically qualifies as service activities. Moreover, petitioner emphasizes that the entities listed under Section 108 (a) are actually businesses that can be properly considered as engaged in the sale of services because all of them, when they get employed/hired by their clients for a particular objective or goal, they are given the freedom or option by which they are to accomplish the said sets of goal or objective. Based on the foregoing, petitioner claims that what is really determinative of the taxability under the VAT on the sale of services is the nature of the business and on whether the business undertakes the job for a client for a desired objective or goal, yet the manner of realizing said goal is left at the discretion of the service business itself. Petitioner insists that in the case of pawnshop business, its activity is solely limited to lending money to financially distressed individuals. Furthermore, he states that unlike lending investors, pawnshops do not accept investments or placements from investors. The petition is bereft of merit. Section 105, Republic Act No. 8424 otherwise known as the "Tax Reform Act of 1997" provides that: SECTION 105. Persons Liable . 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 (VAT) imposed in Sections 106 to 108 of this Code. Then, Section 108 (A), R.A. 8424 further states that: SECTION 108. 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 . . . . (Underscoring supplied) It is clear from the above-quoted provisions that anyone who engages in the sale or exchange of services is subject to a 10% VAT. And, 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 similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties. Under Section 3 of Presidential Decree No. 114, pawnshops had been expressly referred to 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 pawnbrokerage. From the foregoing definition, it is shown that the principal activity of pawnshops is lending money for an interest on the security of personal property. In essence, the pawnshops' act of lending money contemplates the performance of service, while the interest imposed comprises the fee, remuneration or consideration for the rendition of said service. Accordingly, pawnshops are engaged in the sale of services which in the language of Section 108 (A) are subject to the payment of VAT. Moreover, it can be deduced from Section 108 (A) that the enumeration stated therein was not intended to be exclusive owing to the phrase "and similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties." The said phrase definitely requires that all kinds of services should be subject to VAT. Moreover, the circumstances indicate that the enumeration was merely intended to give examples of businesses performing services covered by VAT. It does not, in any way, exclude other service business not mentioned therein from the coverage of the VAT. Besides, as appropriately noted by the CTA in its decision, the terms "includes" and "including" should be construed to mean enlargement and not limitation, and therefore should convey the idea that there are other items includable, although not specifically enumerated. On the other hand, Section 109, R.A. 8424 explicitly specifies the transactions exempt from VAT. The list given therein is exclusive for it is settled in this jurisdiction that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. And the burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. 3 In the case at bench, nowhere in Section 109 or in any other law was it mentioned that pawnshops are exempted from VAT. As a result, petitioner who is involved in the pawnshop business is therefore subject to VAT. HcISTE Notably, in the cases of Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol, Inc . (CA-G.R. SP No. 68180, February 10, 2003) and Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc . (CA-G.R. SP No. 70319, May 13, 2003), this Court had already resolved that pawnshops are subject to 10% VAT. As to the second assigned issue, petitioner argues that interest charges cannot be considered as part of the contract price for the service rendered by pawnshops because the activity of lending money at interest has not yet been proven to be a service activity. Instead, he asserts that it is irrefutably a case of forbearance of money. On the liquidated damages, petitioner claims that the same cannot also be construed as part of the contract price for they are imposed as a consequence of the failure of the pawner to comply with his obligation. Moreover, petitioner avers that the sale of rematados is not incidental to the pawnshop business. In fact, said sale is made because the law mandates the same and the pawnshop business is not even the party seller., The pawnshop's participation is only limited to recovering the amount that it capitalized when it extended a loan to the pawner. Furthermore, petitioner maintains that the proceeds of the sale of rematados cannot likewise be considered as part of the pawnshops' gross receipts because they are not even allowed by law to sell the same based on the provision on pactum commissorium , and must in fact have the same auctioned by an authorized auctioneer. The argument is untenable. Under Section 108 (A) of the Tax Code, the term gross receipts refer to: SECTION 108. Value-added Tax on Sale of Services And Use or Lease of Properties. xxx xxx xxx The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person , excluding value-added tax. xxx xxx xxx (Emphasis supplied) Interest income, liquidated damages and the proceeds from the sale of "rematados" or pawned items, they having been received by the pawnshops in the course of the conduct of its business, thus, fall under the meaning of gross receipts. And as aptly pointed out by the CTA, the above-cited items are indeed payments which are actually or constructively received incidental to the pawnshop business during the taxable year. In view thereof, the said items are subject to VAT. Significantly, in the sale of rematados, Sec. 14, PD 114 indicates that: SECTION 14. Disposition of pawn on default of pawner . In the event the pawner fails to redeem the pawn within ninety days from the date of maturity of the obligation in accordance with the preceding section, the pawnbroker may sell or otherwise dispose of any article taken or received by him in pawn: Provided, however, That the pawner shall be duly notified of such sale on or before the termination of the ninety-day period, the notice particularly stating the date, hour, and place of sale. Evidently, looking at the above-quoted section, it is the pawnshops who sell the pawned properties in case the pawner fails to fulfill his obligation. Therefore, by taking on the sale of the pawned articles, pawnshops are liable to pay VAT. By virtue of the above-mentioned principles, this Court sees no reason to disturb the findings of the Honorable Court of Tax Appeals. As the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. Furthermore, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 4 WHEREFORE, premises considered, the Decision promulgated on May 16, 2003 of the Court of Tax Appeals, Quezon City in C.T.A. Case No. 6533 is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. Abarintos and Bato, Jr., JJ., concur. Footnotes 1. CA-G.R. SP No. 59250, August 30, 2001. 2. CA-G.R. SP No. 62463, November 20, 2001. 3. CIR vs. Mitsubishi Metal Corp., et al. , G.R. No. 54908, January 22, 1990. 4. CIR vs. CA and Commonwealth Management and Service Corp. , G.R. No. 125355, March 30, 2000.