Tokio Marine Malayan Insurance Company, Inc. v. Commissioner of Internal Revenue

FIRST DIVISION [CA-G.R. SP No. 83206. July 5, 2006.] TOKIO MARINE MALAYAN INSURANCE COMPANY, INC. (formerly Pan Malayan Insurance Corporation) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ROXAS, V.Q ., J p : Tax refunds are in the nature of tax exemptions and, as such, are construed strictissimi juris against the tax payer and liberally in favor of the taxing authority. Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims; and of showing, by words too plain to be mistaken, that the legislature intended to exempt them. The Case An insurance company purchased several long term, fixed rate treasury notes, believing that the interest on the notes would not be subjected to the 20% final withholding tax imposed on deposit substitutes. When the Bureau of Treasury paid the interest due on the notes, the insurance company discovered that the 20% tax had been deducted. The insurance company filed a claim for refund or tax credit before the respondent Commissioner of Internal Revenue (CIR). When the two year period was about to prescribe without any action on the part of the respondent CIR, the insurance company filed a judicial claim for refund before the Court of Tax Appeals (CTA). The CTA ruled that the interest on long-term fixed rate treasury notes is subject to the 20% final withholding tax. The insurance company filed this present Petition for Review under Rule 43 of the Rules of Court. THCSAE The Facts This Petition for Review under Rule 43 of the Rules of Court seeks to overturn the December 1, 2003 Decision 1 of the Court of Tax Appeals (CTA) in CTA Case No. 6472, before the Court of Tax Appeals got its residual powers which made its jurisdiction concurrent with the Court of Appeals. The CTA held that petitioner Tokio Marine Malayan Insurance Company, Inc. (TOKIO) was not entitled to a refund or tax credit conversion of P3,852,900.00 which was withheld by the Bureau of Treasury as final tax from interest income TOKIO derived from its investments in long term Fixed Rate Treasury Notes (FXTNs). In the years 1996, 1998 and 1999, petitioner TOKIO purchased several long term FXTNs from the Bureau of Treasury. These FXTNs had maturity dates exceeding five (5) years. For the period covering April 29, 2000 to November 29, 2001, the Bureau of Treasury paid interest for the said FXTNs to petitioner TOKIO but withheld 20% of said interest payments as a final tax. The withheld amounts totaled P3,852,900.00. On April 29, 2002, petitioner TOKIO requested a refund or tax credit equivalent to the withheld amount from respondent CIR. For nearly two years, nothing was heard from the respondent, thus prompting petitioner TOKIO to file a judicial claim before the CTA. In its Petition before the CTA, 2 petitioner TOKIO alleged that it was entitled to a refund or tax credit equivalent to the amount withheld based on Section 32 (B) (7) (g) of the National Internal Revenue Code of 1997, which reads as follows: 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 certificates of indebtedness with a maturity of more than five (5) years. Assailed Decision of the CTA On December 1, 2003, the CTA promulgated its assailed Decision in CTA Case No. 6472, the relevant portions of which state: It is clear from the foregoing discussion that the tax exemption from final withholding tax granted under Section 32(B)(7)(g) of the Tax Code is limited only to the gain from sale of long-term investments (as distinguished from interest income earned from long-term investments which are subject to the 20% final withholding tax). Since the present case involves a claim for refund of 20% final withholding tax on interest income earned from investment in long term FXTNs, the same has no basis in law. EaHDcS At this point, the oft-repeated principle that 'tax refunds are in the nature of tax exemptions, and as such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption deserves reiteration ( Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc ., 309 SCRA 87; and Commissioner of Customs v. Court of Tax Appeals , 328 SCRA 822). The legal issue having been resolved in the negative, the Court finds it no longer necessary to resolve the factual issues raised. WHEREFORE, the instant petition for review is hereby DENIED for lack of merit. SO ORDERED. In arriving at its assailed Decision, the CTA reasoned that the gain obtained from the FXTNs was subject to the 20% final withholding tax because it was from interest and not from a sale or exchange of those said FXTNs. Lone Issue Petitioner TOKIO raised a single issue in this Petition: 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. The Ruling of this Court Petition is devoid of merit . Tax refunds are in the nature of tax exemptions and, as such, are construed strictissimi juris against the tax payer and liberally in favor of the taxing authority. Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims; and of showing, by words too plain to be mistaken, that the legislature intended to exempt them. 3 Furthermore, when a provision of tax law is subject to interpretation, the conclusions of the Court of Tax Appeals should not, as a general rule, be set aside because it is by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority. 4 While the term "gains" as used in Section 32 (B) (7) (g) is indeed broad enough to include interests ("gains" being synonymous with "income") realized from long term debt instruments such as the FXTNs, such an interpretation would be contrary to the jurisprudential mandate of strict interpretation when it comes to tax exemptions. The section states in plain language that the exemption applies only to gains from the sale or exchange of debt instruments with maturity dates in excess of 5 years. Strict construction of this provision can only lead to one conclusion: the exemption will not apply unless the gain came from the sale or exchange of such instruments. Since the Internal Revenue Code does not define the word "sale," this Court must, of necessity, rely on the Civil Code, Article 1458 of which states: Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent. DAHSaT xxx xxx xxx "Sale" therefore means the transfer of ownership of a thing in exchange for a price certain. Applying this definition to the problem at hand, the only gains exempted from taxation are those derived from the transfer of long-term debt instruments from one party to another in exchange for price certain in money or its equivalent. Thus, gains resulting from interest payments cannot be considered as exempted from the 20% final withholding tax. While this Court realizes that the non-exemption of gains or income derived from interest bearing long-term debt instruments is not conducive to the growth of the bond market and virtually eliminates any incentive in acquiring such instruments, strict interpretation is mandated with respect to tax exemptions. The Fallo WHEREFORE, premises considered, petition is hereby DENIED for lack of merit. SO ORDERED. WE CONCUR: Reyes and De Guia-Salvador, JJ., concur. Footnotes 1. Rollo , page 22. 2. Rollo , page 38. 3. Commissioner of Internal Revenue v. Seagate Technology , G.R. No. 153866, February 11, 2005, 451 SCRA 132. 4. The Commissioner of Internal Revenue v. The Court of Appeals , G.R. No. 115349, April 18, 1997, 271 SCRA 605.