CTA Case No. 6470 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MALAYAN INSURANCE CO, INC., Petitioner, -versus- C.T.A. CASE NO. 6470 COMMISSIONER OF INTERNAL REVENUE, Promulgated: JAN 2 J 2004 ~ . Respondent. (jj;Ja/l;ft~Jt~ X - - - - - - - - - - - - - - - --- ---- --- ---- ---- ---- ---- --- - - DECISION This is a Petition for Review to compel respondent Commissioner of Internal Revenue (CIR) to issue a tax credit certificate for alleged erroneous withholding of tax by the Bureau of Treasury on interest payments paid to the petitioner in connection with its purchase of treasury notes with a maturity of more than five (5) years on the ground that interest income realized from government securities with a maturity of more than five (5) years are exempt from taxes. The facts of the case as culled from the records are as follows: Petitioner Malayan Insurance Co., Inc. is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal office at Yuchengco Tower, 500 Q. Paredes St. , Binondo, Manila. In 1996, 1998 and 1999, petitioner purchased Fixed Rate Treasury Notes (FXTNs) issued by the Bureau of Treasury. (Paragraph 4. Petition fo r Review; Annexes "A " to "L ": Petitioner 's Exhibit B-1)

Decision CTA Case No. 6470 Page 2 For the period covering April29, 2000 to December 1, 2001 , the Bureau of Treasury paid interest for the said treasury notes to petitioner and wi thheld tax on said interest at the rate of20% of the interest income. (Paragraph 5, Petition for Review) On April 18, 2002, petitioner wrote a letter addressed to the respondent requesting that a refund or a tax credit in the amount of Ten Million Two Hundred Ninety Two Thousand Eight Hundred Forty Pesos (Pl0 ,292,840) representing the tax withheld by the Bureau of Treasury on the said FXTNs be issued by the respondent in favor of petitioner. (Paragraph 3, Joint Stipulation ofFacts and Issues) However, the respondent has not taken action on petitioner' s request. Hence, on April29, 2002, the petitioner filed the instant Petition for Review with this court in order to compel the respondent to issue a tax credit certificate in its favor relative to the said purchase of treasury notes . (Paragraph 4, Joint Stipulation of Facts and Issues) In his Answer filed on May 29 , 2002, respondent asserted the following Special and Affirmative Defenses, to wit: "4. Petitioner' s alleged claim for refund or the iss uance of tax credit IS subject to administrative routine investigation/examination by respondent's Bureau; 5. Taxes paid and collected are presumed to have been paid in accordance with law, hence, not refundable; 6. Section 32 (B)(7)(g) of the 1997 National Internal Revenue Code speaks of "Gains from the sale or exchange or retirement of bonds, debenture or other certificate of indebtedness with a maturity of more than five (5) years" (Emphasis supplied). It

Deci sion CTA Case No. 6470 Page 3 refers to gains realized from the sale or exchange or retirement and does not cover interest income, hence, is not exempt from taxation (Nippon Life Insurance Co. of the Phils. Vs. CIR, CTA Case No . 6142, Feb. 4, 2002) ; 7. Petitioner must prove that it is entitled to the full amount claimed as alleged erroneously withheld tax ; 8. Assuming but without admitting the fact that petitioner is entitled to tax refund, it is incumbent upon the latter to show that it has complied with the provisions in Section 204 (C) in relation to Section 229 of the Tax Code (RA 8824); 9. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner oflntemal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp . vs. Commissioner oflntemal Revenue, 124 SCRA 1211). " During the course of the trial, the parties decided to stipulate the issues to be resolved by the court, namely: 1. Whether or not interest mcome derived from treasu ry notes which have 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 can be considered bonds, debentures or certificates of indebtedness under the Tax Code .

Decision CIA Case No. 6470 Page 4 3. Whether or not the Bureau of Treas ury paid interest on the Treasury Notes and withheld the tax at the rate of 20% of the interest payment in the total amount of Pl 0,292,840.00. 4. Whether or not Petitioner is entitled to a refund/tax credit on the amount withheld on such interest payment amounting to Pl0,292,840. 00. 5. Whether or not petitioner is liable for deficiency income tax, deficiency withholding tax, deficiency expanded withholding tax and deficiency value-added tax in the amount of P353 ,079.42, P7,796.69, P64,584. 94 and P309,203.63, respectively for calendar year 1996. (Joint Stipulation ofFacts and Issues, page 70, CTA Records ) After considering the attending facts , the evidence adduced and the applicable laws and jurisprudence, the court finds for the respondent. The main issue despite the numerous matters raised by the parti es is simply "Whether or not the petitioner is entitled to a refund or ta..'< credit of the amount withheld on interest payment on the treasury notes with maturity date of more than five (5) years amounting to P l 0,292,840.00 on the ground that such government securities are exempt from tax ". Inasmuch as both parties rely on Section 32(B)(7)(g) of the National Internal Revenue Code (NIRC), the court quotes the pertinent portions hereunder, to wit: "Section 32. Gr�oss Income. - x x x "(B) Exclusion fr�om Gross Income. - The followi ng items shall not be included in gross income and shall be exempt from taxation under this Title : x x x

Decision CTA Case No. 6470 Page 5 "(7) Miscellaneous Items. - x x x "(g) Gains from the sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains reali zed from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than fi ve (5) years." Under said Section 32(B)(7)(g) of the Tax Code of 1997, gains reali zed from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness wi th a maturity of more than fi ve (5) years shall not be included in gross income and thus, exempt from taxation. But what does the term "gains" as used in the said section include? Petitioner interpreted the word "gains" in Section 32(B)(7)(g) as broad enough to include the interest from government bonds. To support this view, it cited respondent' s own rulings, namely, BIR Ruling No. 166-99 dated October 25 , 1999 and BIR Ruling No. 0 16-00 dated January 7, 2000. In BIR Ruling No. 166-99, respondent ruled that interest income or yields or gam from the sale of bonds, debentures and certificates of indebtedness with maturities of more than fi ve (5) years are excluded from gross income in acco rdance with Section 32(B)(7)(g) of the 1997 Tax Code and therefore exempt from the 20% final withholding tax on deposit substitutes. BIR Ruling No. 166 -99 states thus: "x x x As a general rule, the interest income on currency bank deposit and yield or other monetary benefit from these "dep osit substitutes" and similar arrangement deri ved by banks and non-bank fmancial intermediaries are being taxed at the final rate of 20% under Section 27(0)(1) of the 1997 Tax Code. However, Section 32(B)(7)(g) of the Ta'< Code, provides an exception, thus: "Section 32. Ga�oss Income. - x x x

Decision CTA Case No. 6470 Page 6 "(B) Exclusion from G��oss Income. - The foll owing items shall not be included in gross income and shall be exempt from taxation under this Title: x x x "(7) Miscellaneous Items. - x x x "(g) Gains from the sale of Bonds, Debentures or other Certificate oflndebtedness. - Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than fi ve (5) years." The idea therefore, is to still treat bonds, debentures or other certificates of indebtedness as "deposit substitutes" the interest income, yield or gain deri ved therefrom subject to the 20% final tax under Section 27 (D)(l) of the 1997 Tax Code, but exclude said interest income, yield or gain from the gross income if the bond s, debentures or the certificate of indebtedness have maturities of more than fi ve (5) years. Conversely, only the income derived on these instruments with maturity of more than fi ve (5) years shall be excluded from the gross income. Furthermore, the term sale is not limited to the subsequent transfer of the instrument but to its ol"igina tion and issuance, as well. Thus, f��om the time of its issuance, we should conside�� the " income' which is actually the amount coming to a person within a specified time, whethe�� a s payment for the services, inte��est, or profit from investment. Its usual synonym s being "gain", " p��ofit", " revenue". (Trefry v. Putnam, 11 6 N.E. 904, 907 227 Mass . 522, L.R.A. 1917 F, 806. (Words & Phrases, gain, page 11 , Permanent Edition 18)" (Emphasis supplied) However, the respondent quoting the same pro v1s1on and adopting the interpretation based on a previous decision of this court refutes the petitioner' s claim. And correctly so. Noteworthy is the fact that this case is not one of first impression. Several cases were previously decided by the CTA denying exemption from wi thholding tax of the interest payment of said treasury notes. Among them is the case of Nippon Life Insurance Company of the Philippines vs. CIR, CTA Case no. 6142, February 4, 2002. The significant portions of the jurisprudence are quoted hereunder, to wit:

Decision CTA Case No. 6470 Page 7 "We take the view that "gains" as the te��m is used the��ein in Section 32(B)(7)(g) of the Tax Code cannot include inte��est since it clearly refers to the gains from the sale of bond s, debentures and other ce��tificates of indebtedness. Initially, it must be pointed out that whereas the term "gains" includes "interest" as a general rule, this rule cannot be applied to Section 32(B)(7)(g) of the Tax Code which particularly refers to "gains from Sale of Bonds, Debentures or other Certificate of Indebtedness" in its title and "gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness with a maturity of more than fi ve (5) years" in its body. Stated otherwise, Section 32(B)(7)(g) of the Ta;x Code specifically refers to gains from the sale of bonds, debentures and other certificates of indebtedness as contradistinguished 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 : SEC. 32. Gross Income. - (A) Gene��al Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the followin g items : (1) Compensation for services in whatever form paid , including, but not limited to fees, salaries, wages, commissions and similar items: (2) Gross income derived from the conduct of trade or business or the exercise of profession ; (3) Gains derived f��om dealings in property; (4) Inte��ests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (II) Partner's distributive share from the net income of the general professional partnership. x x x From the afo��equoted Section 32(A) of the Tax Code, it is clear that there is a distinction between "gains derived from dealings in property" and " inte��ests", which a��e sepa r ately classified as items of gross income. " Gains realized from the sale or exchange or ��etil�ement of bond s, debentures and othe�� certificate of indebtedness" would fall under the ca tegory of "gains derived from dealings in property". On the other hand,

Decision CTA Case No. 6470 Page 8 "interests" would include interest from bonds, debentures and other certificate of indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures and othe�� certificate of indebtedness and interests from bonds, debentm�es and othe�� certificate of indebtedness fall under separate and distinct income categories. There is a clear distinction between interest from bonds and gain from the sale of bonds. It is only the "Gains realized from the sale or exchange or retirement of bonds, debentm�es or ce��tificate of indebtedness with a matudty of more than five (5) years" that is excluded from gross income and thus exempt f��om income tax under Section 32(B)(7)(g) of the Tax Code. Such gains from sale or exchange or retirement of bonds, debentures and other certificate of indebtedness fall within the general category of "Gains derived from dealings in property", as distinguished ft�om interest from bonds, debentures o�� other certificate of indebtedness, which fall within the general catego��y of " lnte��est" under Section 32(A) of the Tax Code. (Emphasis supplied) This court further pointed out that, "We believe that if Congress intended to exempt interest from bonds, debentures and other certificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, it would have been done so in clear and specific terms . Admittedly, rulings issued by the Commissioner of Internal Revenue command respect and weight and are ordinarily adopted. However, such rulings are not conclusive upon the courts and will be ignored if found erroneous. In this case, we find the aforementioned administrative interpretations flawed . In fact, the Honorable Supreme Court in the case of Philippine Bank of Communications vs. Commissioner of Internal Revenue, G.R. No. 112024, January 28, 1999, m disregarding a Revenue Memorandum Circular iss ued by the Commissioner of Internal Revenue, held thus : "It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers,

Decision CTA Case No. 6470 Page 9 whose duty is to enforce it, is entitled to g��eat respect by the courts. Nevertheless, such interp��etation is not conclusive and will be ignored if judicially found to be eiToneous. Thus, the cou��ts will not countenance administrative issuances that oven�ide, instead of remaining consistent with the law they seek to a pply a nd implement. (Emphasis supplied) Finally, it is a long-standing principle in taxation that refund claims are strictly construed against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95). Accordingly, they are looked upon with disfavo r (Western M inolco Co��p. vs. Commissioner of Internal Revenue, 124 SCRA 1211). The party claiming exemption must justify his claim by clear, positive, or express grant of such pri vilege by law because an exemption from common burden cannot be permitted to exist upon vague implication (Collecto�� oflnternal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670, cited in Philippine Bank of Communications vs. Commissioner of Internal Revenue, CTA Case No. 2725, January 6, 1988). WHEREFORE, in view of the foregoing , petitioner' s claim for issuance of tax credit certificate is hereby DENIED. SO ORDERED. L_-u- co.-vvL- ERNEsTo D. ACOSTA Presiding Judge

Decision CTA Case No. 6470 Page 10 We concur: a~~ c .~~o4, SJ c7.riJANITO C. CASTANEDA, JR.:- Associate Judge Associate Judge CE RTI FICAT IO N 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 ofthe Constitution. ~ ~. c~ ERNESTO D. ACOSTA Presiding Judge