G.R. No. 66416 March 21, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS

Tours Specialists, Inc. (TSI), a travel agency, serviced foreign tourists and “Balikbayans” from 1974 to 1976. Its services included booking hotel accommodations, transportation, and arranging tours. Typically, payments for hotel rooms were made directly by the tourists or their foreign travel agencies to the hotels. However, in some instances, foreign tour agencies would entrust funds earmarked specifically for hotel room charges to TSI. TSI would then hold these funds in trust and pay the local hotels upon receipt of the bills, acting merely as a conduit. The funds were paid in full to the hotels, with no portion retained by TSI for its own account.
The Commissioner of Internal Revenue (CIR) assessed TSI for deficiency contractor’s tax for the years 1974 to 1976, including these entrusted hotel room charges in TSI’s gross receipts subject to the 3% tax under the National Internal Revenue Code. TSI protested, arguing these entrusted funds did not constitute its gross receipts. The CIR, without formally resolving the protest, issued a warrant of distraint and levy and garnished TSI’s bank deposits, prompting TSI to appeal to the Court of Tax Appeals (CTA).

ISSUE

Whether the amounts received by a local travel agency from tourists or foreign tour agencies, which are specifically earmarked for payment of hotel accommodations and are held in trust, form part of the agency’s gross receipts subject to the 3% contractor’s tax.

RULING

No. The Supreme Court affirmed the CTA’s decision, ruling that the entrusted hotel room charges do not form part of TSI’s gross receipts for tax purposes. The legal logic hinges on the nature of the funds and the capacity in which TSI received them. The money was specifically earmarked for hotel payments and was received by TSI in a fiduciary or trust capacity, not as income derived from its service as an independent contractor. Since TSI acted merely as a custodian or conduit, obligated to remit the entire amount to the hotels without any right to use the funds for its own benefit, the funds never became part of its gross income. Gross receipts subject to tax refer to revenues or income realized by the taxpayer for services rendered or from its business. Funds held in trust for another, with a clear obligation to remit them to a third party, do not constitute taxable income to the trustee. To subject these entrusted funds to tax would be to tax TSI on money that is not its own and over which it exercises no proprietary interest. The Court’s ruling ensures that the tax is levied only on the compensation actually earned by TSI for its services, not on funds it merely transmits on behalf of clients.