CTA Case No. 2514 (Decision)

Republic of the Philippines COURT OF TAX APPEALS Quezon City THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., Petitioner, - versus - C.T.A. CASE NO. 2514 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X ------------------------- X THE PHILIPPINE AMERICAN ASSURANCE CO., INC., Petitioner, - versus - C.T.A. CASE NO. 2515 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X ------------------------- X THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Petitioner, - versus - 5 C.T.A. CASE NO. 2516 THE COMMISSIONER OF INTERNAL PROMULGATED : REVENUE, JAN 05 1995 - Respondent. X--------------------------------------------~ X Petitioner seeks refund from respondent of the following sums of P7,985.25 in CTA Case No.2514, P7,047.80 in CTA Case No. 2515, and P=14,541.97 in CTA Case No. 2516, representing 3X of of its interest income on mortgage and other losses.

DECISION - C.T.A. Case No. 2514, 2515, 2516 -2- The �allowing �acts are not disputed: Petitioner is a domestic corporation duly registered to transact insurance business in the Philippines. From August 1971 to September 1972, . petitioner paid under protest the a�orestated amounts to the respondent as 3% tax imposed on lending inve stors by Section 195-A o� the NIRC in the interest income on mortgage and losses. On January 31, 1973, petitioner sent to respondent a letter-claim �or re�und o� the a�oresaid amounts but did not receive any decision �rom the respondent up to its �iling o� the instant action be�ore this Court. The sole issue in this case is whether or not petitioner is entitled to the re�und o� the above- stated amounts representing its payment to respondent o� the 3% percentage tax as a lending investor under Section 195-A o� the Tax Code. Petitioner contends that it is not subject to �ixed and percentage taxes imposed on lending investors because its lending and investment activities �rom which it earns interest �arm part o� and are necessary to its main business o� insurance which is already taxed under Section 194<u> and under Section 182 <gg> and 255 o� the

DECISION - C.T.A. Case No. 2514, 2515, 2516 -3- Tax Code. Respondent maintains that petitioner is a lending investor as de�ined in Section 195-A and 182n <A)93)(dd) o� the Tax Code. We �ind �or the petitioner. This case is similar to CTA Case No. 2336, Insular Li�e Assurance Co. Ltd. v. Comm. o� Internal Revenue, CTA Case No. 2337, Filipinas Li�e Assurance Co. v. Comm. o� Internal Revenue, and CTA Case No. 2300, Philippine American Li�e Insurance Co. vs. Comm. o� Internal Revenue. We thus deem i t su��icient to quote �rom the decision in said cases, to wit: Originally, a person who was engaged in lending money at interest was taxed as a money lender. [Sec. 1464<x>, Rev. Adm. Code. J The term money lenders was de�ined as including "all persons who make a practice o� lending money �or themselves or others at interest."[Sec. 1465(v), id.] Under this law, an 1nsurance company was not considered a money lender and was not taxable as such. To quote �rom an old BIR Ruling: "The lending o� money at interest by insurance companies constitutes a necessary incident o� their regular business. For this reason, insurance companies are not liable to tax as money lenders or real estate brokers �or making or negotiating loans secured by real property. <Ruling, February 28, 1920; BIR 135. 2. >" <The Internal Revenue Law, @

DECISION - C.T.A. Case No. 2514, 2515, 2516 -4- Annotated, 2nd ed., 1929, by B.L. Meer, page 143. > The same rule has been applied to banks. "For making investments on salary loans, banks will not be required to pay the money lender's tax imposed by this subsection, �or the reason that money lending is considered a mere incident o� the banking � business. [See Ruling No. 43, (October 8, 1926> 25 0��. Gaz. 1326. >" <The Internal Revenue Law, Annotated, id. > The term "money lenders" was later changed to "lending investors" but the de�inition a� the term remains the same. [Sec. 1464(x), Rev. Adm. Code, as �inally amended by Com. Act No. 215, and Sec. 1465<v> o� the same Code, as �inally amended by Act No. 3963.] The same law is embodied in the present National Internal Revenue Code (Com. Act No. 466> without change, except in the amount o� the tax. [See Sees. 182<A> (3) <dd) and 194<u>, National Internal Revenue Code. J It is a well-settled rule that an administrative interpretation o� a law which has been �allowed and applied �or a long time, and therea�ter the law is re-enacted without substantial change, such administrative interpretation is deemed to have received legislative approval. In ~hart, the administrative interpretation becomes part o� the law as it is presumed to carry out the legisl~tive purpose. " . 0� course, the rule does not operate to �reeze a meaning which is in evident con�lict with the clearly expressed legislative intent. Helvering vs. Hallock,

DECISION - C.T.A. Case No. 2514, 2515, 2516 -5- 309 u.s. 105, 119-121, 50 S.Ct.444, 84 L.Ed. 504, A.L.R. 1358. But where a statute is susceptible o� the meaning placed upon it by Treasury ruling and Congress therea�ter re-enacts the provision without substantial change, such action is to some extent con�irmatory that the ruling carries out the congressional purpose." <Mead Corporation vs. Comm. o� Internal Revenue, 115 F. [ 2d J 187, p. 194 . > "The law, I believe, is now settled that substantial reenactment o� legislation which has been construed by Treasury regulations is at least strong evidence o� legislative approval o� such construction. It is presumed that Congress knew o� the existing administrative interpretations o� the statute "<Cargill vs. United States, 46 F. Supp. 712, 715.) (Quoted with approval in interprovincial Autobus Co., Inc. vs. Call. o� Int. Rev., Mindanao Bus Co. vs. Call. o� Int. Rev., 1 SCRA 538. > The rule as regards re-enactment o� statutes which have been interpreted and applied �or a long time acquires more �orce in the instant case as the ruling o� the Bureau o� Internal Revenue cited above has been �allowed without interruption �or more than hal� a century. We have had occasion to express the same view. It has been held that "when a person or company is already taxed on its main business, it may not be �urther taxed �or doing something or engaging in

DECISION - C.T.A. Case No. 2514, 2515, 2516 -6- an activity or work which is merely a part o�, incidental to and is necessary to its main business". <Asturias Sugar Central, Inc. vs. Comm. o� Internal Revenue, C.T.A. Case No. 983, February 14, 1963, citing Standard Vacuum Oil Co. vs. Antigua, 96 Phil. 909. > This doctrine was cited and relied upon by this Court in the Asturias case in connection with the issue o� whether or not the taxpayer therein was liable �or the �ixed tax as a lending investor. The doctrine is but the result o� the correct application o� the rule o� interpretation to determine the legislative intent behind revenue laws. 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 o� said business. There can be no question that lending money at interest by li�e insurance companies is not only incidental to their business but is essential 'tO their very existence. No insurance company can survive without investing its �unds in loans. A well-known authority on insurance, Mr. W.R. Vance, says~ In considering the causes o� this phenomenal growth o� li�e insurance, it is well to observe that the business is not con�ined to mere insurance against the untimely termination o� li�e, but includes, as perhaps its most important element, the �eature o� investment o� savings �or the purpose o� creating an "insurance estate". X X X X �

DECISION - C.T.A. Case No. 2514, 2515, 2515 -7- The insured, in e��ect, pays the insurer annual sums which the latter must hold, invest, and accumulate until the maturity o� the policy, by death or -the expiration o� an endowment term, �ixes the duty o� the insurer to pay. <Vance on Insurance, 3rd ed., p.32. > Ariother recognized authority on insurance says that "li�e insurance companies must invest their �unds so as to enable them to meet their obligations to their policyholders." <Appleman, Insurance Law and Practice, Vol. 19, p. 180. ) In the case o� Bowers vs. Lawyers Mortg. Co., 285 U.S. 182, 75 L. ed. 590, 595 (1931>, the U.S. Supreme Court stated: "Premiums" are charac- teristic o� the business o� insurance, and the creation o� "investment income" is generally, i� not necessarily, essential to it. Evidence �or the petitioners sustained the �act that they have to invest the premiums they receive, that they cannot just hold them idle, and that investing those premiums is incidental to the operation o� li�e insurance companies <p. 12, T.S.N., July 10, 1972). As a matter o� �act, Section 183 o� the Insurance Act requires every li�e insurance company doing business in the Philippines to hold its �unds "in secure investments" equal to the "aggregate net value" o� its policies, and among the investments indicated in Section 197 o� said Act is precisely the lending o� money on �irst mortgages.

DECISION - C.T.A. Case No. 2514, 2515, 2516 -8 - That the investment o� the premiums collected by insurance companies �rom policyholders appears to be not merely incidental or necessary but in �act essential to the conduct o� the li�e insurance business cannot be gainsaid. Nor can it be denied that "insurance is a��ected with a public interest", and that perhaps "no other business a��ects the public so intimately as does the insurance business. " <Vance on Insurance, p. 36. > It is �or these reasons that the investment aspect o� the insurance business, including investments in mortgage loans, is subject to stringent regulation by the state. <See Sees. 178-A, 183, 197, 200- A o� the Insurance Act. > It is noteworthy that according to Sec. 200<1> o� the Insurance Act, an insurance corporation may purchase and hold property "as may have been mortgaged, pledged , qr conveyed to it . by reason o� money loaned by it in pursuance o� the regular business o� the corporation " <Underscoring supplied. > This provision , to our mind, con�irms the �act that lending money is part and parcel o� the insurance business. In this connection, it should be noted that Republic Act No. 6110 amended Section 293<A><3> o� the Revenue Code by inserting therein , among others, subparagraph <gg> in which, �or the �irst time, banks, insurance companies doing business in the Philippines were grouped together and made subject to a �ixed tax on their businesses. Petitioners allege, and respondent has not denied, that prior to Republic Act No. 6110, which was approved on August 4, 1969, insurance companies were already engaged in lending activities but had never been required by respondent to pay the �ixed tax imposed on lending investors under the �ormer Section 182<A><3><u> o� the Revenue Code. <See BIR Ruling dated Feb. 28 , �

DECISION - C.T.A. Case No. 2514, 2515, 2515 -9- 1920, supra.) It appears to us that there is less reason now than be�ore to hold them liable �or the �ixed tax imposed on lending investors since they are presently subject to the �ixed tax under Section 183 <A>93><gg> by virtue o� Republic Act No. 5110. In �act, it would be di��icult to accept the view that the legislators, in making them liable �or the �ixed tax on their businesses, also intended to make them additionally liable �or the �ixed tax on lending investors under subparagraph (dd} o� Sec. 182 <A> (3) [�ormerly, subparagraph <u> o� Sec. 182 <Af<3>J. It is inconceivable that banks and finance companies, whose lending activities obviously constitute an inherent and integral part of their businesses, are to be required to pay the fixed tax on their businesses as banks or finance companies and again as lending investors. Since lending money is an integral and essential activity not only of banks and finance companies but also of insurance companies, they were all grouped together under subparagraph <gg>; and since Congress must have been aware of the nature of their businesses, it is to be presumed in the absence of any express provision to the contrary, that Congress intended them to pay only the fixed tax under subparagraph <gg). Respondent cites Section 178 o� the Revenue Code which provides that "one occupation or line o� business does not become exempt by being conducted with 1 An opinion has been expressed to the effect that if the incoae derived by banks fro� interest on their lending transactions is not subject to the lending investor's percentage tax under Section 195!B> of the Revenue Code, said interest would not also be subject to the percentage tax on the gross receipts of banks under Section 249 of the sa.e Code. This opinion apparently overlooks the express provision of Section 249 which i�poses the percentage tax provided therein on the 'gross receipts' of banks. The term 'gross receipts' in said section includes all iteas of inco.e as defined in Section 29 of the Code which includes interest.

DECISION - C.T.A. Case No. 2514, 2515, 2516 - 10 - some other business or occupation �or which such tax has been paid". But the view we have taken in this case does� not contravene said provision which, as we had occasion to rule, "contemplates a case where a person is engaged in two or more separate and distinct occupations or businesses" <Ilagan & Alejandrino v. Collector, CTA Case No.43). In the cited Ilagan case it was held that under Section 178, one who was engaged in business as a road contractor and also as a building contractor was subject to the �ixeq tax on road contractors and also to the �ixed tax on building contractors. It will be noted, however, that unlike the insurance business and lending activity o� the petitioners on this case, the business o� a road contractor and the business o� a building contractor are separate or distinct �rom each other such that neither is incidental or necessary to, nor an integral part o�, the other. In the case o� Collector o� Internal Revenue v. Eternit Corporation 105 Phil. 565, the Supreme Court upheld this Court's ruling to the e��ect that the "installation" o� asbestos sheets was an occupation "distinct and separate" �rom the business o� manu�acturing and selling those sheets <105 Phil. 568> so that the tax exemption accorded by law to the latter was no bar to the contractor's tax imposed by the Revenue Code on the �ormer. Since petitioners are not taxable as lending investors under Section 182(a)(3)9dd), it �allows that they are not also subject to the percentage tax imposed on lending investors under Section 195-B o� the Revenue Code. It should be pointed out in this connection that petitioners as insurance companies are, like banks, �inance companies and �ranchise grantees which are all grouped together under Section 182<A><3><gg>, are already subject to the miscellaneous tax imposed in Title VIII o� the Revenue

DECISION - C.T.A. Case No. 2514, 2515, 2516 - 11 - Code. It is noteworthy that the miscellaneous tax o� "three per centum o� the total premiums collected" under Section 255 o� the Revenue Code is essentially a percentage tax and is no di��erent in nature �rom the percentage tax imposed on lending investors in Section 195- B o� the same Code. WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co., Philippine American Assurance Co., and Philippine American General Insurance Co. Inc. are not taxable on their lending transactions independently o� their insurance business. Accordingly, respondent is hereby ordered to re�und to petitioner the sum o� F7, 985. 25, P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing the �ixed and percentage taxes when paid by petitioners as lending investor �rom August 1971 to September 1972. No pronouncement as to cost. SO ORDERED. GRUBA Associate Judge WE esiding Jup e ~ ~t-)~ aA RAMON 0. DE VE Associate Ju

DECISION - C.T.A. Case No. 2514, 2515, 2516 - 12 - CERTIFICATION I hereby certi�y that this decision was reached a�ter due consultation among the members o� the Court o� Tax Appeals in accordance with Section 13 Article VIII o� the Constitution. ~Q-C.~ ERHESTO D. ACOSTA Presiding Judge Court o� Tax Appeals