G.R. No. 186659-710 - Candao vs. People

Case Summary (G.R. No. 186659-710)

Key Dates and Applicable Law

Significant dates and procedural chronology include: cooperative incorporation and registration (established February 17, 1968); BIR Letters of Authority (November 27, 2001); pre-assessment notices and administrative protests (2002); payment under VAAP (November 29, 2002); Letters of Demand with attached Transcripts of Assessment (April 24, 2003); protest to CIR (May 9, 2003); petition to CTA after CIR’s inaction (filed December 3, 2003); CTA First Division decision (February 6, 2007); CTA En Banc denial and Motion for Reconsideration denial (2007–2008); Supreme Court decision (January 22, 2010). Applicable law for substantive issues includes the National Internal Revenue Code of 1997 (NIRC), specifically Section 24(B)(1) (20% final tax on certain interest) and Section 249(C) (20% delinquency interest), Revenue Regulations No. 2-98, Republic Act No. 6938 (Cooperative Code) as amended by RA 9520, and relevant provisions of the 1987 Constitution.

Factual Background

DCCCO is a credit cooperative whose activities include encouraging savings and accepting members’ savings and time deposits. BIR examiners audited DCCCO’s books for taxable years 1999 and 2000 and issued pre-assessment notices for alleged deficiency withholding taxes covering several items: honoraria of the board, payments to security and janitorial services, legal and professional fees, commissions, and interest on members’ savings and time deposits.

Administrative Assessments and Partial Payments

Petitioner protested the initial pre-assessments but elected to pay certain withholding liabilities relating to compensation, honoraria, security and janitorial services, and professional fees under the BIR’s Voluntary Assessment and Abatement Program (VAAP), making payments on November 29, 2002. Thereafter the BIR issued Letters of Demand with Transcripts of Assessment for substantially larger deficiency withholding taxes (inclusive of penalties) on April 24, 2003; these assessments included the contested withholding on interest earned by members on savings and time deposits.

Administrative Exhaustion and CTA Filing

Petitioner timely protested the Letters of Demand to the CIR on May 9, 2003. The CIR failed to act within the statutory 180-day period, prompting petitioner to file a Petition for Review before the Court of Tax Appeals (CTA) on December 3, 2003 (C.T.A. Case No. 6827).

CTA First Division Ruling

The CTA First Division partially granted the petition: it cancelled the assessments for deficiency withholding taxes on honoraria, per diems, payments to security and janitorial services, commissions, and legal/professional fees, but it affirmed the assessments for deficiency withholding taxes on interest from members’ savings and time deposits for taxable years 1999 and 2000. The First Division ordered payment of the assessed deficiency withholding taxes on interest together with 20% delinquency interest under Section 249(C) of the Tax Code.

CTA En Banc Ruling

Upon petition for review to the CTA En Banc, the First Division ruling was affirmed. The En Banc relied on the statutory requirement of withholding at source (Section 57, NIRC, and implementing regulations) and Revenue Regulations No. 2-98, which enumerates income payments subject to final withholding tax, including “interest from any peso bank deposit and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.” The CTA En Banc concluded that a cooperative that holds members’ deposits falls within the phrase “similar arrangements” and therefore is a withholding agent obliged to withhold 20% final tax under Section 24(B)(1).

Issue Presented to the Supreme Court

The issue before the Supreme Court was whether DCCCO, as a credit cooperative, was liable as a withholding agent for the deficiency withholding taxes on interest from its members’ savings and time deposits for taxable years 1999 and 2000 and for the attendant 20% delinquency interest.

Petitioner’s Arguments to the Court

Petitioner argued that Section 24(B)(1) of the NIRC (20% final tax on interest from bank deposits, deposit substitutes and “trust funds and similar arrangements”) applies to banking transactions and deposit substitutes but not to members’ deposits with cooperatives. Petitioner relied on two BIR rulings—BIR Ruling No. 551-888 (November 16, 1988) and BIR Ruling DA-591-2006 (October 5, 2006)—which held that cooperatives are not required to withhold tax on interest from members’ savings and time deposits. Petitioner further invoked the Cooperative Code (RA 6938, as amended by RA 9520) and the Constitution to assert a legislative and constitutional policy of preferential tax treatment for cooperatives and their members.

Respondent’s Arguments to the Court

The CIR argued that the language of Section 24(B)(1) is not limited to banks; where the law does not distinguish, courts should not distinguish, and the phrase “similar arrangements” encompasses cooperatives acting as depositaries. The CIR also advanced the maxim that tax exemptions are strictly construed against taxpayers and liberally in favor of the taxing authority. The CIR stressed that the assessments targeted the cooperative as withholding agent.

Supreme Court’s Analysis of Administrative Rulings and Statutory Text

The Supreme Court found merit in petitioner’s reliance on the cited BIR rulings. It observed that BIR Ruling No. 551-888 unequivocally stated that cooperatives are not the proper party to withhold taxes on interest from members’ savings and time deposits, and that BIR Ruling DA-591-2006 reaffirmed that members’ deposits with cooperatives are not currency bank deposits nor deposit substitutes and thus are not within Section 24(B)(1). The Court recognized that administrative interpretations by the agency charged with enforcement are entitled to great weight unless in sharp conflict with the statute or the Constitution.

Supreme Court’s Analysis of Legislative Intent and Cooperative Code Provisions

The Court read Section 24(B)(1) of the NIRC together with the Cooperative Code (RA 6938) as amended by RA 9520. It emphasized the declared State policy to foster the creation and growth of cooperatives (Article 2, RA 6938 as amended) and the specific tax-treatment provisions (Articles 61 and 62 of RA 6938, and Article 61 of RA 9520) which provide that duly registered cooperatives transacting business with members and nonmembers shall not be subject to tax on transactions with members, and that transactions of members with the cooperative shall not be subject to various taxes, inclu

Case Syllabus (G.R. No. 186659-710)

Case Caption, Citation and Court

G.R. No. 182722, January 22, 2010; reported at 624 Phil. 650, Second Division.
Petition for Review on Certiorari under Section 11 of Republic Act No. 9282 in relation to Rule 45 of the Rules of Court.
Decision of the Court promulgated by Justice Del Castillo; Justices Carpio (Chairperson), Brion, Abad, and Perez concurred.
Case sprang from a December 18, 2007 Decision of the Court of Tax Appeals (CTA) and an April 11, 2008 Resolution denying reconsideration.

Parties and Nature of the Case

Petitioner: Dumaguete Cathedral Credit Cooperative (DCCCO), represented by Felicidad L. Ruiz, General Manager; a credit cooperative registered with and regulated by the Cooperative Development Authority (CDA).
Respondent: Commissioner of Internal Revenue (CIR).
Subject matter: challenge to CTA assessment ordering petitioner to pay deficiency withholding taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000, and 20% per annum delinquency interest under Section 249(C) of the NIRC.

Factual Antecedents (Organizational Profile of Petitioner)

DCCCO was established on February 17, 1968.
Stated objectives included increasing members’ income and purchasing power, pooling member resources through savings and thrift, and extending loans to members for provident and productive purposes.
Powers granted include entering into financial instruments and securing indebtedness (promissory notes, mortgages, bills of exchange, issuance of bonds, pledges, liens, etc.).

Administrative Audit and Pre-Assessment Notices

November 27, 2001: BIR Operations Group issued Letters of Authority Nos. 63222 and 63223 authorizing audit of petitioner’s books for taxable years 1999 and 2000 (BIR Officers Tomas Rambuyon and Tarcisio Cubillan, Revenue Region No. 12, Bacolod City).
June 26, 2002: Petitioner received two Pre-Assessment Notices for deficiency withholding taxes for 1999 and 2000; protested on July 23, 2002.
October 16, 2002: Petitioner received two additional Pre-Assessment Notices for the same years. These deficiency assessments covered payments of:
- Honorarium of the Board of Directors;
- Security and janitorial services;
- Legal and professional fees;
- Interest on savings and time deposits of members.
Petitioner’s responses:
- October 22, 2002: informed BIR it would pay deficiency withholding taxes corresponding only to honoraria, security/janitorial, legal/professional fees for 1999 (P87,977.86), excluding penalties and interest.
- November 8, 2002: informed BIR it would pay withholding taxes for similar items in 2000 (P119,889.37) and would avail of the BIR’s Voluntary Assessment and Abatement Program (VAAP) per Revenue Regulations No. 17-2002.
November 29, 2002: Petitioner availed of VAAP and paid P105,574.62 and P143,867.24 corresponding to withholding taxes on compensation/honoraria, security/janitorial and legal/professional services for 1999 and 2000 respectively.

Letters of Demand and Administrative Protest

April 24, 2003: BIR Regional Director Sonia L. Flores issued Letters of Demand Nos. 00027-2003 and 00026-2003 attaching Transcripts of Assessment/Audit Results, demanding payment of deficiency withholding taxes inclusive of penalties: P1,489,065.30 (1999) and P1,462,644.90 (2000).
May 9, 2003: Petitioner protested the Letters of Demand with the Commissioner of Internal Revenue.
CIR failed to act within the 180-day statutory period on the protest.

Proceedings Before the Court of Tax Appeals (CTA) — First Division

December 3, 2003: Petitioner filed Petition for Review before the CTA (C.T.A. Case No. 6827).
February 6, 2007 Decision of CTA First Division:
- Petition for Review PARTIALLY GRANTED.
- Assessment Notices Nos. 00026-2003 and 00027-2003 MODIFIED.
- Cancelled assessments: deficiency withholding taxes on honorarium/per diems of Board, security/janitorial services, commissions, and legal/professional fees.
- Affirmed assessments: deficiency withholding taxes on interests from savings and time deposits of members.
- Ordered petitioner to pay respondent: P1,280,145.89 (1999) and P1,357,881.14 (2000) representing deficiency withholding taxes on interest.
- Ordered 20% delinquency interest from May 26, 2003 until full payment per Section 249(C) of the Tax Code.
Petitioner moved for partial reconsideration; motion denied by CTA First Division Resolution dated May 29, 2007.

Proceedings Before the CTA En Banc

July 3, 2007: Petitioner filed Petition for Review with the CTA En Banc raising the lone issue of liability for deficiency withholding taxes on interest from members’ deposits for 1999 and 2000 and the 20% delinquency interest.
CTA En Banc Decision:
- Denied the Petition for Review and petitioner’s Motion for Reconsideration.
- Reasoning:
  - Relied on Section 57 of the NIRC requiring withholding of tax at source.
  - Cited Revenue Regulations No. 2-98 enumerating income payments subject to final withholding tax which includes “interest from any peso bank deposit and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.”
  - Treated petitioner’s business as falling under “similar arrangements,” concluding petitioner should have withheld 20% final tax on interest from members’ deposits.
- CTA En Banc viewed BIR Ruling No. 551-888 as premised on deposits being placed by members in banks and therefore not applicable when deposits are maintained in a cooperative.

Issue Presented to the Supreme Court

Whether petitioner is liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members for the taxable years 1999 and 2000, and the 20% per annum delinquency interest.

Petitioner’s Principal Arguments

Statutory interpretation:
- Section 24(B)(1) of the NIRC imposes a 20% final tax on interest “from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.”
- The phrase “similar arrangements” and the preceding terms refer to banking transactions with deposit peculiarities; thus, Section 24(B)(1) applies to banks, not to cooperatives.
- Savings and time deposits of cooperative members are not included and thus not subject to the 20% final tax.
Reliance on administrative rulings:
- Invoked BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006], where BIR ruled that interest from deposits maintained by cooperative members are not subject to withholding tax under Section 24(B)(1).
Statutory policy and preferential treatment:
- Relied on Article XII, Section 15 of the Constitution and Article 2 of Republic Act No. 6938 (Cooperative Code) asserting