Summary of CIR v.

Tours Specialists
This case involves a petition to review the decision of the Court of Tax Appeals,
which ruled that hotel room charges paid by foreign tourists and entrusted to
Tours Specialists, Inc. are not included in the company's gross receipts and are not
subject to the 3% contractor's tax.
Background
Tours Specialists, Inc. operated as a travel agency and earned income by servicing
foreign tourists and "Balikbayans," offering services like hotel bookings, airport
transportation, local tours, and cultural activities. They offered a package fee to
tourists and usually, the payments for accommodations, food, and other personal
expenses were handled directly by tourists or foreign travel agencies.
However, some foreign travel agencies requested that hotel room charges be paid
through Tours Specialists, Inc. This arrangement involved the foreign agency
entrusting the funds to Tours Specialists, who would then pay the local hotels when
billed. The Commissioner of Internal Revenue assessed Tours Specialists, Inc. for
deficiency in contractor's tax by including these entrusted hotel room charges in its
gross receipts, leading to a total tax deficiency of P122,946.93.
Key Issue
The central question in this case is whether amounts received by a local
tourist and travel agency, specifically earmarked for hotel
accommodations and paid on behalf of tourists or foreign tour agencies,
form part of the agency's gross receipts subject to the 3% contractor's
tax.
Court of Tax Appeals Findings
The Court of Tax Appeals found that the amounts entrusted to Tours Specialists, Inc.
were exclusively for paying the hotel room charges of foreign tourists and were not
part of the package fee. The court also determined that evidence presented by
Tours Specialists, Inc. proved the funds were not diverted for personal gain and were
purely an act of accommodation. Additionally, the court verified that the amounts
earmarked for hotel room charges were documented and traceable, refuting the
petitioner's claim of a lack of evidence.
Supreme Court Ruling
The Supreme Court upheld the decision of the Court of Tax Appeals, citing
substantial evidence supporting their findings. The court determined that gross
receipts subject to tax do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not benefit the taxpayer.
They cited the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc.
to illustrate this principle, highlighting that funds earmarked for specific purposes
and not benefiting the recipient are not considered taxable gross receipts.
The Supreme Court also considered the relevance of Presidential Decree No. 31,
which exempts foreign tourists from paying hotel room taxes. While the petitioner
argued that the 3% contractor's tax is an excise tax on the travel agency's business
operations, the court, referencing Commissioner of Internal Revenue v. John
Gotamco & Son, Inc., clarified that the burden of this tax ultimately shifts to
the service recipient, indirectly imposing a tax on the foreign tourists and
contradicting the intent of P.D. 31.
Conclusion
The Supreme Court denied the petition and affirmed the Court of Tax Appeals'
decision. The court concluded that hotel room charges held in trust by Tours
Specialists, Inc. and paid to local hotels on behalf of foreign tourists do
not constitute part of the agency's taxable gross receipts for the 3%
contractor's tax. This ruling emphasizes the importance of considering the nature
and purpose of funds received by a taxpayer when determining their tax liability.
Summary of the Medicard Case
This case is a petition for review to reverse a Court of Tax Appeals (CTA) decision
that upheld and modified a Bureau of Internal Revenue (BIR) assessment of
deficiency Value-Added Tax (VAT) against Medicard Philippines, Inc. (MEDICARD) for
the taxable year 2006. The total deficiency amounted to P220,234,609.48, plus a
20% annual interest starting January 25, 2007.
Background
MEDICARD is a Health Maintenance Organization (HMO) that offers prepaid health
and medical insurance to its members. Individuals pay annual membership fees and
have access to healthcare services from healthcare providers participating in
MEDICARD's network. The BIR, after noticing discrepancies between MEDICARD's
income tax returns and VAT returns, informed the company and issued a Letter
Notice (LN) followed by a Preliminary Assessment Notice (PAN) for deficiency VAT.
The BIR later issued a Formal Assessment Notice (FAN) to MEDICARD alleging a VAT
deficiency for the taxable year 2006, totaling P196,614,476.69, including penalties.
The BIR, referencing the Commissioner of Internal Revenue v. Philippine Health Care
Providers, Inc. case and Revenue Regulations (RR) No. 16-2005, stated that an
HMO's taxable base for VAT purposes is its gross receipts without deductions. The
BIR reasoned that since MEDICARD does not directly provide medical and hospital
services but arranges for them, its services are not VAT exempt.
MEDICARD contested the assessment, arguing that:
 They provide medical and laboratory services directly through their facilities,
evidenced by their 2006 audited balance sheet.
 P319 million of their P1.9 billion membership fees came from Philippine
Export Zone Authority (PEZA) and Bureau of Investments registered clients.
 Processing fees (P11.5 million) should be excluded from gross receipts since
P5.6 million represented client advances for professional fees paid by
MEDICARD, while the remainder was previously VAT-subjected.
 Professional fees (P11 million) should be excluded because they covered
medical services directly provided by MEDICARD and its subsidiary.
 Even if they were liable, the 12% VAT rate should apply only from February 1,
2006, when it came into effect. They also argued against surcharge and
deficiency interest, claiming they did not pass VAT on to members.
Proceedings and Decisions
After a series of protests, responses, and additional evidence submission, the BIR
denied MEDICARD's protest in their Final Decision on Disputed Assessment,
upholding the VAT deficiency assessment of P196,614,476.99. MEDICARD appealed
to the CTA, reiterating its arguments. The CTA Division affirmed the BIR's
assessment with modifications, ordering MEDICARD to pay P223,173,208.35,
including a 25% surcharge, deficiency interest, and delinquency interest.
The CTA Division reasoned that:
 The CIR has broad powers to conduct examinations and assessments.
 The LN, authorized under RMO Nos. 30-2003 and 42-2003, sufficiently
informed MEDICARD of discrepancies.
 MEDICARD was estopped from challenging the assessment due to lack of a
Letter of Authority (LOA), having availed itself of legal remedies without
raising the issue of the assessment's validity.
 Funds earmarked for doctors, hospitals, and clinics could not be excluded
from gross receipts under RR No. 4-2007, as earmarking constitutes
ownership and management beyond the scope of the regulation.
 Earnings from clinics and laboratories were not excludable as their operation
was incidental to MEDICARD's primary HMO business, and no evidence
showed segregation of these amounts when receiving premiums.
 MEDICARD did not substantiate January 2006 income, thus lacking basis for a
10% VAT rate.
MEDICARD's Motion for Reconsideration was denied. Appealing to the CTA en banc,
MEDICARD succeeded only in applying the 10% VAT rate for January 2006. The CTA
en banc upheld the CTA Division's other findings, resulting in a modified deficiency
VAT assessment of P220,234,609.48. MEDICARD's motion for reconsideration was
again denied, leading to their appeal to the Supreme Court.
Supreme Court Decision
The Supreme Court found the petition meritorious and reversed the CTA en banc's
decision and resolution. The Court concluded:
The absence of an LOA violated MEDICARD’s right to due process. The Court
highlighted the statutory requirement of an LOA for any tax examination under
Section 6 of the NIRC, emphasizing that only the CIR or their authorized
representatives may undertake an examination. Although the BIR's RELIEF System
and related RMOs (30-2003, 42-2003, and 32-2005) provided alternative methods
for discrepancy detection and assessment, the Court stressed that these procedures
cannot override the statutory LOA requirement.
The Court noted that the LN issued to MEDICARD did not convert into an LOA, which
was required by RMO No. 32-2005 for the assessment to be valid. Referencing
Commissioner of Internal Revenue v. Sony Philippines, Inc., the Court stated that an
assessment without proper authorization is void. The Court also clarified that an LN
serves a different purpose than an LOA, highlighting their distinct characteristics
and legal implications.
The Court argued that due process requires an LOA following an LN, which was not
done in MEDICARD's case. The absence of a physical examination of MEDICARD's
records did not negate the need for an LOA, as the statutory requirement focuses on
the "examination of a taxpayer." The Court acknowledged the effectiveness of the
BIR's RELIEF System but asserted that it does not excuse non-compliance with
statutory requirements and due process principles.
The Court determined that:
The amounts earmarked and eventually paid by MEDICARD to the medical
service providers do not form part of gross receipts for VAT purposes. The
Court disagreed with the CTA's conclusion that the entire membership fees should
be included in MEDICARD's gross receipts based on RR No. 16-2005. The Court
clarified that RR No. 16-2005 merely presumes the membership fees as
compensation, allowing HMOs to prove that portions of these fees compensate
others (in this case, the medical service providers).
The Court emphasized the principle of interpreting statutory language in its plain
and ordinary meaning, noting that Congress could have left the term "gross
receipts" undefined but chose to limit its scope for VAT purposes. Analyzing
MEDICARD's business, the Court recognized their role as an intermediary between
members and healthcare providers for a fee. The Court accepted MEDICARD's
practice of earmarking 80% of membership fees for medical utilization, informing
members beforehand that only 20% constituted their service fee.
The Court stated that subjecting the entire amount to VAT requires explicit statutory
support, which is absent in the NIRC. The Court reiterated the doctrine of strict
interpretation in tax imposition, emphasizing that taxes should not be imposed
beyond the clear meaning of tax laws.
The Court rejected the argument that earmarking constitutes ownership, asserting
that it actually weakens MEDICARD's ownership claim by demonstrating their role as
an administrator of the earmarked funds. MEDICARD's issuance of separate receipts
for the VATable service fee and the non-vatable medical utilization portion further
supported their position.
Conclusion
The Supreme Court's decision in Medicard Philippines, Inc. v. Commissioner of
Internal Revenue clarified the importance of an LOA in tax assessments, upholding
the taxpayer's right to due process. Additionally, the decision clarified the scope of
"gross receipts" for HMOs regarding VAT, recognizing the portion of membership
fees earmarked for medical services as not belonging to the HMO and therefore not
subject to VAT.
Summary of the Lhuiller Case
This case is a judicial appeal against the Commissioner of Internal Revenue (CIR)'s
decision that held Michel J. Lhuillier liable for deficiency Value Added Tax (VAT)
amounting to P1,480,371.51 for the taxable year 1999.
Background
Michel J. Lhuillier, a resident of Cebu City, is engaged in the pawnshop business.
Lhuillier received a Post Reporting Notice informing him that, after an investigation,
he owed P1,678,299.59 in deficiency income tax and VAT for the year 1999. Lhuillier
expressed willingness to discuss the income tax deficiency but disagreed with the
VAT deficiency findings.
Subsequently, the Regional Director of the Bureau of Internal Revenue (BIR) issued
a Formal Letter of Demand and Assessment Notice, demanding payment of
P1,480,371.51 for deficiency VAT, including interest. Lhuillier filed a motion for
reconsideration, arguing:
 Section 102(a) of the Tax Code (now Section 108(A)) does not subject
pawnshop businesses to VAT.
 VAT on the sale of rematados (forfeited items) should be levied on the
pawner, not the pawnshop.
 Penalties should not be imposed as he did not commit tax evasion, and the
VAT issue is industry-wide due to the lack of express provisions in the Tax
Code.
The CIR denied the motion for reconsideration, prompting Lhuillier to file a Petition
for Review with the Court of Tax Appeals. In response, the CIR asserted that:
 Lhuillier's income from his pawnshop business was subject to the 10% VAT on
the sale of services under Section 108(A) of the Tax Code.
 Lhuillier also had VAT liabilities related to income from his farming business,
understated rental income, and salaries and wages.
 He claimed input VAT credit that was unsubstantiated.
 Since he only contested the VAT on pawnshop income, the assessments for
other income sources and input VAT disallowance had become final.
 Interest on pledge loans, past-due loans, and liquidated damages are part of
Lhuillier's gross receipts and subject to VAT.
After both parties stipulated on evidence, the case was submitted for decision.
Key Issues
The court outlined the following key issues:
1. Whether a pawnshop business is a service or merely a forbearance of money.
 2. Whether pawnshop businesses are subject to VAT on the sale of services
under Section 108(A) of the NIRC.
3. Whether a pawnshop business is similar to a lending investor business.
4. Whether interest on pledge loans, past-due loans, and liquidated damages
are income from service or just indemnification, and whether they are part of
Lhuillier's gross receipts subject to VAT.
5. Whether the CIR has the legal authority to impose VAT on the proceeds of the
auction sale of pawned items.
Court of Tax Appeals Decision
The Court of Tax Appeals (CTA) addressed the first three issues jointly due to their
interrelation. The court rejected Lhuillier's arguments that the pawnshop business is
not a sale of services as defined by Section 108(A) of the Tax Code, and that
imposing VAT would be unjust, particularly for the poor who rely on pawnshops.
The CTA, referring to Gomez vs. Ventura, found that the enumeration of
businesses subject to VAT under Section 108(A) is not exclusive and that
the phrase "all kinds of services" implies a broader application. The court reasoned
that including other businesses not specifically listed does not contradict the
legislative intent.
The court considered "including" as a term of enlargement, not limitation, and
highlighted the legislative intent to subject "all kinds of services" to VAT. The court
cited Sutherland, Statutory Construction and Mertens, Law of Federal Income
Taxation to support this interpretation.
The CTA determined that:
 Pawnshops, like other businesses listed in Section 108(A), are engaged in the
sale of services and therefore subject to VAT.
 Section 105 of the Tax Code further reinforces this by stating that any
business rendering services for a fee is subject to VAT.
The court referenced several Court of Appeals decisions, notably Commissioner of
Internal Revenue vs. Agencia Exquisite of Bohol, Inc., which clearly ruled that
pawnshops are subject to the 10% VAT imposed under Section 108(A). The Court of
Appeals, in that case, highlighted the following points:
 Pawnshop businesses are similar to lending investors as both lend money at
interest, differing only in the type of security required.
 Even if pawnshops are not classified as lending investors, their service of
lending money for a fee is still covered under the broad definition of "all kinds
of services" in Section 108(A).
 Pawnshops also engage in the sale of pawned items through public auctions,
further subjecting them to VAT.
The CTA then referenced Section 3 of Presidential Decree No. 114, defining a
pawnshop as a business lending money on personal property as security. The court
argued that lending money at interest constitutes a service for a fee and therefore
falls under the purview of Section 108(A), regardless of the business's classification.
Addressing Lhuillier's argument that pawnshop transactions are not explicitly
exempt under Section 109 of the Tax Code, the CTA reiterated that tax exemptions
are strictly construed against the taxpayer. The court cited the Supreme Court
decision in Commissioner of Internal Revenue vs. Court of Appeals and
Commonwealth Management and Services Corporation, emphasizing that any
service provided for a fee, remuneration, or consideration is subject to VAT unless
explicitly exempt.
Regarding the fourth and fifth issues, the CTA disagreed with Lhuillier's contention
that interest income, liquidated damages, and proceeds from the auction sale of
rematados should not be subject to VAT. The court referenced Section 108 of the Tax
Code, defining "gross receipts" to include all payments received for services
rendered, explicitly mentioning "interest" and "compensation."
The CTA concluded that interest income, liquidated damages, and gains from the
sale of rematados are all part of the pawnshop's gross receipts and subject to VAT,
citing their own recent decision in Agencia Exquisite of Bohol, Inc. vs. Commissioner
of Internal Revenue.
Conclusion
The CTA upheld Assessment Notice No. 81-VAT-13-99-2002-7-190 and ordered
Lhuillier to pay the deficiency VAT of P1,480,371.51 plus delinquency interest. This
decision emphasized the broad scope of "all kinds of services" under Section 108(A)
of the Tax Code, solidifying the principle that pawnshop businesses, by engaging in
the service of lending money for a fee, are liable for VAT. The decision also clarified
that income incidental to the pawnshop business, such as interest and gains from
the sale of pawned items, is included in gross receipts and therefore subject to VAT.