H. TAMBUNTING PAWNSHOP, INC., PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Tambunting Pawnshop versus Commissioner of Internal Revenue

The Case

This is a petition for review on certiorari brought by H. Tambunting Pawnshop, Incorporated against the Commissioner of Internal Revenue. The pawnshop challenges a deficiency value-added tax assessment and compromise penalty for taxable year 2000, insisting that a pawnshop is not subject to value-added tax. The case matters because it fixes, for the bar examination and for practice, the exact period during which pawnshops as non-bank financial intermediaries were exempt from value-added tax by reason of the repeated legislative deferments of its imposition.

Procedural History

The Commissioner of Internal Revenue issued an assessment notice dated August 27, 2003, demanding deficiency value-added tax of 5,212,404.52 pesos and a compromise penalty of 25,000 pesos for taxable year 2000. Tambunting protested the assessment on September 15, 2003, disclaiming liability. When the Commissioner failed to act on the protest, Tambunting filed a petition for review with the Court of Tax Appeals pursuant to Section 228 of the National Internal Revenue Code.

The Second Division of the Court of Tax Appeals denied the petition in a decision dated April 11, 2005, ordering payment of the deficiency value-added tax plus surcharge and delinquency interest, but deleting the compromise penalty. Tambunting moved for partial reconsideration, and later manifested that it had paid 828,809.67 pesos for the years 2000 to 2002 pursuant to a settlement agreement with the Bureau of Internal Revenue allowing payment of 25 percent of its value-added tax due. The Second Division denied the motion in a resolution dated July 14, 2005.

Tambunting appealed to the Court of Tax Appeals en banc, which affirmed the decision and resolution in toto on March 21, 2006, and denied reconsideration on April 18, 2006. Tambunting then elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

H. Tambunting Pawnshop, Incorporated is a domestic corporation duly licensed to engage in the pawnshop business. For taxable year 2000, the Bureau of Internal Revenue assessed it for deficiency value-added tax and a compromise penalty.

Tambunting protested, arguing that a pawnshop business was not subject to value-added tax and that the compromise penalty was improper. The Commissioner took no action on the protest, prompting the pawnshop to seek judicial relief.

Meanwhile, Tambunting paid 25 percent of its value-added tax liability for the years 2000 to 2002 under a settlement agreement with the Bureau. The tax liability in dispute before the Court covered taxable year 2000 only.

Issues

• Whether or not a pawnshop, as a non-bank financial intermediary, was liable for value-added tax for taxable year 2000.
• Whether or not the deficiency value-added tax assessment and the surcharge imposed on Tambunting lacked legal basis and should be cancelled.
• Whether or not Tambunting is entitled to a refund of the amount it paid under the settlement agreement corresponding to taxable year 2000.

Applicable Provisions

Section 108, paragraph A, of the National Internal Revenue Code, as quoted in the decision, provides:

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 or 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 another 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.

This is the provision under which the Commissioner assessed the pawnshop, and the Court had to determine whether pawnshops fall within its coverage and when the tax on them took effect.

Section 5 of Republic Act Number 8424, the Transitory Provisions on the deferment of the effectivity of the imposition of value-added tax on certain services, provides:

Section 5. Transitory Provisions - Deferment of the Effectivity of the Imposition of VAT on Certain Services. - The effectivity of the imposition of the value-added tax on services as prescribed in Section 17(a) and (b) of Republic Act No. 7716, as amended by Republic Act No. 8241, is hereby further deferred until December 31, 1999, unless Congress deems otherwise: Provided, That the said services shall continue to pay the applicable tax prescribed under the present provisions of the National Internal Revenue Code, as amended.

This provision postponed the value-added tax on non-bank financial intermediaries, and the later amendatory laws moved the date further.

Section 1 of Republic Act Number 8761, amending Section 5 of Republic Act Number 8424, provides:

Section 5. Transitory Provisions - Effectivity of the Imposition of VAT on Certain Services. - The imposition of the value-added tax on the following services shall take effect on January 1, 2001: (b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions.

This moved the effectivity to January 1, 2001, still after the taxable year in question.

Section 1 of Republic Act Number 9010, amending Section 5 of Republic Act Number 8424 as amended by Republic Act Number 8761, provides:

Section 5. Transitory Provisions - Effectivity of the Imposition of VAT on Certain Services. - The imposition of the value-added tax on the following services shall take effect on January 1, 2003: (b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions.

This final deferment placed the start of the tax on pawnshops at January 1, 2003, beyond taxable year 2000.

Ruling

On the first issue, the Court ruled that pawnshops are treated as non-bank financial intermediaries for purposes of determining their tax liability. The value-added tax on non-bank financial intermediaries was first levied under the Expanded Value-Added Tax Law, but its effectivity was repeatedly deferred by subsequent legislation. The consecutive deferments of the effectivity date of the application of value-added tax on non-bank financial intermediaries like pawnshops resulted in their non-liability for value-added tax during the affected taxable years. Following its earlier rulings, the Court held that pawnshops were not liable for value-added tax for taxable years 1996 to 2002, and became liable only beginning January 1, 2003.

On the second issue, because the imposition itself had been deferred, the Court concluded that the value-added tax deficiency assessment and the surcharge served on Tambunting by the Bureau lacked legal basis and had to be cancelled.

On the third issue, the Court noted that Tambunting had paid 25 percent of its value-added tax liability for the years 2000 to 2002 pursuant to a settlement agreement, while the liability in question covered taxable year 2000 only. To align with the result, the Court held that Tambunting was entitled to a refund of any amount paid pursuant to the settlement agreement corresponding to taxable year 2000 only.

Doctrine

For purposes of determining their tax liability, pawnshops are treated as non-bank financial intermediaries. Although Section 108, paragraph A, of the National Internal Revenue Code includes the services of non-bank financial intermediaries among those subject to value-added tax, the imposition of that tax on them was successively deferred by the Transitory Provisions of Republic Act Number 8424, then by Republic Act Number 8761, and finally by Republic Act Number 9010, which fixed the effectivity at January 1, 2003. A deferment of the imposition of a tax means there is no tax to assess, so any deficiency assessment and surcharge for a covered year is without legal basis and must be cancelled, and any amount paid under a settlement agreement for that year must be refunded.

Disposition

The Court granted the petition, reversed and set aside the decision and resolution of the Court of Tax Appeals en banc, declared Tambunting not liable for value-added tax in taxable year 2000, and ordered the Commissioner of Internal Revenue to refund any amount paid under the settlement agreement corresponding to taxable year 2000 only, with no pronouncement on costs.

Remember This

Memorize the line: pawnshops are non-bank financial intermediaries, and the value-added tax on them was deferred until January 1, 2003, so they were not liable for taxable years 1996 to 2002. Examiners use this case to test the effectivity of the value-added tax on non-bank financial intermediaries and the rule that a deferred imposition cannot support a deficiency assessment.