Nippon Life Insurance Co. of the Philippines, Inc. v. Commissioner of Internal Revenue

SECOND DIVISION [CA-G.R. SP No. 69224. November 15, 2002.] NIPPON LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N GUERRERO , J p : Before Us is a petition for review of the decision of the Court of Tax Appeals, dated 04 February 2002, granting in part the refund applied for by petitioner. The pertinent facts: Petitioner Nippon Life Insurance Company of the Philippines, Inc. (hereafter, Nippon) is a duly organized domestic corporation engaged in the life insurance business. As such, Nippon is required under the Insurance Code to invest in government securities such as bonds and other evidence of indebtedness of the government or government-owned and controlled corporations. Thus, on 01 December 1997, Nippon purchased from Citibank N.A. a ten (10) year Fixed Rate Treasury Bond with a face value of P20 Million, and an interest coupon rate of 22.875%, payable semi-annually on 27 May and 27 November each year. The Bureau of Treasury had originally issued the bond to Citibank on 27 November 1997 at face value. Nippon, however, acquired the bond at a premium in the amount of P20,076,022.89. 1 From 01 December 1997 to 15 June 1999, Nippon was the holder of the bond. On three (3) occasions within this period, to wit: on 27 May 1998, 27 November 1998 and 27 May 1999, Nippon received interest income amounting to P1,830,000.00 on each occasion or a total of P5,490,000.00. For these interests income, the Bureau of Treasury withheld the following taxes from Nippon: (1) P371,083.33 for the interest paid on 27 May 1998; (2) P457,500.00 for the interest paid on 27 November 1998; and (3) P457,500.00 for 27 May 1999. For the remaining period until Nippon transferred the bond, the Bureau of Treasury further withheld P48,291.67 in taxes. 2 On 16 June 1999, Nippon sold the bond to Hongkong and Shanghai Banking Corporation (hereafter, HSBC) at a premium in the amount of P27,152,761.15 for which P890,726.20 in taxes were again withheld by the Bureau of Treasury. 3 On 17 March 2000, Nippon filed a claim for refund with the Bureau of Internal Revenue (hereafter, BIR) for taxes withheld on its income in 1998 and 1999 from the subject bond. The amount claimed by Nippon is P2,223,359.82, computed as follows: "Withholding Taxes on Selling Price P890,726.20 Withholding Taxes on Accrued Interest Receivable from 5/27/99 to 6/15/99 48,291.67 Withholding Taxes on Interest Income: from 1/1/98 to 5/27/98 [P457,500 x (180-34 days) / 180 days] 371,083.33 from 5/28/98 to 11/27/98 457,500.00 from 11/28/98 to 5/27/99 457,500.00 Subtotal P2,225,101.20 Less: Withholding Tax on Purchase from Citibank N.A. [P1,728.80 x (360 - 4 days) - 30 days) / 356 days] (1,741.38) Total Withholding Taxes Subject to Refund P2,223,359.82" 4 As basis for the refund, Nippon invoked Section 32(B)(7)(g) of Republic Act No. 8424, the Tax Reform Act of 1997, which states that: "Section 32. Gross Income . xxx xxx xxx "(B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx "(7) Miscellaneous Items . xxx xxx 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 or more than five (5) years." Nippon argued that the term "gains" on bond transactions should include interest income as well. It explained thus: "The tax-exempt payments referred to above should not be limited to the spread between the cost or purchase price of the bond and its selling price. In determining the price of a bond, the future interest payments are essentially taken into account. Thus, in the case of NLICP, the bond with a fact value of P20 Million was purchased at a price of P20,037,085.03 and later sold at a price of P27,850,230.69. The purchaser of a bond, in fact, 'pays' for the present value of the interest it expects to receive, which payment, in turn, represents the gain of the seller. Thus, in this respect, 'gain', 'interest' and 'yield' are synonymous. "It is noteworthy that Section 32(B)(7)(g) of the NIRC uses the term 'gain' without qualification . The use of the term 'gains' per se , without any restrictions, demands a comprehensive interpretation and application ( Trefry v. Pumam , 116 NE 904 [1917]). Under the principles of taxation, the term 'gains' ordinarily refers and is synonymous to the concepts of 'profit', 'income' and other similar forms of wealth or value which flow into the taxpayer through a period of time, other than as a mere return of capital (Section 36, Revenue Regulations No. 2). In other words, capital is wealth, while gain, income or profits is the service of wealth ( Madrigal v. Rafferty , 38 Phil. 414 [1917]). Specifically, 'gain' or 'income' denotes a 'profits, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived' that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit or disposal that is income derived from property Eisner v. Macomber , 252 US 189 [1920]." 5 As the BIR failed to resolve the claim for refund, Nippon, on 17 July 2000, filed a petition for review with the Court of Tax Appeals (CTA). 6 This time Nippon cited BIR Ruling No. 166-99, dated 25 October 1999, to support its claim. In this ruling, the BIR concluded that interest income from bonds, debentures and certificates of indebtedness, with maturities of more than five (5) years are excluded from gross income in accordance with Section 32(B)(7)(g) and thus exempt from the 20% final withholding tax on deposit substitutes. 7 This ruling was reiterated in BIR Ruling No. 016-2000, dated 07 January 2000. 8 On 04 February 2002, the CTA ruled on the petition, in this wise: TIaEDC "In this case, We conclude that the aforementioned BIR rulings are erroneous. Such rulings 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 statutory construction that tax exemptions are strictly construed against the taxpayer. Consequently, where Section 32(B)(7)(g) of the Tax Code which grants tax exemption, is susceptible of a restrictive interpretation, such interpretation must be adopted. "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 gains from the sale of bonds, debentures and other certificates 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 the 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 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. xxx xxx 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 and 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. 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 income categories. "Moreover, it should be noted that both Section (24)(B)(1) and 25(A)(2), respectively, of the Tax Code expressly exempt interest derived from certain long-term deposit or investment (covered by Bangko Sentral ng Pilipinas [BSP] certificates and with maturity of five years or more) by citizens, resident aliens and non-resident aliens engaged in trade or business within the Philippines from income tax. However, there is no such exemption from income tax on such interest for corporation, domestic or foreign, under Sections 27 and 28 of the Tax Code. xxx xxx xxx 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 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' under Section 32(A) of the Tax Code. xxx xxx xxx "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 done so in clear and specific terms. The fact that it used the term 'Gains from sale' in the aforementioned section, knowing fully well of the reference to interest under Sections 24, 25, 27 and 28 of the Tax Code shows that it did not intend to exempt such interest under the aforementioned Section 32(B)(7)(g) of the Tax Code. xxx xxx xxx "It is clear from the foregoing that Petitioner paid a 20% final withholding tax in the amount of P890,726.20 on the gain derived from the sale of the Bond in 1999 out of the total tax withheld for the years 1998 and 1999 on both interest from the Bond and the gain from sale thereof. It is this amount that is exempt from income tax under Section 32(B)(7)(g) of the Tax Code. "WHEREFORE, premises considered, the Court finds the instant Petition partly meritorious. Accordingly, Respondent is hereby ORDERED to REFUND to Petitioner the amount of P890,726.20, representing income tax erroneously withheld from petitioner's gain from sale of long-term fixed rate treasury bond for the year 1999. "SO ORDERED." 9 Hence, this petition which raises this ground: "THE CTA COMMITTED SERIOUS ERRORS OF LAW WHEN IT INTERPRETED THE TERM 'GAINS UNDER SECTION 32(B)(7)(g) OF THE NIRC AS EXCLUDING INTEREST AND OTHER FORMS OF INCOME ON LONG-TERM BONDS, AND CONSEQUENTLY DENIED THE PORTION OF PETITIONER'S CLAIM FOR REFUND OF WITHHOLDING TAXES OF P1,372,500.00 PERTAINING TO ITS INTEREST INCOME ON THE BOND." 10 We dismiss the petition. The point of contention here is the interpretation of the term "gains" in Section 32(B)(7)(g) of the Tax Reform Act of 1997, which excludes gains from the sale, exchange or retirement of bonds from the computation of gross income. If so excluded, no taxes are due on such transactions. Petitioner Nippon and the BIR, through then Commissioner Beethoven L. Rualo, take the view that gains encompass interest income from bonds, thereby entitling Nippon to a refund of taxes paid on interest income received from the subject bond. Nippon supports its view with the legislative intent behind the Tax Reform Act to grant incentives to develop the bond market. 11 Furthermore, Nippon insists that the law does not qualify the term "gains" and so the CTA erred in distinguishing "gains" from "interests" into separate categories. 12 The CTA, on the other hand, ruled that "gains", as used in Section 32(B)(7)(g) refers only to those emanating from the sale of bonds, thereby, excluding "interests" in the process. 13 It stressed the distinction between "gains derived from dealings in property" and "interests", which are classified as separate items of gross income. 14 From this distinction, the CTA went on to conclude that only interests on long-term bonds held by individuals, whether citizens, resident aliens or non-resident aliens are tax-exempt. The interests on such bonds held by corporations, domestic or otherwise, are neither excluded from gross income nor exempt from taxes. 15 The CTA is absolutely correct. Income is the flow of money to an individual or corporation within a specified time, as payment for services, interests, or profits from investments. 16 Income is the return in money from one's business, labor or capital invested. 17 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. 18 Nippon 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 flaws. First, while the Tax Reform Act adhered to the above definition of income, it also classified income into the following categories: compensation for services, income derived from the conduct of business or exercise of profession, gains derived from dealings in property, interest, rents royalties, dividends, annuities, prizes and winnings, pensions, and a partner's distributive share from net income of a general professional partnership. 19 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. Nippon argued that the law did 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. Section 32(B) enumerates the exclusions from gross income. Exclusions, like tax exemptions, are highly disfavored in law. 20 A person claiming a tax exemption must justify his claim by the clearest terms possible because an exemption from the common burden of taxation is not allowed upon vague implications 21 but on language too plain to be mistaken. 22 In the instant case, Nippon's claimed exclusion runs counter to the plain, unequivocal language of the law. It resorted to the legislative 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. 23 If a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. 24 To depart from the meaning expressed by the words of the statute is to alter the statute and legislate, not to interpret. 25 A statute which is plain, clear and free from doubt is not subject to construction; there is no need for interpretation, only application. 26 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 subject provision means gains from sale of bonds, debentures and other certificates of indebtedness, such legislative intent still finds 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 Nippon would have wanted to but it is an incentive nonetheless, which is faithful to the legislative intent. Nippon's all or nothing stance on the exclusion of gains from bonds finds no support in either the language or intent of the law. Nippon's position must have drawn inspiration from the tax exemption of long-term deposits under Section 24(B)(1) and 25(A)(2) of the Tax Reform Act. However, these provisions fall under Chapter III, entitled Tax on Individuals and cover specifically citizens/resident aliens and non-resident aliens, respectively. On the other hand, Chapter IV, the Tax on Corporations does not contain a similar exemption on long-term deposits held by corporations, such as Nippon. Thus, the CTA correctly concluded that interests income on bonds held by corporations are not tax exempt, unlike those held by individuals. This is the law but Nippon could not abide by this and so it attempted to make up for this deficiency in Chapter IV by enlarging the scope of Section 32(B)(7)(g). For these unassailable reasons, the petition must fail. WHEREFORE, the instant petition is hereby DISMISSED and the decision of the CTA dated 04 February 2002, is AFFIRMED in toto . SO ORDERED. CaHcET Regino and Del Castillo, JJ . , concur. Footnotes 1. Rollo , pp. 7-8. 2. Id ., pp. 8-9. 3. Id ., p. 9. 4. Id ., p. 100. 5. Rollo , p. 101. 6. Id ., p. 83. 7. Id ., p. 79. 8. Id ., pp. 80-82. 9. Rollo , pp. 17-19, 22-23, 26-27. 10. Id ., p. 37. 11. Rollo , p. 100. 12. Id ., p. 41. 13. Id ., p. 17. 14. Id ., p. 18. 15. Id ., p. 19. 16. Conwi v. CTA , 213 SCRA 83, 87 [1992]. 17. Fisher v. Trinidad , 43 Phil. 973, 981 [1922]. 18. Madrigal v. Rafferty , 38 Phil. 414, 418-419 [1918]. 19. Sec. 32[A], RA 8424. 20. Afisco Insurance Corp. v. CA , 302 SCRA 1 [1999]. 21. Asiatic Petroleum Co., v. Llanes , 49 Phil. 466. 22. Davao Gulf Lumber Corp. v. CIR , 293 SCRA 76 [1998]. 23. Regalado v. Yulo , 61 Phil. 173 [1935]. 24. Espiritu v. Cipriano , 55 SCRA 533 [1974]. 25. Taada v. Yulo , 61 Phil. 515 [1935]. 26. Cebu Portland Cement Co., v. Municipality of Naga , 24 SCRA 708, 712 [1968].