COOPERATIVE BANK OF BENGUET (COOPBANK) v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC COOPERATIVE BANK OF BENGUET (COOPBANK), EB No. 356 Petitioner, (CTA Case No. 7141) Present: ACOSTA, PJ. CASTANEDA JR., -versus- BAUTISTA UY, CASANOVA, and COMMISSIONER OF INTERNAL PALANCA-ENRIQUEZ, JJ: REVENUE, Respondent. Promulgated: JUL 0 1 2008 t?J4/IJ'd./-,'~/~ -.J~ n-~ X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X , DECISION CASANOVA, J: This is an appeal, by way of a Petition for Review,1 filed by the petitioner- Cooperative Bank of Benguet (COOPBANK) from the Decision2 (Assailed Decision) of the Court of Tax Appeals Second Division ( CTA Second Division) dated June 19, 2007 in CTA Case No. 7141 entitled, "Cooperative Bank of Benguet (COOPBANK), herein represented by its General Manager GERRY T. LAB-OYAN, petitioner vs. Commissioner of Internal Revenue, respondent' denying petitioner-COOPBAN K's Petition for Review therein thus, ordering COOPBANK to pay the assessment for Gross Receipts Tax in the amount of P1,364,212.83 and the delinquency interest at the rate of 20% per annum from the date of notice and dema nd until the amount is fully paid, and from the~ 1 CTA En Bane Rollo, pp. 3-9. 2 Annex "A", Petition for Review, CTA En Bane Ro llo, pp. 12-24.

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION Resolution3 (Assailed Resolution) dated November 6, 2007 denying COOPBANK's Motion for Reconsideration. The facts of the case, as culled from the records, are as follows: ''Petitioner (COOPBANK) is a duly registered cooperative with the Cooperative Development Authority under and in accordance with R.A. No. 6938.4 The purposes' for which petitioner is formed are as follows: 1. To carry on banking and credit services for the cooperatives; 2. To receive financial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in business and to supervise the lending and collection ofloans; 3. To mobilize savings of its members for the benefit of the cooperative movement; 4. To act as a balancing medium for the surplus funds ofcooperatives and their federations; 5. To discount bills and promissory notes issued and drawn by cooperatives; 6. To issue negotiable instruments to facilitate the activities ofcooperatives; 7. To issue debentures subject to the approval and under conditions and guarantees to be prescribed by the Government; 8. To borrow money from banks and other financial institutions within the limit to be prescribed by the Authority; 9. To carry out all other functions as may be prescribed by the Authority; and 10. To perform banking and credit functions with individual(s) and/or the public in general; Provided, that the performance of any banking function shall be subject to prior approval by the Central Bank of the Philippines:lf�- 3 Annex "B", Petition for Review, CTA En Bane Rollo, pp. 26-27. 4 Certificate of Registration, Exhibit " A", CTA Second Division Rollo, page 92. 5 Articles of Cooperation of the Cooperative Bank of Benguet, Exhibit "A- I", CTA Second Division Rollo, page 93 .

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION On December ~ 200~ petitioner received a letter from the Ole- Revenue District Officer of Revenue District Office (RDO) No. 9, La Trinidad, Benguet, informing it ofits deficiency Gross Receipts Tax for the year 2002 in the amount of One Million Three Hundred Seventy One Thousand Seven Hundred Twelve Pesos and Seven Centavos {P1,371,712.07}, inclusive ofpenalties.6 In a letter-reply to the OIC-Revenue District Officer of the RDO No. 9, La Trinidad, Benguet dated December 15, 200~ petitioner expressed disagreement with the findings ofhis deficiency Gross Receipts Tax. 7 On January 28, 2004, the OIC-Revenue District Officer of the ROO No. 9, La Trinidad, Benguet, notified petitioner via letter that Revenue Memorandum Circular No. 48-91 has been amended by Revenue Regulations No. 20-01 dated November 12, 2001 and that petitioner's exemption from Gross Receipts Tax (GRT} under Sections 121-122 of the National Internal Revenue Code of 1997 (1997 Tax Code) is no longer among the listed exemptions. On January 14, 2004, petitioner again wrote the OIC-Revenue District Officer acknowledging receipt of the latter's letter dated January 7, 2004. It restated its position that it is not liable to pay the GRT under Section 121 of the 1997 Tax Code. It, likewise, reiterated its request for the RDO No. 9, La Trinidad, Benguet, to issue a letter of termination of tax examination, tax clearance or whatever is appropriate. On March 16, 2004, petitioner got from the OIC-Revenue District Officer, RDO No. 9, La Trinidad, Benguet, a Preliminary Assessment Notice (PAN} assesst'ng petitioner deficiency Gross Receipts Tax for the year 2002 in the amount of One Million Three Hundred Seventy On~ 6 Petition for Review, Annex "A", CTA Rollo, page 11 ; Joint Stipulation of Facts and Issues, Paragraph 2, CTA Second Division Rollo, page 75 . 7 Joint Stipulation of Facts and Issues, Paragraph 3, CTA Second Division Rollo, page 75.

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION Thousand, Seven Hundred Twelve Pesos and Eighty Three Centavos (P1/371/712.83J computed as follows: Regular Income 18 ,273 ,37 4 .00 Income from Bank Deposit, at gross of the 986,101 .25 20% final tax TOTAL 19,259,475.25 5% xGRT 962 ,973 .76 Less: Payment per Percentage Tax Return Deficiency Tax 962 ,973 .76 Add : Increments 7,500 .00 408 ,739 .07 Compromise penalties 240 ,743.44 1,371 ,712.83 Surcharge (25%) 160,495.63 Interest (20%) On May 31/ 2004, the Assistant Regional Director of Revenue Region No. 2, Baguio City, found petitioner liable to pay deficiency percentage tax in the amount of One Million Three Hundred Seventy One Thousand Seven Hundred Twelve Pesos and Eighty Three Centavos (P1/371/712.83) and issued a Formal Letter of Demand and Audit Results/Assessment Notice No. 02-04-0006-P"t/ which petitioner admittedly received. On July 8/ 2004, petitioner formally filed its request for reconsideration on the findings of the Revenue District Officer that it is liable for deficiency Gross Receipts Tax. As the one hundred eighty (180)-day period expired without the respondent deciding on the protesC petitioner filed before this Court a./2A- 8 Petition for Review, Annex "F", CTA Second Division Rollo, page 18.

EB CASE NO. 356 (CTA CASE NO. 7141 ) DECISION Petition for Review on January 31, 2004 assailing the assessment for deficiency Gross Receipts Tax. /9 After trial on the merits, the CTA Second Division promulgated the Assailed Decisiorf0 on June 19, 2007, the dispositive portion of which reads as follows: "WHEREFORE, premises considered, the petition for review is hereby DENIED. Accordingly, for lack of documentary evidence to disprove the correctness of the assessment, petitioner is hereby ORDERED a) TO PAY the assessment for deficiency Gross Receipts Tax in the amount of ONE MILliON THREE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED TWELVE PESOS AND EIGHTY THREE CENTAVOS {Pl,364,212.83) computed as follows: Regular Income 18,273,374.00 Income from Bank Deposit, at gross of the 986,101.25 20% final tax TOTAL 19, 259,475.25 5% xGRT Less: Payment per Percentage Tax Return 240,743.44 962,973.76 Deficiency Tax 160,495.63 962,973.76 Add: 401,239.07 Surcharge (25%) Interest (20%) 1,364,212.83 b) and in addition, TO PAY the delinquency interest at the rate of twenty percent (20%) per annum from the date of notice and demand until the amount is fully paid./i!6- 9 Assailed Decision, pp. 2-4. 10 Supra, note 2.

EB CASE NO. 356 (CfA CASE NO. 7141) DECISION However, the compromise penalty in the amount of P~500. 00 has been deleted because there was no compromise agreement entered into between petitioner and respondenC which shall serve as a basis for the imposition ofa compromise penalty. SO ORDERED. " Not satisfied with the above decision, COOPBANK posted a "Motion for Reconsideration11" on July 17, 2007. No Comment was filed by the respondent- GR. In the Assailed ResolutiorP dated November 26, 2007, the CTA Second Division denied COOPBANK's "Motion for Reconsideration" for lack of merit. On December 6, 2007, COOPBANK filed the instant Petition for Review13 with the CTA En Bane, praying that the CTA En Bane reverse the Decision dated June 19, 2007 of the CTA Second Division in CTA Case No. 7141 entitled, "Cooperative Bank of Benguet (COOPBANK), herein represented by its General Manager GERRY T. LAB-OYAN, petitioner vs. Commissioner of Internal Revenue, respondent' and decide in favor of the petitioner, Cooperative Bank of Benguet. Petitioner raised its sole issue14 in the instant Petition for Review, to wit: "WHETHER OR NOT ARTICLE 62 OF REPUBLIC ACT 6938, OTHERWISE KNOWN AS 'THE COOPERATIVE CODE OF THE PHILIPPINES', GRANTS THE PETffiONER AND ALL OTHER DULY REGISTERED COOPERATIVES TAX EXEMPTION FROM THE 5% GROSS RECEIPTS TAX." The CTA En Bane promulgated a Resolution15 on February 7, 2008, ordering the CIR to file a Comment on the said Petition for Review, within ten (10) days from receipt of the said Resolution. Respondent filed a "Motion fo~ 11 CTA Second Division Rollo, pp. 206-2 10. 12 Supra, note 3. 13 Supra, note I . 14 Ibid, p. 5. 15 CTA En Bane Rollo, p. 30.

'EB CASE NO. 356 (CTA CASE NO. 7141) DECISION Extension to File Comment"16 on February 20, 2008, which was granted by the CTA En Bane in a Resolution17 dated February 26, 2008. In compliance with the said Resolution, CIR filed its Comment18 on March 7, 2008. After a careful and thorough evaluation and consideration of the records of the case, the Court En Bane finds no new matters which have not yet been considered and passed upon by the CTA Second Division in its assailed Decision and Resolution. As aptly discussed by the CTA Second Division, and We quote, to wit: ''It is undisputed that petitioner is a cooperative bank, which renders services to both members and non-members, and registered with Cooperative Development Authority. As a duly registered cooperative bank, petitioner enjoys several rights and privileges under Republic Act No. 6938 or the 'Cooperative Code of the Philippines~ Article 62 of R.A. No. 6938 which is specifically applicable to the situation of petitioner, states thus: 'ARTICLE 62. Tax and Other Exemptions. - Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (PlO,OOO,OOO.OO) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax- free importations shall not be transferred to any person$ 16 CTA En Bane Rollo, pp. 31-32. 17 CTA En Bane Rollo, p. 36. 18 CTA En Bane Rollo, pp.37-45 .

'EB CASE NO. 356 (CfA CASE NO. 7141) DECISION until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarity liable to pay twice the amount of the tax and/or duties thereon. (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos {PlO,OOO,OOO.OO) shall pay the following taxes at the full rate: (a) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members; (b) Sales Tax - On sales to nonmembers: Provided, however, That all cooperatives, regardless of classification, are exempt from the payment of income and sales taxes for a period of ten (10) years. For cooperatives whose exemptions were removed by Executive Order No. 93, the ten-year period shall be reckoned from the effectivity date of said executive order. Cooperatives created after the approval of this Code shall be granted the same exemptions, the period of which shall be reckoned from the date of registration with the Authority: Provided, That at least twenty-five per centum (25%) of the net income of the cooperatives is returned to the members in the form of interest and/or patronage refunds. (c) All other taxes unless otherwise provided herein; and (d) Donations to charitable, research and educational institutions and reinvestment to socio- economic projects within the area of operation of the cooperative may be tax deductible. (3) All cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies: Provided, That all sales or services rendered for nonmembers shall be subject to the applicable percentage taxes except sales made by producers, marketing or service cooperatives: Provided, further, That nothing in~

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION this article shall preclude the examination of the books of accounts or other accounting records of the cooperative by duly authorized internal revenue officers for internal revenue tax purposes only, after previous authorization by the Authority. Xxx' It is safe to conclude that the subject of Article 62 of the Cooperative Code are cooperatives classified as 'transacting business with both members and nonmembers' and the rules relating to the tax treatment of each type of transactions are also provided. Regarding the transactions of the Cooperatives with their members, the same shall not be subject to tax. However, as to the Cooperatives' transactions with non-members, Article 62 makes a distinction, namely: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten Million Pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature (Article 62[1})/ (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (P10,000,000.00) shall be subject to certain taxes at the full rate (Article 62[2})/ (3) All Cooperatives, regardless of the amount of accumulated reserves and undivided net savings shall be exempt from payment of local taxes and taxes on transactions with banks and insurance companies, provided that all sales rendered for non-members shall be subject to the applicable percentage taxes except sales made by producers, marketing or service Cooperatives (Article 62[3]). Article 23(1) of the Cooperative Code enumerates and defines the different types ofcooperatives, namely: a) Credit Cooperative is one which promotes thrift among its members and creates funds in order to grant loans for productive andprovident purposes/0--..

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION b) Consumer Cooperative is one the primary purpose of which is to procure and distribute commodities to members and nonmembers/ c) Producers Cooperative is one that undertakes joint production whether agricultural or industrial/ d) Marketing Cooperative is one which engages in the supply of production inputs to members and market their products/ e) Service Cooperative is one which engages in medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and power, communication and other services; and f) Multipurpose Cooperative is one which combines two (2) or more of the business activities of these different types ofcooperatives. As correctly pointed out by responden~ an examination of petitioner's Articles of Cooperation and the amendments thereto shows that none of its purposes would properly classify it as producers, marketing or service Cooperative. The same conclusion is corroborated by the admission of petitioner that it is a duly registered Cooperative Bank and not a 'service cooperative, producers cooperative nor a marketing cooperative. ' 9 Accordingly, petitioner is not exempt from payment ofpercentage taxes. Section 121 of the 1997 Tax Code, as amended, which will apply in determining petitioner's tax liability, is hereunder quoted for ready reference, to wit: SEC. 121. Tax on Banks and Non-bank Financial Intermediaries. - There shall be collected a tax on gross receipts derived from sources within the-li>- 19 Joint Stipulation of Facts and Issues, Paragraph 9, CTA Second Division Rollo, page 76.

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest., commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Short-term maturity (not in excess of two (2) years)- 5% Medium-term maturity (over two (2) years but not exceeding four (4) years) - 3% Long-term maturity- {1) Over four (4) years but not exceeding seven (7) years - 1% (2) Over seven (7) years - 0% (b) On dividends - 0% (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 32 of this Code - 5% Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities. Petitioner's admission and stated purposes in its Articles of Cooperation, such as: {1} to carry on banking and credit services for the cooperatives; (2) to receive financial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in business and to supervise the lending and collection of loans~

EB CASE NO. 356 (erA CASE NO. 7141) DECISION and (3) to perform banking and credit functions with individual(s) and/or the public in genera& clearly make it fall within the category of 'banks~ The term 'bank' is defined as 'an institution., usually incorporated, whose business it is to receive money on deposit, cash checks or drafts, discount commercial paper, make loans, and issue promissory notes payable to bearer, known as bank notes. Lo The Honorable Supreme Court provides a similar definition that a bank is 'a moneyed institute founded to facilitate the borrowing, lending and safekeeping of money and to deal in notes, bills of exchange, and credits' and 'an investment company which lends out the money of its customers, collects the interest and charges a commission to both lender and borrower. Ll From the foregoing, petitioner cannot escape liability to pay deficiency Gross Receipts Tax by invoking its alleged tax exemption under R.A. No. 6938. Our jurisprudence is replete with the rule that the law frowns against exemption from taxation. For this reason, statutes granting tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority.22 Aside from the clear taxability ofits transactions to non-members, as provided in Article 62(3), the Cooperative Code itself declared its policy to comply with other laws and executive orders applicable to cooperatives.23 The adoption of the Cooperative Code by reference makes the other laws as much a part of the said Code as if the other laws have been incorporated therein in full. Thus, the Cooperative Code should be so construed as to harmonize with, and give effect to, th~ 20 Bl acks' Law Dictionary With Pronunciations, 61h ed. 21 Republic v. Security Credit and Acceptance Corporation, 19 SCRA 58, No. L-205 83, January 23, 1967 22 Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667, G.R. No. 120082, September I I, 1996 23 ARTICLE 119. Compliance with Other Laws. - xxx (3) All other laws and executive orders applicable to cooperatives duly registered under th is Code.

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION other laws referred to. A construction that will render meaningless the other laws referred to is not favored. 24 As the Cooperative Code should be taken in harmony with other laws, which in the present case is the 1997 Tax Code, petitioner should be held liable to pay percentage tax under Section 121 of the 1997 Tax Code for all sales or services rendered for its non-members. ,zs In sum, the Court En Bane finds no cogent justification to disturb the findings and conclusion spelled out in the assailed June 19, 2007 Decision and November 6, 2007 Resolution of the CTA Second Division. What the instant petition seeks is for the Court En Bane to view and appreciate the evidence in their own perspective of things, which unfortunately had already been considered and passed upon. WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the June 19, 2007 Decision and November 6, 2007 Resolution of the CTA Second Division in CTA Case No. 7141 entitled, "Cooperative Bank of Benguet (COOPBANK), herein represented by its General Manager GERRY T. LAB-OYA~ petitioner vs. Commissioner of Internal Revenue, respondent', are hereby AFFIRMED in toto. SO ORDERED. CAESAR A. CASANOVA Associate Justice 24 Agpalo, Statutory Construction, 51h Edition, page 280. 25 Assailed Decision, pp. 6-1 2.

EB CASE NO. 356 (CTA CASE NO. 7141) DECISION WE CONCUR: c___-v... Q, .,A ERNESTO D. ACOSTA Presiding Justice ~(2. ~~\:J.. JO'ANiT(fC. CASTANEDJ{,qR. Associate Justice AEsRLs~ o~~WticeUY ~~~-E~Z Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~\Sl- ~ ERNESTO D. ACOSTA Presiding Justice