Kwik Loans Pawnshop, Inc. v. Commissioner of Internal Revenue

NINETEENTH DIVISION [CA-G.R. SP No. 79158. November 18, 2005.] KWIK LOANS PAWNSHOP, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N MAGPALE , J p : The instant petition assails the Decision 1 dated April 21, 2003 of the Court of Tax Appeals (CTA) in CTA Case No. 6424 ordering Kwik Loans Pawnshop, Inc. (hereinafter petitioner) to pay the amount of P3,635,275.07 as deficiency value-added tax (VAT) for the year 1999, plus 20% delinquency interest from March 1, 2002 until fully paid, and its Resolution 2 dated July 23, 2003 denying petitioner's motion for reconsideration on the said Decision. The facts are as follows: On August 24, 2001, petitioner, a domestic corporation and engaged in pawnshop business, received from respondent Commissioner of Internal Revenue (hereinafter respondent) a Preliminary Assessment Notice dated August 14, 2001 informing the former that it has unpaid deficiency (VAT) in the amount of P3,634,729.89, inclusive of surcharges, interests and compromises for the year 1999. Petitioner then filed a letter with the office of the respondent on September 7, 2001 opposing the Preliminary Assessment Notice. On October 8, 2001, petitioner received a Formal Demand Letter and Assessment Notice (Assessment No. 81-vat-13-99-2001-9-595) from the respondent for unpaid deficiency VAT in the amount of P3,879,629.53 for the year 1999. On October 22, 2001, petitioner lodged an administrative protest by filing a motion for reconsideration on the said Formal Demand Letter and Assessment Notice. In a letter dated January 31, 2001, respondent denied the motion for reconsideration filed by petitioner, but it reduced the assessment of the deficiency VAT from P3,879,629.53 to P3,660,275.07. cTIESD Unsatisfied, petitioner filed a petition for review with the Court of Tax Appeals (CTA) assailing the aforementioned assessment for deficiency VAT. On April 21, 2003, the CTA rendered the challenged Decision, the dispositive portion of which reads: "WHEREFORE, premises considered, Assessment Notice No. 81-vat-13-99-2001-9-595 dated September 24, 2001 issued by respondent against petitioner is hereby upheld, recomputed as follows: Amount Output Tax Sales-Jewelry P453,166.39 P45,316.64 Add: Receipts not subjected to VAT Interest Income-Pledge Loan P10,073,279.00 P915,752.64 Interest Income-Part due 6,852,848.30 622,986.21 Service Charge 707,843.60 64,349.42 Gain on Auction Sale 1,789,518.00 162,683.45 Liquidated Damages 2,191,659.80 199,241.80 Total P21,615,148,70 P1,965,013.52 Total P22,068,315.09 2,010,330.16 Less: Creditable input tax 39,538.10 VAT Payable P1,970,792.06 Less Payments 5,778.51 Deficiency VAT P1,965,013.55 Add: 25% Surcharge 491,253.39 20% Interest p.a. (1/26/99-2/28/02) 1,179,008.13 Total amount due and payable P3,635,275.07 Accordingly, petitioner is ORDERED to PAY the respondent COMMISSIONER OF INTERNAL REVENUE the amount of P3,635,275.07 representing deficiency VAT for the year 1999, plus 20% delinquency interest from March 1, 2002 until fully paid pursuant to Sections 248 and 249 of the Tax Code, as amended. SO ORDERED." Petitioner filed a motion for reconsideration on the above decision but the same was denied by the CTA in its Resolution 3 dated July 23, 2003. Hence, this petition. For consideration are the following issues: I. Whether or not the pawnshop business is subject to VAT. II. Whether or not the sale of "rematados" is subject to VAT against the pawnshop business. Anent the first issue, petitioner materially contends that Section 108 of the 1997 National Internal Revenue Code (NIRC), which is the basis of the CTA in arriving the questioned Decision, does not expressly include pawnshop or its activity of lending money at an interest as a sale of service subject to VAT. It asserts that pawnshop business is not one of those entities enumerated under Section 108 of the NIRC subject to VAT. Neither said provision explicitly states that the activity of lending money at an interest is a sale of service subject to VAT. It posits that the clause "performance of all kinds of services" shall include only the services performed by the entities specifically listed under Section 108. Thus, the CTA erred in holding petitioner liable for VAT. Petitioner also argues that when the VAT law was passed by the legislature it did not intend to impose a new tax burden or tax subject, rather it only reclassified taxable transactions or businesses from being subject to percentage taxes and other indirect taxes to VAT. This is shown by the fact that businesses subject to VAT enumerated under Section 108 were previously subject to percentage taxes and other indirect taxes. DTIcSH We are not persuaded. The pertinent portion of Section 108 of the NIRC states: 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 of not the performance thereof calls for the exercise of use of the physical or mental faculties . . . . . (Emphases supplied) Apparently, the above-cited provision subjects to VAT any sale or exchange of service to others for a fee, remuneration or consideration. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. 4 Section 3 of Presidential Decree (PD) No. 114, otherwise known as the Pawnshop Regulation Act, 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 pawnshop. Taking into account the business of pawnshops of lending money at an interest, We agree with the finding of CTA that the same constitutes performance of service subject to VAT. Lending money at an interest, to the general public, with personal property placed to secure the payment of the loan, is undoubtedly a service. While pawnshop is not one of those entities listed under Section 108 the phrase "performance of all kinds of services" is comprehensive enough to include the business of pawnshop in lending money at an interest. The listing of entities subject to VAT in the said provision is not exclusive, it serves only as example of entities which are subject to VAT. To confine the applicability of Section 108 to the enumerated entities would negate the unequivocal meaning of the phrase "performance of all kinds of services". Elementary is the rule in statutory construction, that when laws or rules are clear, application and not interpretation is imperative. In the instant case, the law is clear and leaves no room for interpretation. Moreover, Section 109 of the NIRC, which provides for exempt transactions from VAT, does not include the pawnshop transaction of lending money at an interest. Well settled is the rule that exemption from taxation is construed strictissimi juris against the taxpayer and liberally against the taxing authority. A claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. 5 Since Section 108 subjects to VAT sales of all kinds of services and the exemption from VAT under Section 109 does not include the pawnshop transaction of lending money at an interest, then it follows that such transaction of pawnshop business is subject to VAT. cCESTA In the case of Commissioner of Internal Revenue vs. Court of Appeals, et al ., 6 the Highest Tribunal held: "Section 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration". . . . . . . . As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. At any rate, it is the rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of tax must be clearly stated in the language of the law; it can not be merely implied therefrom. In the case of VAT, Section 109, Republic Act 8424 clearly enumerates transactions exempted from VAT. (Emphasis Supplied) Apropos the second issue, petitioner ascribes that the CTA erred not only in declaring the sale of "rematado" items is subject to VAT but also in holding that the interest on pledge loans, past due loans and liquidated damages are subject to VAT. Petitioner argues that the sale of "rematado" items, interest on pledge loans and liquidated damages are not subject to VAT as they are not part of the gross receipts of the pawnshop business, and the sale of "rematado" items is not of the pawnshop but of the pawners. Furthermore, the proceeds of the auction sale of "rematado" items do not immediately inure to the benefit of the pawnshop as income or gain as the proceeds are still subject to the cost of the auction sale. Also, the net proceeds of the auction sale of "rematado" items only serve as reimbursement of its capital and any excess can not be taken as gain, rather it is an indemnification of the injuries suffered by pawnshop business as consequence of non-redemption of the pawned items by the pawners. We do not agree. The allegation of the petitioner that the CTA held the auction sale of "rematado" items subject to VAT is misleading. The CTA ruled that it is the gain on auction sale of pawned items that is subject to VAT and not the auction sale per se . Section 108 of the NIRC defines gross receipts as follows. "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." (Emphasis supplied) Undoubtedly, the interest on pledge loans, past due loans and liquidated damages are included in the gross receipts of the pawnshop business as these are part of the compensation it receives for lending money at an interest. With respect to the proceeds of the sale of "rematado'" items, it is also Our considered view that the same form part of the gross receipts of the pawnshop business. Under PD 114, pawnshops are allowed to sell at public auction the pawned items after the pawners thereof failed to redeem the same within the period allowed by the law. The proceeds of the sale shall then be applied to the costs of the auction sale, unpaid loan, the interest thereon and other allowable charges. After these charges are deducted any excess shall pertain to the pawnshop business as its gain. Such gain is obtained by the pawnshop as a consequence of its activity of lending money at an interest . Thus, it is only proper that the gain on auction sale of pawned items shall be included in the gross receipts of the pawnshop business subject to VAT as it is part of the compensation it received from its sale of service, that is of lending money at an interest. cASEDC We give full accord to the informed observation of the CTA that: "By the very nature of the pawnshop business, money is being lent secured on personal property. The interest on pledge loans and past due loans are not compensation for forbearance of money. The same is true with liquidated damages in case the pawner fails to pay the borrowed money on time. Said loan having been secured on personal property, the pawnshop operator does not suffer any damage if ever the pawner defaults in the payment of the borrowed money. This is because in the pawnshop business, the loaned amount is always very much lower than the actual worth of the personal property pawned. As regards the sale of the pawned items, what is being taxed by the respondent is the gain on the auction sale and not the auction sale per se . But more importantly, gross receipts is defined in Section 108 as follows: "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." (Emphasis by the CTA) Thus, all interest income, liquidated damages and gains from auction sale of pawned items actually or constructively received by petitioner, having been derived as an intrinsic part of the pawnshop business , form part of the gross receipts of pawnshop subject to VAT. (Italics by the CTA) Finally, it has to be stressed that as a matter of principle, even the Highest Tribunal will not set aside the conclusion reached by an agency such as the CTA which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority, 7 which is not present in the instant case. WHEREFORE, premises considered, the petition is hereby DENIED and the challenged Decision and Resolution of the Court of Tax Appeals are AFFIRMED in toto . SO ORDERED. Yap and Bruselas, Jr., JJ., concur. Footnotes 1. Rollo , pp. 66-81, Annex "A" of the petition. 2. Id ., pp. 89-90, Annex "C" of the petition. 3. Rollo, pp. 89-90, Annex "C" of the Petition. 4. Commissioner of Internal Revenue vs. Court of Appeals , G.R. No. 125355, March 30, 2000. 5. Mactan Cebu International Airport Authority vs. Marcos , G.R. 120082, September 11, 1996. 6. G.R. No. 125355, March 30, 2000. 7. Reyes vs. Commissioner of Internal Revenue , L-24020-21, July 29, 1968.