Case Digest: CIR v. M.J. Lhuiller Pawnshop, Inc., G.R. No. 150947, July 15, 2003

 Taxation | Constitutional Limitation: Due Process of Law 

Facts: 

• On March 11, 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a 5% lending investor’s tax on pawnshops.
• This was clarified by Revenue Memorandum Circular (RMC) No. 43-91 on May 27, 1991, revoking previous rulings and imposing taxes retroactively from January 1, 1991. 
• In 1997, Michel J. Lhuillier Pawnshop, Inc. received an Assessment Notice demanding payment for deficiency percentage tax in 1994.
• Lhuillier protested, arguing that pawnshops are not lending investors and that the rulings imposing taxes were invalid.
• Despite protests, the Bureau of Internal Revenue (BIR) enforced the tax with a Warrant of Distraint and/or Levy.
• CTA: Ruled in favor of Lhuillier, declaring RMO No. 15-91 and RMC No. 43-91 null and void, and cancelling the Assessment Notice.
• CA: Affirmed the CTA decision in November 2001.
• The CIR further appealed to the Supreme Court, arguing that pawnshops should be subject to the 5% lending investor’s tax.
• Lhuillier argued that RMO No. 15-91 and RMC No. 43-91 were invalid as they were new tax measures not enacted by Congress and not published.

Issue: Whether RMO No. 15-91 and RMC No. 43-91 are invalid because they have never been published in the Official Gazette or any newspaper of general circulation. YES

Held:

We are therefore called upon to resolve the issue of whether pawnshops are subject to the 5% lending investor’s tax. Corollary to this issue are the following questions:

1. Are RMO No. 15-91 and RMC No. 43-91 valid? 
2. Were they issued to implement Section 116 of the NIRC of 1977, as amended?
3. Are pawnshops considered "lending investors" for the purpose of the imposition of the lending investor’s tax?
4. Is publication necessary for the validity of RMO No. 15-91 and RMC No. 43-91.

RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of 1977, as amended by E.O. No. 273.6 Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the law.7

The CIR argues that both issuances are mere rules and regulations implementing then Section 116 of the NIRC, as amended, which provided:

SEC. 116. Percentage tax on dealers in securities; lending investors. - Dealers in securities and lending investors shall pay a tax equivalent to six (6) per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income.

It is clear from the aforequoted provision that pawnshops are not specifically included. Thus, the question is whether pawnshops are considered lending investors for the purpose of imposing percentage tax.

We rule in the negative.

Incidentally, we observe that both parties, as well as the Court of Tax Appeals and the Court of Appeals, refer to the National Internal Revenue Code as the Tax Code. They did not specify whether the provisions they cited were taken from the NIRC of 1977, as amended, or the NIRC of 1986, as amended. For clarity, it must be pointed out that the NIRC of 1977 as renumbered and rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended by P.D. Nos. 1991, 1994, 2006 and 2031. The citation of the specific Code is important for us to determine the intent of the law.

Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a practice of lending money for themselves or others at interest." A pawnshop, on the other hand, is defined under Section 3 of P.D. No. 114 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 pawn brokerage."

While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons:

First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments; thus:

(3) Other Fixed Taxes. – The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified:

….

(dd) Lending investors –

1. In chartered cities and first class municipalities, one thousand pesos;

2. In second and third class municipalities, five hundred pesos;

3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos.

….

(ff) Pawnshops, one thousand pesos (underscoring ours)

Second. Congress never intended pawnshops to be treated in the same way as lending investors. Section 116 of the NIRC of 1977, as renumbered and rearranged by E.O. No. 273, was basically lifted from Section 1758 of the NIRC of 1986, which treated both tax subjects differently. Section 175 of the latter Code read as follows:

Sec. 175. Percentage tax on dealers in securities, lending investors. -- Dealers in securities shall pay a tax equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994).

We note that the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found. However, as emphasized earlier, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects differently. Hence, we must likewise interpret the statute to conform with such legislative intent.

Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect.9 This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the human mind.10

Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273. This was even admitted by the CIR in RMO No. 15-91 itself. Considering that Section 116 of the NIRC of 1977, as amended, was practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the interpretation thereof should not have been altered.

It may not be amiss to state that, as pointed out by the respondent, pawnshops was sought to be included as among those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads:

Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"SEC. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS. – Dealers in securities shall pay a tax equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross income."

If pawnshops were covered within the term lending investor, there would have been no need to introduce such amendment to include owners of pawnshops. At any rate, such proposed amendment was not adopted. Instead, the approved bill which became R.A. No. 771611 repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91; thus:

SEC. 20. Repealing Clauses. -- The provisions of any special law relative to the rate of franchise taxes are hereby expressly repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed.

Section 21 of the same law provides that the law shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier. R.A. No. 7716 was published in the Official Gazette on 1 August 199412; in the Journal and Malaya newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. No. 7716 is deemed effective on 27 May 1994.

Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward would have no leg to stand on.

Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. 

While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances: the legislative rule and the interpretative rule. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. 

In Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary this Tribunal ruled:

… In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation. - If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition, such rule must be published.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored.

There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled Commissioner of Internal Revenue v. Agencia Exquisite of Bohol Inc., which upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say that the judgment in that case cannot be binding upon the Supreme Court because it is only a decision of the Court of Appeals. The Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts should take their bearings.16

In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void. Consequently, Lhuillier is not liable to pay the 5% lending investor’s tax.

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the Court of Appeals of 20 November 2001 in CA-G.R. SP No. 62463 is AFFIRMED.

SO ORDERED.