MANILA MANDARIN HOTELS, INC.

vs THE COMMISSIONER OF INTERNAL REVENUE,

(GR No. L-48532, Aug 31, 1992)

FACTS OF THE CASE:

A domestic and VAT registered corporation was assessed by the CIR for the deficiency of value-added, input and percentage
taxes for the taxable year 1988. The said assessment was gravely protested by the Manila Mandarin Hotels because of erroneous
interpretation of various tax laws which resulted in a legally flawed assessment. Later on, the petitioner waived the prescriptive
period with respect to the issuance of assessment and the consequent collection of business taxes. Meanwhile, the CIR denied all of
these protests.

Hence, this petition to the CTA.

Manila Mandarin Hotels argued insofar as 10% VAT is concerned that

● TELEPHONE FEE: the proper tax base is only the handling fees (the amount actually accrued by petitioner) because it
is the one being represented in their actual gross receipts, and the CIR should not include their payments to PLDT for
using its telephone lines because that amount is PLDT’s revenue not to them.
● TRANSPORTATION SERVICES: the revenues they received from their service are already subject to the 3% tax on
common carriers under the Tax Code (Section 115), hence, these should no longer be subject to VAT as clearly provided
in the Tax Code (Section 103(j)) that services rendered by persons subject to percentage tax are exempt from the payment
of VAT.
● ASSET DISPOSAL:
➔ the demolished old civil works to give way to renovation of the hotel is not subject to the VAT
➔ transportation equipment in catering business which has been fully depreciated and SOLD is already subjected to
the 4% caterer's tax under the Tax Code (Section 114(1) as amended) hence not subjected to the 10% VAT
➔ lost, destroyed, and unuseful operating equipment (silverware, china and linen) used in its hotel operations after
inventory count hence the retirement of this equipment can not be considered a deemed sale transaction.

Input taxes refund claims been disallowed by the Revenue Examiner as arbitrary and baseless

In percentage taxes: they alleged that the deficiency percentage tax assessment arose because of the Tax Code that imposed tax on
deposits, hence, the use of the hotel facilities by their clients became taxable. However, they insisted that the said deposit is in the
nature of a security deposit, hence, it is not an income nor be subjected to percentage tax.

On the other hand, the CIR argued that:

● TELEPHONE FEE: their handling fee being accrued/gained by the hotel from their clients were in the form of
REIMBURSEMENT, that forms part of their GROSS RECEIPTS of the hotel and hence, for purposes of tax
computation, the tax base must include the handling fees + toll fees due to PLDT
● TRANSPORTATION SERVICES: The Hotel did not engage in the business of common carriers because their
transporting hotel guests are merely as part of its hotel services. Its transportation services extended to the hotel guests are
subject to VAT under the Tax Code (Section 102).
● ASSET DISPOSAL:
➔ ALL SALE of furniture and fixtures from the company/borrower to the financing company is considered sale of
personal (movable) property subject to 10% value added tax
➔ While it is true that the demolition of civil works in the building to give way for the renovation is not subjected
PER SE to tax, same with retirement of the operating equipment by reason of loss or being obsolete, and the
situation of transportation equipment but not the SALE of those other equipment.

In addition, the deficiency assessment input and percentage taxes are in accordance with the Tax Code as part of the gross income
of the hotel.

In all foregoing, the tax authorities presumptively complied with the regularity of the tax assessment bound to Manila Mandarin
Hotels.

ISSUES:

Whether or not the amount that petitioner paid to PLDT should form part of the gross receipts subject to the 10% VAT

Whether the imposition of VAT to Manila extended to the amount received on transportation services for the hotel guests and not
part of the principle of common carrier which separately distinct of its imposition of 3% common carrier’s tax

Whether in the event of an asset disposal, those other assets sold were still subjected to VAT
Whether the Hotel be subjected to percentage tax from the deposits of the clients of the latter

HELD:

1) No, it is not correct

The Tax Court cited the Tax Code provision (Section 102) that a 10% value-added tax equivalent to gross receipts derived by any
person engaged in the SALE OF SERVICES shall be levied, assessed and collected.
● SALE OF SERVICES - the performance of alI kinds of services for others for a fee, remuneration or consideration,
whether calls for the EXERCISE OR USE OF THE PHYSICAL OR MENTAL FACULTIES.
● GROSS RECEIPTS - the total amount of money or its equivalent representing the contract price, compensation or
service fee, including the amount charged for materials supplied with the services and deposits or advance
payments ACTUALLY OR CONSTRUCTIVELY received during the taxable quarter for the services performed
or to be performed for another person, excluding value-added tax.

Jurisprudence provides that 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.

So, while it is true that handling fees are taxable as sales of services, the amount paid by the petitioner to PLDT as tolling charges
for the overseas calls made by its guests were not actually nor constructively received by the petitioner as service fees but were
instead charges of PLDT.

Hence, the argument which CIR argued that tax base for the purpose of computing the tax due must include the handling fees, the
gross profit from petitioners telephone service activity rendered to hotel guests, plus the toll fees due to Philippine Long Distance
Telephone Company was unmeritorious.

2) Yes, transportation services offered by the Manila is NOT classified as common carrier and hence subject to VAT

The CTA cited the definition of a common carrier under the New Civil Code (Article 1732), common carriers are persons,
corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water,
or air, for compensation, offering their services to the public.
According to jurisprudence (US vs. Quinajon and Quitoriano), it classifies common carriers as REGULAR business in persons or
is to carry passengers or property for ALL persons for purposes of remuneration.

So, while it might be true that the hotel performs regular services of transporting their hotel guests through limousine for
remuneration, it does not provide transport to ALL PERSONS OR TO THE PUBLIC AS GENERAL but only to particular, as
such, to their hotel guests.

3) No, the incidental selling of the transportation equipment by virtue of full depreciation is not subject to VAT

According to several jurisprudence (Standard Vacuum Oil vs. Antigua and Insular Life Assurance Co Ltd vs CIR), the Supreme
Court ruled that where the law taxes a business, it is presumed to be the legislative intent not to separately tax every activity which
is merely incidental or necessary to the conduct of said business.

Meanwhile, Tax Code (Sec. 99) provides that the persons liable in VAT insofar as this case is concerned are those persons who
engage in the course of trade or business of the taxpayer who sells goods or in similar direct transactions.

In this case, selling of the transportation equipment in the catering business is merely incidental to its renovation. Petitioner's main
business is hotel business and not primarily selling transportation equipment. Based on the records, real property in 1988 are not
yet included among those subject to VAT.

Hence, CIR’s argument that the sale of some of the equipment which incidentally sold be subjected to VAT is unmeritorious.

4) No, deposits for future services is not a gross income until the completion of the earning process

Under the rule REALIZATION PRINCIPLE, revenue is recognized under certain conditions: 1) EARNING PROCESS is
COMPLETE OR VIRTUALLY COMPLETE, 2) EXCHANGE has taken place. (EARNED BEFORE RECORDED).

The CTA ruled that amounts received in ADVANCE is not REVENUE IN THE EVENT OF RECEIVED but REVENUE OF A
FUTURE PERIOD or periods in WHICH THEY ARE EARNED (unearned revenue). It is a liability to transfer goods or services
in the future - until the earning process is complete.
When will the earning process be completed? When the reserved facility is USED or the reserving guest CANCELS the
reservation. A meant by REALIZATION.

In all foregoing, the deficiency assessment of percentage tax is erroneous and be canceled therewith.

WHEREFORE, in view of the foregoing, petitioner is hereby ORDERED to PAY the sum of P799,573.61 representing its value-
added tax deficiency for the taxable year 1988, plus 20% interest from June 22, 1992 insofar as to the handling fees, to the hotel
guest’s transportation service until fully paid pursuant to the Tax Code (Section 249(c), as amended).