Malayan Insurance Co., Inc. v. Commissioner of Internal Revenue

SPECIAL SIXTH DIVISION [CA-G.R. SP No. 77071. May 19, 2006.] MALAYAN INSURANCE CO., INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ROMILLA-LONTOK , J p : This petition seeks the setting aside of the decision rendered by the Court of Tax Appeals on December 16, 2002 which denied petitioner's claim for refund and/or issuance of tax credit certificate. In the years 1996 to 1999, petitioner corporation purchased Fixed Rate Treasury Notes (FXTN's) issued by the Bureau of Treasury hereinafter enumerated as follows: TREASURY ISIN# ISSUE MATURITY PRINCIPAL INTEREST SEMI-ANNUAL NOTE DATE DATE RATE INTEREST PAYMENT FXTN 7-2 PIBD 0703R029 Feb 29, 1996 Feb 28, 2003 P6,000,000 15.375% P461,250 FXTN 7-1 PIBD 0703AO11 Jan 25, 1996 Jan 25, 2003 5,000,000 15.50% 387,500 FXTN 7-4 PIBD 0703EO44 May 30, 1996 May 30, 2003 4,860,000 15.375% 373,612.50 FXTN 7-5 PIBD 0703C051 Jul 25, 1996 Jul 25, 2003 5,000,000 15.750% 393,750 FXTN 10-1 PIBD 10061010 Sept. 26, 1996 Sept. 26, 2006 15,000.000 16.000% 1,200,000 FXTN 10-4 PIBD 1007K042 Nov. 27, 1997 Nov 27, 2007 17,800,000 22.875% 2,035,875 FXTN 10-7 PIBD 1008KT29 Nov 26, 1998 Nov 26, 2008 19,000,000 17.800% 1,691,000 FXTN 7-10 PIBD 0705D102 Apr. 30, 1998 Apr. 30, 2005 23,200,000 20.500% 2,378,000 FXTN 7-12 PIBD 0705J124 Oct. 29, 1998 Oct. 29, 2005 32,800,000 18.375% 3,013,500 FXTN 10-8 PIBD 1009B084 Feb 25, 1999 Feb 25, 2009 30,000,000 16.500% 2,475,000 FXTN 7-11 PIBD 0705G118 Jul 30, 1998 Jul 30, 2005 10,000,000 20.000% 1,000,000 In the year 1999, the Bureau of Treasury paid interest for the above treasury notes. 20% final tax on the said interest income was withheld as shown hereinbelow: TREASURY INTEREST TOTAL 20% NET AMOUNT NOTE PAYMENT INTEREST WITHHOLDING PAID TO DATE PAYABLE TAX MALAYAN FXTN 7-2 28 Feb. 99 P461,250 P92,250 P369,000. 28 Aug. 99 461,250 92,250 369,000. FXTN 7-1 25 Jul. 99 387,500 77,500 310,000. FXTN 7-4 30 May 99 373,612.50 74,722.50 298,890. 30 Nov. 99 373,612.50 74,722.50 298,890. FXTN 7-5 25 Jul. 99 393,750 78,750 315,000. FXTN 10-1 26 Mar. 99 1,200,000 240,000 960,000. 26 Sept. 99 1,200,000 240,000 960,000. FXTN 10-4 27 May 99 2,035,875 407,125 1,628,700. 29 Nov. 99 2,035,875 407,175 1,628,700. FXTN 10-7 26 May 99 1,691,000 338,200 1,352,800. 26 Nov. 99 1,691,000 332,200 1,352,800. TREASURY INTEREST TOTAL 20% NET AMOUNT NOTE PAYMENT INTEREST WITHHOLDING PAID TO DATE PAYABLE TAX MALAYAN FXTN 7-10 30 Apr. 99 2,378,000 475,600 1,902,400 30 Oct. 99 2,378,000 475,600 1,902,400 FXTN 7-12 29 Apr. 99 3,013,500 602,700 2,410,800 29 Oct. 99 3,013,500 602,700 2,410,800 FXTN 10-8 25 Aug. 99 2,475,000 495,000 1,980,000 FXTN 7-11 30 Jul. 99 1,000,000 200,000 800,000 P5,312,545 On February 25, 2001, within the two-year prescriptive period, petitioner, thru counsel, wrote a letter to the Commissioner of Internal Revenue ( Rollo , pp. 70-74) claiming a refund or issuance of a tax credit certificate in the amount of Five Million Four Hundred Sixty Eight Thousand Seven Hundred Ninety Five Pesos (P5,468,795.00) inclusive of the Five Million Three Hundred Twelve Thousand Five Hundred Forty Five Pesos (P5,312,545.00) constituting the 20% tax withheld by the Bureau of Treasury. No action on said letter request was taken. STcHDC On February 28, 2001, the petitioner corporation filed a petition before the Court of Tax Appeals claiming tax refund or the issuance of tax credit certificate in the amount equivalent to the 20% tax the Bureau of Treasury has withheld. Petitioner Malayan Insurance contends that under Sec. 32(B)(7)(g) of the National Internal Revenue 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 are excluded from taxable income. In the same manner, pursuant to BIR Ruling 166-99, interest income realized from government securities with a maturity of more than five (5) years is exempt from withholding tax. Respondent Commissioner of Internal Revenue, by way of Special and Affirmative Defenses in his Answer, interposed that the claim for refund is still subject to administrative investigation/examination before the Bureau. The petitioner failed to prove that the tax withheld was either (a) erroneously or illegally received or collected internal revenue taxes; or (b) constituted penalties imposed without authority which under Section 204 of the NIRC are grounds to claim for refund. He insists that claims for refund are construed strictly against the claimant as they partake of the nature of an exemption from tax. It is incumbent upon the claimant to prove entitlement to the claim under the law. The Court of Tax Appeals denied the petition and the Motion for Reconsideration. The petition for review was raised on this lone assignment of error: WHETHER OR NOT THE COURT OF TAX APPEALS ERRED IN RULING THAT THE TERM "GAIN" AS USED IN SECTION 32(B)(7)(g) OF THE TAX CODE DOES NOT INCLUDE INTEREST. This Court finds that the actual issue to be resolved is whether the interest income earned on fixed rate treasury notes acquired by petitioner corporation should be subjected to the final tax of 20%. Section 2(h)(iii)(b) of Revenue Regulation No. 17-84 reads: "The term 'deposit substitutes' includes 'all borrowings of the national and legal government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments.' The Bangko Sentral ng Pilipinas is the withholding agent for the 20% final tax on interest on Treasury Bills." ( China Banking Corporation vs. Court of Appeals , 403 SCRA 635). Section 204 of the National Internal Revenue Code provides: "Section 204. Authority of the Commissioner to compromise, Abate and Refund or Credit taxes . The Commissioner may: A. . . . B. . . . C. Credit or refund taxes erroneously or illegally or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, that a return filed showing an overpayment shall be considered as a written claim for credit or refund. xxx xxx xxx." Petitioner corporation has failed to substantiate its claim for refund. This claim partakes of the nature of a tax exemption. Petitioner failed to establish that the withheld amount was erroneously or illegally received or collected nor did it constitute penalties imposed without authority. The fact that the Bangko Sentral ng Pilipinas is designated withholding agent for the 20% final tax on interest on treasury bills implies authority for such collection. The cardinal rule in taxation is exemptions are highly disfavored and whoever claims an exemption must justify his right by the clearest grant of organic or statute law. Tax exemption cannot arise by mere implication and any doubt about whether the exemption exists is strictly construed against the taxpayer and in favor of the taxing authority ( China Banking Corporation vs. Court of Appeals, 403 SCRA 634 ). IHEDAT WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. SO ORDERED. Buzon and Santiago-Lagman,* JJ., concur. * Per Office Order No. 01-05-RTR.