CTA Case No. 6471 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MALAYAN REINSURANCE CORPORATION (form erly EASTERN GENERAL REINSURANCE C O R P O R A T I O N), Petiti oner, - versus - C .T.A. CASE NO . 6471 COMMISSIONER OF INTERNAL REVENUE, Promul gated: R es po nd en t. JAN 2 6 200~ ~~ X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION This case involves a claim for refund or issuance of tax credit certifi cate in the total amount of P548,750.00 allegedly representing 20% final taxes erroneously withheld by the Bureau of Treasury on the interest inco me deri ved by petitioner from its investments in long-term treasury notes. Petiti oner is a corporati on organi zed and ex isting under and by virtue of the laws of the Philippines, with principal offi ce at Yuchengco Tower, 500 Q. Paredes St. , Binondo, Ma nil a . 1 In 1996, petiti oner purchased treasury notes issued by the Bureau of Treasury with the following details: T reasury IS IN # Iss ue Ma turity Prin cipa l Interes t Se mi- No te Da te Da te Rate a nnu a l Inte r est Payment FXTN7-2 PIBD07038029 29 Feb 96 28 Fe b 03 P5,000 ,000 15.375 % P384,375 FXTN 10- 1 PI BD I006 10 I0 26 Sep 96 26 Sep 06 P5,000 ,000 16.000% P400,000 1 Joint Sti pul ati o n of Facts, par. I.

DECISION CTA CASE NO. 6471 Page 2 For the months of August and September of 2000 and March, August and September of 2001 , the Bureau of Treasury allegedly paid interest and withheld taxes thereon at the following rates: Treasu ry Note Inter es t Total 20 % Net ISIN P a y m en t Interes t Withholding Amount Payable Paid to Date Tax M a la y a n PIBD0703B029 28 Aug 00 P384,375 p 76,875 P307 ,500 76,875 307,500 PIBD0703B029 28 Aug 01 384,375 80 ,000 320,000 80 ,000 320 ,000 PIBD 10061010 27 Sep 00 400 ,000 80 ,000 320 ,000 77 ,500 3 10,000 PIBD10061010 26 Mar 01 400 ,000 77 500 310,000 PIBD 1006101 0 27 Sep 01 400 ,000 P548 ,750 PIBD 1009IA 118 13 Sep 00 387 ,500 PIBD1009IA118 13 Sep 01 387 ,500 TOTAL WITHHOLDING TAX It is the position of the petitioner that pursuant to Section 32(B)(7)(g) of the Tax Code, as amended, gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years are excluded from taxable income. Thus, the above interest income is exempt from the 20% final withholding tax on deposits and deposit substitutes considering that the same constitutes gain from the sale of bonds, debentures and c.ertificates of indebtedness with a maturity of more than five (5) years. Consequently, on April 18, 2002, petitioner wrote a letter to the respondent requesting for a refund of P548 ,750.00 corresponding to the tax withheld by the Bureau of Treasury on the subject treasury notes. 2 Petitioner likewise relied on BIR Ruling No. 166-99 (October 25 , 1999) wherein it was opined that interest income realized from 2 Ibid, par. 3.

DECISION CTA CASE NO. 6471 Page 3 gove rmnent securiti es with a maturity of more than five (5) years are exempt fro m withholding tax. Respondent has not taken any action on petitioner' s letter claim for refund ; hence, petitioner timely fil ed the instant petition on April 29, 2002.3 By way of an Answer, respondent raised the fo llowing Spec ial and Affirm ati ve Defenses, to wit: a) The petition does not state a cause of action as there is no all egation that the tax sought to be refunded was actually remitted to the Bureau of Internal Revenue in accordance with the provisions of the Tax Code; b) Petitioner erroneously concluded that the interest income which was subj ected to 20% withholding tax constitutes gain from the sale of bond s, debentures and certi ficates of indebtedness; c) Granting without admitting, that petiti oner' s interest income was subj ected to 20% withholding tax, the same is presumed to have been collected in accordance with law; d) The petition is premature co nsidering that the petitioner' s application fo r the refund/tax credit of the alleged erroneous withholding tax of P548,750.00 which was onl y received by Revenue Di strict Office No . 34 on April 18, 2002, is still pending investigation by the said Office ; e) Claim fo r refund is construed stri ctly against the claimant and cannot be allowed unl ess proven expli citly and categorically; and f) The allegati ons regarding tax refundability do not ipso facto merit the refund claimed. To support its claim, petitioner submitted numerous documents and likewise presented witnesses to identify the same. Respondent, on the other hand, submitted the case fo r dec ision based on the pleadings .4 The parties jointl y stipulated the issues to be reso lved by this court, viz: 3 ld., pars. 6 & 7. 4 CT A Record s, page I07 .

DEC IS ION CTA CASE NO. 6471 Page 4 (1 ) Whether or not interest income deri ved from treasury notes which have a maturity in excess of fi ve years is exempt from the 20% withholding tax ; (2) Whether or not the treasury notes purchased by petitioner from the Bureau of Treasury thro ugh Government Securiti es Eligible Dealers (GSEDs) can be considered as bonds, debentures or certificates of indebtedness under the Tax Code; (3) Whether or not the Bureau of Treasury paid interest on the treasury notes and withheld the tax at the rate of 20% of the interest payment in the total amount of P548 ,750.00; and (4) Whether or not petitioner IS entitl ed to a refund/tax credit on the amoun t withheld on such interest pay ment amounting to P548 ,750.00. The issue of whether or not interest income derived from treasury notes which have a maturity in excess of five years is exempt from the 20% withholding tax is not novel. Thi s court has consistently ruled that only the gain from sale (as distingu ished fro m interest) of bond s, debentures or other certificates of indebtedness with maturity of more than fi ve years shall be exempt from income tax . Therefore, interest income earned from investments in long-term fi xed rate treasury notes are subj ect to 20% withholding tax .5 Thi s issue has been fi rst passed upon by thi s court in the case of Nippon Life Insurance 5 Malayan Reinsurance Corp. (fonnerly Eas1. m General Reinsurance Corp.) vs. CIR , CTA Case No. 6252 , July 24, 2002 ; Malay an Z urich Ins. Co. , In c. vs. CIR, CTA Case No. 625 1, Sept. 30, 2002; First Nation wide Assurance Co rp. vs. CIR, CTA Case No. 6253 , Oct. 3, 2002; R CBC vs. CIR , CTA Case No . 6228, Dec. 4, 2002; Malayan Ins. Co., In c. vs. CIR , CTA Case No . 6243, Dec. 16, 2002; Tokio Marine Malay an Ins. Co., In c. (fo rmerly Pan Malayan Ins. Corp.) vs. CIR , CTA Case No . 6254, Jan. 13, 2003 ; RCBC Savings Bank, In c. vs. CIR , CTA Case No. 634 1, May 5, 2003 ; Nippon Life Ins. Co. of til e Pflils., Inc. vs. CIR, CTA No . 63 23, July 24, 2003 ; Nippon Life Ius. Co. of til e Pflils., In c. vs. CIR , CTA Case No. 6289, September 22, 2003 ; Nippon Life Ins. Co. of til e Pflils., In c. vs. CIR , CTA Case No . 6348, September 12, 2003 ; Tok io Ma rine Malayan Ins. Co., In c. (formerly Pan Malayan Ius. Corp.) vs. C/R , CTA Case No. 64 72, Dec. I, 2003 ; First Nation wide Assurance Corp. vs. Cl R, CTA Case No. 6473, Dec . 22, 2003.

DEC ISIO N CTA CASE NO . 6471 Page 5 Company of the Philippines, In c. vs. Commissioner of Internal Revenue, CTA Case No. 6 142, February 4, 2002, wherein we held that: "Rulings issued by the Commi ss ioner of Internal Revenue command respect and weight. However, such rulings are not co nclusive upon the co urts and will be ignored if fo und to be erroneo us. Hence, in the case of Philippin e Bank of C ommunications vs. C ommiss ion er of In ternal R evenu e, G.R. No. 112024, January 28, 1999, our Supreme Court, in disregarding a Revenue Memorandum Circular issued by the Commissioner oflnternal Revenue, held: " It bears repeating that Revenue memorandum- circ ulars are considered administrative ru lings (in the sense of more specific and less general interpretations of tax laws) which are iss ued from time to time by the Comm issioner of Internal Revenue. It i. widely accepted that the interpretatio n placed upon a statute by the executi ve officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judiciall y fo und to be erroneous. Thus, courts will not countenance admini strative issuances that override, instead of remainin g consistent with , the law they seek to appl y and implement. " XXX XXX XXX In thi s case, We conclude that the aforementioned BIR rulings are erroneous. Such ru lings were based on the mistaken belief that the term "gains" as used in Section 32(B)(7)(g) of the Tax Code include interest. It is a well-settled rule of statutor y construction that tax exemptions are strictly construed against the taxpayer. Consequently, where Secti on 32(B)(7)(g) of the Tax Code, which grants tax exemption, is susceptibl e of a restrictive interpretati on, such interpretation must be adopted. We take the view that " gains" as the term is used therein in Secti on 32(B)(7)(g) of the Tax Code cannot include interest since it clearl y refers to gains ji-om the sale of bonds, debentures and other certificates of ind ebtedn ess . Initially, it must be pointed out that whereas the term "gains" inc ludes " interest" as a general ru le, thi s rul e cannot be applied to Section

DECISION CT A CASE NO. 6471 Pa ge 6 32(B)(7)(g) of the Tax Code which particularly refers to "Gains from the Sale ofBonds, Debentures or other Certificate ofIndebtedness" in its title and "Gains realized from the sale or exchange or retirement of bond s, debentures and other certificate of indebtedness with a maturity of more than five (5) years" in its body. Stated otherwise, Section 32(B)(7)(g) of the Tax Code specifically refers to gains ji-om the sale of bond s, debentures and other certificates of indebtedness as contradistingu ished from the term "gains" in its general sense, which is synonymous to income." In this regard, Section 32(A) of the Tax Code defines "gross income" as follows: Section 32. Gross Income.- (A) General Definition. - Except when otherwise provided in this Title, gross income means all income deri ved from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees , salaries, wages, commissions and similar items; (2) Gross income deri ved from the conduct of trade or business or the exercise of profession; (3) Gains deri ved fro m dealings in prop ~,y; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities ; (9) Prizes and winnings; (1 0) Pensions; and ( II ) Partner ' s di stributi ve share from the net tncome of the general professional partnership. From the aforequoted Section 32(A) of the Tax Code, it is clear that there is a distinction between "gains derived from dealings in property" and "interests", which are separately classified as items of gross income. "Gains realized from the sale or exchange or retirement of bond s, debentures and other certificate of indebtedness" would fall under the category of "gains derived from dealings in pro, t:rty". On the other hand , "interests" would include interest from bonds, debentures and other certificate of indebtedness. Gain realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness and interest from bonds, debentures and other certificate of indebtedness fall under separate and distinct inco me catego ri es."

DECISION C TA CASE NO. 6471 Page 7 XXX XXX XXX There is a cl ear di stinction between interest from bonds and gain from the sale of bond s. It is onl y the "Gains realized from the sale or exchange or retirement of bonds, debentures or other certifi cate of indebtedness with a maturity of more than fi ve (5) years" that is excluded from gross inco me and thus exempt from income tax under Section 32(B)(7)(g) of the Tax Code. Such gains from sale or exchange or retirement of bonds, debentures or other certificate of indebtedness fall within the general category of "Gains derived from dealings in property", as distinguished from interest from bonds, debentures or other certificate of indebtedness, which fall within the general category of "Interests" w1d er Section 32(A) of the Tax Code. It is wo rth emphasizing that our ruling in the above case was affirmed in toto by the Court of Appeals in the case of Nippon Life Insurance Company ofthe Philippines, Inc. vs. Commissioner of Internal Revenue, CA-G.R. SP No. 69224, November 15, 2002, where it enun ciated that: "The CTA is abso lutely co rrect. Inco me is the fl ow of money to an individual or corporation within a specified time, as payment for services, interests, or profits from investments. Income is the return in money from one's business, labor or capital invested. The famous analogy used by the Supreme Court described property, labor and capital as trees and income as their fruits. Thus, income is synonymous with profit or gain. N ippon used this general concept of income or gain to include interest within the meaning of Section 32(B)(7)(g) . This strained interpretation suffers from serious fl aws . First, while the Tax Reform Act adhered to the above definition of income, it also classified inco me into the following categories : compensation fo r services, income derived fro m the conduct of business or exercise of profession, gains deri ved from dealings in property, interest, rents, royalties, di vidends, annuities, prizes and wi1mings, pensions, and a partner' s di stributi ve share from net income of a general professional partnership. Section 32(B)(7)(g) clearly refers to gains realized from the sale, exchange or retirement of bonds, among others, with a maturity date of more than five (5) years. There is no reason to confuse gains from sale of bonds with gains in the general sense of income. N ippon argued that the law d id not qualify the term "gains" but it is �impossible not to see that the law did qualify such term and restricted it to gains from sale of bonds.

DECISION CT A CASE NO. 6471 Pa ge 8 Section 32(B) enumerates the exclusions from gross income. Exclusions, like tax exemptions, are highl y disfavored in law. A person claiming a tax exemption must justi fy hi s claim by the clearest terms possible because an exemption from the commoq burden of taxati on is not allowed upon vague implications but on language too plain, to be mistaken. In the instant case, Nippon' s claimed exclusion runs counter to the plain, unequi vocal language of the law. It resorted to the legislati ve intent behind the provision to justify departure from the literal meaning but we all know this is prohibited. The only intent that must be given effect is the one expressed in the language of the statute. If a statute is clear, plain and free from ambi guity, it must be given its literal meaning and appli ed without attempted interpretation. To depart from the meaning expressed by the words of the statute is to alter the statute and legislate, not to interpret. A statute which is plain, clear and free from doubt is not subj ect to construction; there is no need for interpretation, only applic ati o n. In enacting the Tax Reform Act, the legislature may have intended to develop the capital market and encourage savings in long-term investments but even under the restrictive interpretation that gains under the subj ect provision means gains from sale of bonds, debentures and other certifi cates of indebtedness, such legislative intent still find s full expression. Section 32(B)(7)(g) as written and as interpreted by the CTA is still an incentive to the development of the bond market because it excludes gains from sales from the computation of the gross income. This may not be as sweeping as N ippon would have wanted to but it is an incenti ve nonetheless, which is faithful to the legislative intent. N ippon' s all or nothing stance on the exclusion of gains from bonds find s no support in either the language or intent of the law. In view of the foregoing discussions, it is clear that the tax exemption from final withholding tax granted under Secti on 32(B)(7)(g) of the Tax Code, as amended, is limited onl y to gain from sale of long-term investments. Inasmuch as the claim of the petitioner is for the refund of the 20% fi nal tax on interest income earned by it fro m investments in long-term treasury notes, the same has no legal basis. Accordingly, petitioner is not entitled to the claim sought for. It follows that the resolution of the remaining issues is no longer necessary.

DECISION CTA CASE NO. 6471 Page 9 WHEREFORE, in view of the foregoing, the instant petition is hereby DENIED for lack of merit. SO ORDERED . Associate Judge WE CONCUR: ERNESTO D. ACOSTA Presiding Judge ~--..1'>6 Ce. C. AS. TAN~ED~ A~g.r<R2. . q'iJANiio Associate Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ERNESTO D. ACOSTA Presiding Judge