A.L.L. Pawnshop, Inc. v. Commissioner of Internal Revenue

EIGHTEENTH DIVISION [CA-G.R. SP No. 79758. April 16, 2007.] A.L.L. PAWNSHOP, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N DIZON , J p : Before Us is a petition for review of the decision of the Court of Tax Appeals dated in September 03, 2003, CTA Case No. 6482. The antecedent facts of the case are as follows: Petitioner A.L.L. Pawnshop, Inc. is a corporation duly existing and organized under Philippine law. It is engaged in the pawnshop business. On August 18, 2000, Regional Director of the Revenue No. 13, authorized officer Fidela Bardelas and Group Supervisor Jonathan Capanas of Revenue District No. 81 Cebu City-North, through Letter of Authority No. 1998-00022091, to examine petitioner's books of account and other accounting records for all internal revenue taxes for the calendar year 1999. On September 06, 2001, respondent issued a Preliminary Assessment Notice for deficiency income tax of P35,227.82 and deficiency value-added tax (VAT) in the amount of P2,918,467.69 totaling P2,953,695.51 for taxable year 1999 but as to the deficiency tax, petitioner through a letter dated September 25, 2001 and filed with the BIR on September 27, 2001, informed the Regional Director of Revenue Region 13 of the BIR of its disagreement with the preliminary assessment. CcaASE After investigation, respondent found due from the petitioner deficiency VAT for the taxable year 1999 in the amount of P2,972,147.96. Hence on November 15, 2001, respondent simultaneously issued his final resolution on the protest Assessment value-added tax in the amount of P2,972,147.96 covering the taxable year 1999, together with a formal letter of demand. On November 27, 2001, petitioner filed a motion for reconsideration on the decision of the respondent denying the protest on the preliminary assessment. Petitioner claims that Section 102 (a) of the Tax Code does not subject pawnshop businesses to value-added tax should be 1/11 and not 10% of the gross receipts and that VAT on the sale of rematados should not be a tax against the pawnshop but on the pawner. On February 19, 2002, the Assistant Chief, Assessment Division of Revenue Region No. 13 issued a Memorandum to the Chief of the Assessment Division advising the latter that after verification of the documents submitted by petitioner, it was found out that only jewelry sales were recorded net of value-added tax. All other receipts were recorded inclusive of value-added-tax or its total invoice amount. On April 01, 2002, the Regional Director of Revenue Region No. 13, issued a letter which in effect, informed the petitioner of his final decision denying its protest and adjusting the deficiency VAT in the amount of P3,230,407.38. On May 03, 2002, petitioner filed a petition for Review with the Court of Tax Appeals. DHcEAa Respondent Commissioner of Internal Revenue in his answer raised the following Special and Affirmative Defenses: a) Petitioner, as a pawnshop operator performs services for others for a fee, remuneration or consideration. Its gross receipts derive from such service are subject to the 10% value-added tax (VAT) imposed under Section 108 (a) of the Tax Code. b) Interest on pledge loans and past due loans and liquidated damages are part of the petitioner's gross receipts subject to VAT. c) The original basic deficiency VAT (inclusive of interest) in the amount of P2,198,009.14 was computed at ten (10%) percent of gross receipts of P21,980,091.40. However according to petitioner's protest, the basic tax was recomputed by multiplying the total amount indicated in the invoice by 1/11. Hence, the deficiency VAT was adjusted to P1,998,190.13. d) Respondent's right to assess has not prescribed. Contrary to the petitioner's claim that the assessment is for the taxable year ending December 31, 1996, it is for the taxable year 1999. e) The assessment was issued in accordance with law and regulations and f) All presumptions are in favor of the correctness of tax assessments. DcSEHT Pre-trial was conducted wherein the parties stipulated on the following facts and issues: 1. Whether or not Pawnshop business is that of service or mere forbearance of money. 2. Whether pawnshop business are subject to VAT on sale of services under Section 108 (A) of the NIRC. 1 3. Whether pawnshop business is akin to Lending Investor business. 4. Whether interest on pledge loans, past due loans and liquidated damages are income from service or a simple item of indemnification, and whether the same is part of petitioner's gross receipts subject VAT; and 5. Whether respondent is legally empowered to impose and charge VAT on the petitioner for the proceeds of the auction sale of pawned item. On September 03, 2003, the CTA handed a decision the dispositive portion of which reads as follows: SCEDAI "Wherefore, premises considered, assessment Notice No. 81-VAT-13-99-2001-11-621 issued by respondent against petitioner is upheld (with adjustment). Accordingly, petitioner is ordered to pay the respondent Commissioner of Internal Revenue the amount of P3,230,407.38 representing deficiency VAT for the year 1999 inclusive of 20% deficiency interest, plus 20% delinquency interest from April 11, 2002 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended." Not satisfied with the decision, Petitioner filed a petition for review, assigning the following as alleged errors of the CTA; I THE HONORABLE COURT OF TAX APPEALS COMMITTED AN ERROR IN HOLDING THE PAWNSHOP BUSINESS IS ENGAGED IN A SERVICE BUSINESS AS DEFINED UNDER SECTION 102 (a) OF THE NATIONAL INTERNAL REVENUE CODE; II THE HONORABLE COURT OF TAX APPEALS COMMITTED AN ERROR IN DECLARING THAT THE SALE OF REMATADOS IS SUBJECT TO VAT ON SALE OF SERVICES AND IMPOSABLE AGAINST THE PAWNSHOP; III THE HONORABLE COURT OF TAX APPEALS COMMITTED AN ERROR IN DECLARING THAT THE INTEREST ON PLEDGE LOANS, PAST DUE LOANS AND LIQUIDATED DAMAGES ARE INCOME FROM SERVICE, THEREFORE, SUBJECT TO VAT; IV THE HONORABLE COURT OF TAX APPEALS COMMITTED AN ERROR IN DECLARING THAT PAWNSHOPS ARE AKIN TO LENDING INVESTORS. 2 The primary contention of petitioner is that the activity of a pawnshop which is lending money at an interest does not fall under Section 108 (A) of the NIRC. It contends that it is not engaged in the sale of services, therefore respondent BIR should not subject Petitioner to VAT pursuant to the above mentioned Section of the Law. ICAcHE We do not agree with petitioner's contention. Said contention is bereft of merit. Under Section 108 (A) [formerly Section 102 (a)] of the Tax Code, as amended, it is provided that: (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 services contractors; stock, real estate, commercial, custom 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, operator or keepers of hotels, motels, resthouses, pension houses, inns, resort; proprietors or operators of restaurants, refreshments parlors, cafes and other eating places, including clubs and caterer's; 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 insurance), 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. 3 Under the law, the sale or exchange of services is subject to 10% VAT. The phrase "sale or exchange or services" means the performance of all kinds of services in the Philippines for others for a fee or remuneration or consideration. It includes the services enumerated therein and similar services regardless of whether or not the performance thereof calls for the exercise or use of physical or mental faculties. According to petitioner, in order to be subject to VAT, respondent must first establish that petitioner is in fact subject to VAT and the determination of whether herein petitioner is subject to VAT or not must be guided accordingly by the standard of strict interpretation of tax law against the government. DCASIT We find this contention of petitioner legally untenable. From the words of Section 108 (A), the legislative intent is not to limit the application of the law to those enumerated therein because the law speaks of all kinds of services. As held in Gomez vs. Ventura , 4 ". . . . The maxim expressio unius est exclusio alterius should be applied only as a means of discovering legislative intent and should not be permitted to defeat the plain indicated purpose of the legislative. It does not apply when words are mentioned by way of example, or to remove doubts." The enumeration of persons performing services for others for a fee is not exclusive, which means that other persons performing services for a fee, who are not expressly mentioned in the enumeration; are also subject to VAT. The enumeration is merely intended to give examples of businesses performing services that are subject to VAT. CIAcSa It is of common knowledge that the principal activity of pawnshops is lending money at interest on the security of personal property. The act of lending money with interest constitutes the performance of a service for a fee, remuneration or consideration. Lending money is the service, and the interest is the fee, remuneration or consideration for such service. Hence, pawnshops are engage in the sale of services that are subject to VAT under Section 108 (A) of the Tax Code. Although they are not specifically mentioned in the law. Moreover, since the transactions of pawnshops are not among those enumerated in Section 109 of the Tax Code as exempt from VAT, the same are subject to VAT under Section 108 (A). This is in line with the principle that Tax exemptions are strictly construed. In the case of Commissioner of Internal Revenue vs. Exquisite Pawnshop and Jewelry, Inc ., 5 it was held: "Pawnshop shall refer to a person on entity engaged in the business of lending money on personal property delivered as security for loans." 6 From the foregoing definition, the fact that, the principal activity of a pawnshop is lending money at interest on the security of personal property is instantly recognizable. Needless to state, the act of lending money with interest constitute or is a performance of a service for a fee, remuneration or consideration. The phrase, "all kinds of services" as stated in second paragraph of Section 108 (A) of Republic Act No. 8424 is broad enough to cover the kind of service which is provided by pawnshops to their borrowers, that is, lending money in consideration or personal property delivered as security. Hence, a pawnshop engaged in the sale of services is subject to VAT, although it is not specifically mentioned in the law. Clearly then, pawnshops are subject to Value-Added Tax." Anent the claim of Petitioner that the Court of Tax Appeals was in error when it declared that the sale of rematados, the interest on pledge loans, past due loans and liquidated damages are subject to VAT. We are not persuaded. The Court of Tax Appeals ruled correctly when it opined: "By the very notice 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 and damages in case the pawners 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 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 loaned. AaCTcI As regards the sale of the pawned items, what is being taxed by the respondent is the gain on auction sale and not the auction sale per se. But more importantly, gross receipt 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 change for materials supplied with the services and deposits and advanced payments actually or contractually received during the taxable quarter for the services performed or to be performed for another person including value-added tax. Thus, all interest income, liquidated damages and gains from auction sale of pawned items actually or constructively received by petitioner, having been derived as intrinsic part of the pawnshop business, form part of the gross receipts of pawnshops subject to VAT." On the said premise, the Honorable Tax Court held that all auctioned sale made by the pawnshop is subject to VAT and interest on loans and liquidated damages is also subject to VAT. As a matter of principle, We do not set aside the conclusion of the Court of Tax Appeals which is, by the very nature of its functions 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 authority. 7 WHEREFORE, in the light of the foregoing, the Petition for Review is DENIED for lack of merit. Costs against Petitioner. AIECSD SO ORDERED. Magpale and Acosta, JJ., concur. Footnotes * Per Office Order No. 79-07-RTR dated March 27, 2007. 1. Decision, p. 16. 2. Rollo , p. 20. 3. Decision, p. 6. 4. 54 Phil. 726. 5. CA-G.R. Sp. No. 70319, May 13, 2003. 6. Section 3, P.D. No. 114. 7. Commissioner of Internal Revenue vs. Court of Appeals , 303 SCRA 614.