G.R. No. 171863 - People vs. Court of Appeals

Petitioner: Michel J. Lhuillier Pawnshop, Inc., a corporation engaged in the pawnshop business, received deficiency assessments for both Value Added Tax (VAT) and Documentary Stamp Tax (DST) for the year 1997 based on Assessment Notice Nos. 81-VAT-13-97-99-12-118 and 81-DST-13-97-99-12-119, respectively.
Initial Proceedings:

The petitioner filed a motion for reconsideration of the assessment notices, which was denied by the Commissioner of Internal Revenue (CIR).
On petition for review with the Court of Tax Appeals (CTA), the CTA reversed these assessments and set aside the notices by ruling that a pawn ticket is neither a security nor printed evidence of indebtedness and hence cannot be the subject of DST.

The respondent, through a petition for review, sought to reverse the CTA decision.
The CA held that while a pawn ticket per se is not subject to DST, the underlying transaction—a pledge—was taxable under DST because it involves the exercise of a taxable privilege.
The CA reversed the CTA decision, ordering the petitioner to pay deficiency VAT and DST, with the order later modified to include a directive to pay delinquency interest at a rate of 20% per annum starting January 2, 2000.

On January 25, 2005, the petitioner elevated the case to the Supreme Court.
The petitioner subsequently filed a motion to withdraw issues related to VAT, relying on a Memorandum of Agreement between the Chamber of Pawnbrokers of the Philippines and the Bureau of Internal Revenue, thereby narrowing the controversy to the issue of DST on pawnshop transactions.

Section 173 of the National Internal Revenue Code (NIRC) imposes stamp taxes on documents, agreements, and instruments.
Section 195 of the NIRC explicitly requires that every mortgage or pledge shall be subject to DST.

Pawnshops are defined under Presidential Decree No. 114 (Pawnshop Regulation Act) as entities engaged in lending money secured by personal property.
The law mandates the issuance of a pawn ticket, which contains the essential details of the transaction, though it is clarified as neither a security nor printed evidence of indebtedness.

Earlier BIR rulings (Nos. 305-87 and 018-88) held that a pawn ticket is subject to DST because it evidences a pledge transaction; however, these were later revoked by BIR Ruling No. 325-88.
Notwithstanding the revocation, the statutory language of Section 195 remains unambiguous regarding the imposition of DST on the exercise of the pledge privilege.

Whether petitioner’s pawnshop transactions, evidenced by pawn tickets in connection with pledge contracts, are subject to Documentary Stamp Tax (DST) under Section 195 of the NIRC.

Whether the classification of pawn tickets as not being evidence of security or indebtedness exempts them from DST.
The extent to which administrative issuances and prior BIR rulings can override or modify the clear statutory directive imposed by Section 195.