17 CIR, vs. TOURS SPECIALISTS, INC.

, and THE COURT OF TAX APPEALS AUTHOR: Florido

GR L-66416, March 21, 1990 Notes:.
Ponente: Gutierrez Jr., J
Topic: Output VAT; “VAT-taxable vs Zero-rated vs Exempt Transactions”
CASE LAW/ DOCTRINE:
Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not
belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.
Emergency Recit:
TSI, a local travel agency earning from its services offered to foreign tourists and balikbayans, have an arrangement with
some foreign tour agencies abroad wherein the hotel room charges of the tourists will be paid through them (foreign tour
agency will send money to TSI for the payment of the tourist’s hotel accommodation). CIR assessed TSI for deficiency of 3%
contractor’s tax as independent contractor by including the entrusted hotel room charges in its gross receipts for the years
1974 to 1976. TSI formally protested CIR’s assessment, and produced 2 witnesses proving that TSI only holds in trust the
money for payment of hotel room and that such act is only an accommodation on its part. CIR, without deciding TSI's written
protest, caused the issuance of a warrant of distraint and levy, and later, CIR had TSI's bank deposits garnished. CTA: decided
in favor of TSI (amounts received not part of gross receipts, they’re not liable to pay 3% contractor’s tax).

FACTS:
1. From 1974 to 1976, Tours Specialists, Inc. (TSI) derived its income from its activities as a travel agency (servicing
the travel needs, lodging, transportation of foreign tourists and Filipino "Balikbayans" during their stay in the Phil.).
2. To supply services to foreigners, TSI and its counterpart travel agency abroad agreed to offer a package fee to its
clients (TSI quotes the fee to be paid by tourist, but tourist still has to pay for hotel room, food, and other personal
expenses).
3. Some tour agencies abroad request the local tour agencies (TSI in this case) that the hotel room charges be paid
through them (billing hotel sends the bill to TSI, the local hotel identifies the tourist/group of tourists and the
duration of their stay, and then, TSI pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency).
4. Despite this arrangement, Commissioner of Internal Revenue (CIR) assessed TSI for deficiency of 3% contractor's
tax as independent contractor by including the entrusted hotel room charges in its gross receipts for the years
1974 to 1976.
5. CIR: TSI should pay deficiency contractor's tax of P122,946.93, AND compromise penalty of P500.00.
6. TSI formally protested the assessment made by CIR (the money received and entrusted to it by the tourist travel
agencies to pay hotel room charges were not considered by it as part of its taxable gross receipts for purposes of
computing and paying its contractor's tax).
7. During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the
Accounting Department of TSI, had testified and stated that the amounts entrusted to it by the foreign tourist
agencies intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any
portion being diverted to its own funds.
8. Serafina Sazon’s testimony was corroborated by Gerardo Isada, General Manager of TSI, declaring that payments
of hotel accommodation are made through TSI without any increase in the room charge and that the reason why
tourists pay their room charge through their foreign tourists agencies, is because the room charge is exempt from
hotel room tax under P.D. 31.
9. Isada stated on cross-examination that if the payment is made thru TSI's tour agency, the hotel cost or charges "is
only an act of accomodation on its part" or that the "agent abroad instead of sending several telexes and saving on
bank charges they take the option to send money to us to be held in trust to be endorsed to the hotel."
10. CIR, without deciding TSI's written protest, caused the issuance of a warrant of distraint and levy, and later, CIR
had TSI's bank deposits garnished.
11. CTA: money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of
tourists, travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3%
independent contractor's tax under the National Internal Revenue Code of 1977.
ISSUE(S): WON amounts received by a local travel agency from a foreign travel agency intended for payment of tourist’s
hotel accommodation form part of gross receipts subject to 3% contractor’s tax. – NO, gross receipts subject to tax under
the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound
to the taxpayer's benefit.
HELD: WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No
pronouncement as to costs.

RATIO:

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and absent strong
reasons for this Court to delve into facts, only questions of law are open for determination. In the recent case of Sy Po
v. Court of Appeals, we ruled that the factual findings of the Court of Tax Appeals are binding upon this court and can only be
disturbed on appeal if not supported by substantial evidence.

In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of Tax Appeals.
Evidence presented by TSI shows that the amounts entrusted to it by the foreign tourist agencies to pay the room charges of
foreign tourists in local hotels were not diverted to its funds; this arrangement was only an act of accommodation on the
part of the private respondent. This evidence was not refuted.

In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc., the CTA, as affirmed by the SC stated:

Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although
delivered to the amusement place has been especially earmarked by law or regulation for some person other than the
proprietor. (The situation thus differs from one in which the owner of the amusement place, by a private contract, with
its employees or partners, agrees to reserve for them a portion of the proceeds of the establishment.

In another case, the SC resolved the issue in the following manner:

We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-peso contribution
never belonged to the Club. It was held by it as a trust fund. And then, after all, when it received the ten-peso
contribution, it at the same time contributed ten pesos out of its own pocket, and thereafter distributed both amounts as
prizes to horse owners. It would seem unreasonable to regard the ten-peso contribution of the horse owners as taxable
receipt of the Club, since the latter, at the same moment it received the contribution necessarily lost ten pesos too.

As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross
receipts under the Tax Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its
gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to
accommodate the foreign travel agencies.

ISSUE OF PD 31 which exempts foreign tourists from payment of hotel room tax (BAKA LANG ITANONG NI ATTY. BALILI):

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges of foreign
tourists in local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated:

. . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what
respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like
hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may
claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of
petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect
would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges.
One way or the other, it would not have the effect of promoting tourism in the Philippines as that would
increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said
tourists.