MALAYAN INSURANCE CO., INC. v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City EN BANC MALAYAN INSURANCE CO. INC., C.T.A. EN BANC No.8 Petitioner (C.T.A. Case No. 6470) -versus- Members: ACOSTA, P.J. CASTAl'J"EDA, Jr. BAUTISTA, UY, CASANOVA, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, MAR 3 1 2005 4t>!!Ar~#h~~ Respondent. X- - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X DECISION CASANOVA, J.: This is a Petition for Review before the Court of Tax Appeals En Bane filed under Republic Act # 9282 seeking to set aside the Decision dated January 23, 2004 of the then Court of Tax Appeals which, under RA # 9282, is now a division of the current Court of Tax Appeals. The assailed Decision is hereunder reproduced as follows: 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

C.T.A. EB No. 8 (CTA Case No. 6470) Decision 2 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 for Review; Annexes "A" to "L "; Petitioner 's Exhibit6 B-1) For the period covering April 29, 2000 to December 1, 2001, the Bureau of Treasury paid interest for the said treasury notes to petitioner and withheld tax on said interest at the rate of 20% of the interest income. 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 (P10,292,840.00) 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 April 29, 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 ofFacts 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 issuance 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 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. ofthe 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 in relation to Section 229 of the Tax Code (RA 8824); 9. Claims for refund are construed strictly a ainst

3 C.T.A. EB No. 8 (CTA Case No. 6470) Decision from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs Commissioner of Internal 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 income derived from treasury notes which have maturity in excess of five 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. 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 ofP10,292,840.00. 4. Whether or not Petitioner is entitled to a refund/tax credit on the amount withheld on such interest payment amounting to P10,292,840.00. 5. Whether or not petitioner is liable for deficiency mcome 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 of Facts 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 parties is simply "Whether or not the petitioner is entitled to a refund or tax credit of the amount withheld on interest payment on the treasury notes with maturity date of more than five (5) years amounting P10,292,840.00 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:

C.T. A. EB No. 8 (CTA Case No. 6470) Decision 4 "Section 32. Gross Income.-xxx "(B) Exclusion from Gross Income.- The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx "(7) Miscellaneous Items. - xxx "(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - 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." Under said Section 32(B)(7)(g) of the Tax Code of 1997, 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 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. 016-00 dated January 7, 2000. In BIR Ruling No. 166-99, respondent ruled that interest income or yields or gains from the sale of bonds, debentures and certificate of indebtedness with maturities of more than five (5) are excluded from gross income in accordance 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: "xxx As a general rule, the interest income on currency bank deposit and yield or other monetary benefit from these "deposit substitutes" and similar arrangement derived by banks and non-bank financial intermediaries are being taxed at the final rate of20% under Section 27(D)(l) ofthe 1997 Tax Code. However, Section 32(B)(7)(g) of the Tax Code provides an exception, thus: "Section 32. Gross Income. - xxx "(B) Exclusion from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx "(7) Miscellaneous Items. - xxx

C.T.A. EB No. 8 (CTA Case No. 6470) Decision 5 "(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - 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." The idea therefore, is to still treat bonds, debentures or other certificate of indebtedness as "deposit substitutes" the interest income, yield or gain derived therefrom subject to the 20% final tax under Section 27(D)(1) of the 1997 Tax Code, but exclude said interest income, yield or gain from the gross income if the bonds, debentures or the certificate of indebtedness have maturities of more than five (5) years. Conversely, only the income derived on these instruments with maturity of more than five (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 origination and issuance, as well. Thus, from the time of its issuance, we should consider the "income" which is actually the amount coming to a person within a specified time, whether as payment for the services, interest, or profit from investment. Its usual synonyms being "gain", "profit", "revenue". (Trefry v. Outnam, 116 N.E. 904 227 Mass. 522, L.R.A. 1917 F, 806. Words & Phrases, gain, page 11, Permanent Edition)" (Emphasis supplied) However, the respondent quoting the same provision 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 withholding 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: "We take the view that "gains" as the term is used therein in Section 32(B)(7)(g) of the Tax Code cannot include interest since it clearly refers to the gains from the sale of bonds, debentures and other certificate 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

C.T.A. EB No. 8 (CTA Case No. 6470) Dec ision 6 of bonds, debentures or 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 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) General Definition. - Except when otherwise provided in this Title, gross income means all income derived 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 derived from the conduct of trade or business or the exercise of profession; (3). Gains derived from dealings in property; (4). Interests; (5). Rents; (6). Royalties; (7). Dividends; (8). Annuities; (9). Prizes and winnings; (10). Pensions; and (11). Partner's distributive share from the net income of the general professional partnership. XXX 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 bonds, debentures or other certificate of indebtedness" would fall under the category of "gains derived from dealings in property". On the other hand, "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 other certificate of indebtedness and interests from bonds, debentures and other certificate of indebtedness fall under separate and distinct income cafe ories.

C.T.A. EB No. 8 (CTA Case No. 6470) Deci sio n 7 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, debentures or other certificate of indebtedness with a maturity of more than five (5) years" that is excluded from gross income 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 and 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 "Interest" 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 certificate of indebtedness under Section 32(B)(7)(g) of the Tax Code, it would have 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, in disregarding a Revenue Memorandum Circular issued 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, 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 judicially found to be erroneous. Thus, the courts will not countenance administrative issuances that override, instead of remaining consistent with the law they seek to apply and 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). Accordin 1 , the are looked u on with disfavor Western

C.T.A. EB No. 8 8 (CTA Case No. 6470) Dec is io n SCRA 1211). The party claiming exemption must justify his claim by clear, positive or express grant of such privilege by law because an exemption from common burden cannot be permitted to exist upon vague implication (Collector of Internal Revenue vs Manila Jockey Club, Inc., 98 PHIL 670, cited in Philippine Bank of Communication vs. Commissioner of Internal Revenue, CTA Case No. 2725, January 6, 1988). WHEREFORE, in view of the foregoing, petitioner's claim for issuance oftax credit certificate is hereby DENIED. SO ORDERED." Petitioner filed a "Motion for Reconsideration" on February 17, 2004. In a Resolution dated May 11, 2004, the then Court of Tax Appeals denied the said motion on the ground of lack of merit. Hence, petitioner filed the instant Petition for Review raising the following issue: WHETHER OR NOT THE CTA DIVISION ERRED IN RULING THAT THE TERM "GAIN" AS USED IN SECTION 32 (B) (7) (g) OF THE TAX CODE DOES NOT INCLUDE INTEREST. After a careful and thorough perusal, evaluation and consideration of the instant Petition for Review, the Court En Bane finds no cogent justification to disturb its previous conclusion as spelled out in the Decision of this Court promulgated on January 23 , 2004 and the Resolution dated May 11 , 2004, denying petitioner' s claim for issuance of tax credits certificate for alleged erroneous withholding of tax by the Bureau of Treasury on interest payments paid to the petitioner. What the instant petition asks is for the Court En Bane to view and appreciate the evidence in their perspective of things, which unfortunately had been considered and passed upon. The Court En Bane adopts by reference the findings of facts and conclusions of laws contained in the above-mentioned Decision and Resolution of this Court. It is also worth mentioning that the case of Nippon Life Insurance Company of the Philippines vs. CIR, CTA Case No. 6142, February 4, 2002, where this Court denied the exemption from withholding tax of the interest payment of treasury notes, was affirmed by the Court of Appeals in CA-GR SP No. 69224 on November 15, 2002 and by the Supreme Court per Minute Resolution dated November 19, 2003 with Entry of Judgment January 6, 2004. WHEREFORE, the instant Petition for Review is hereby DISMISSED for being patently without merit. SO ORDERED. ~ CAESAR A. CASANOVA Associate Ju tice

C.T.A. EB No. 8 9 (CTA Case No. 6470) Decision ~ ~-~ ERNESTO D. ACOSTA WE CONCUR: Presiding Justice Jlf. .. Q_~lo ~- ~~-~ . CfUANITO C. CASTANEDA, Associate Justice L-]luL_~~ OLG~ PALANCA-�N-Rl:QUEZ Associate Justice CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with the members of this Court before the case was assigned to the writer of the opinion of the Court. L ~ ~~ ERNESTO D. ACOSTA Presiding Justice