G.R. No. 182722 - Dumaguete Cathedral Credit Cooperative vs. Commissioner of Internal Revenue

Case Summary (G.R. No. 182722)

Factual Background

DCCCO is a duly registered credit cooperative established February 17, 1968 and regulated by the Cooperative Development Authority. The cooperative’s objectives included encouraging savings and mobilizing capital formation among members and extending loans for provident and productive purposes. Its corporate powers included accepting deposits and issuing obligations in furtherance of its business operations.

Audit and Assessment by the BIR

On November 27, 2001 the BIR issued Letters of Authority authorizing an examination of petitioner’s books for taxable years 1999 and 2000. The BIR issued Pre-Assessment Notices in June and October of 2002 asserting deficiency withholding taxes on payments that included honoraria, security and janitorial services, legal and professional fees, commissions, and interest on savings and time deposits of members. Petitioner paid certain assessed amounts under the Voluntary Assessment and Abatement Program on November 29, 2002 but thereafter received Letters of Demand dated April 24, 2003 with attached Transcripts of Assessment calling for payment of substantial deficiency withholding taxes, inclusive of penalties, in the amounts stated above.

Administrative Protest and Petition to the CTA

Petitioner protested the Letters of Demand to the Commissioner of Internal Revenue on May 9, 2003. The Commissioner did not act on the protest within the 180-day period, and petitioner filed a Petition for Review with the Court of Tax Appeals on December 3, 2003, docketed as C.T.A. Case No. 6827.

CTA First Division Ruling

The CTA First Division rendered judgment on February 6, 2007. The First Division cancelled the assessments for deficiency withholding taxes on honoraria, per diems, security and janitorial services, and legal and professional fees, but it affirmed the assessments for deficiency withholding taxes on interest earned from savings and time deposits of members. The First Division ordered petitioner to pay P1,280,145.89 and P1,357,881.14 for taxable years 1999 and 2000, respectively, and to pay delinquency interest at 20% per annum from May 26, 2003 until full payment. Petitioner’s motion for partial reconsideration was denied by the First Division on May 29, 2007.

CTA En Banc Proceedings

Petitioner elevated the case to the CTA En Banc by filing a Petition for Review on July 3, 2007, raising the sole issue whether petitioner was liable for the deficiency withholding taxes on interest and the attendant 20% delinquency interest. The CTA En Banc affirmed the First Division and denied reconsideration, reasoning that Section 57 of the NIRC requires withholding at source and that Revenue Regulations No. 2-98 enumerated interest from bank deposits and similar arrangements among items subject to final withholding tax. The En Banc held that the phrase “similar arrangements” encompassed cooperatives acting as depositaries for members.

Issue Presented to the Supreme Court

The sole legal issue presented was whether petitioner, as a credit cooperative, was liable to pay deficiency withholding taxes under Section 24(B)(1) of the NIRC on interest from savings and time deposits of its members for taxable years 1999 and 2000, and whether petitioner was liable for delinquency interest at the rate of 20% per annum under Section 249(C).

Petitioner’s Contentions

Petitioner argued that Section 24(B)(1) applies to banks and deposit substitutes peculiar to banking transactions and does not extend to cooperatives. Petitioner relied on BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006], which, petitioner asserted, held that interest from members’ deposits with cooperatives is not subject to the 20% final tax. Petitioner further invoked the cooperative preferential tax treatment under Art. XII, Sec. 15, 1987 Constitution and Article 2 of RA 6938, asserting that members of cooperatives share in that preferential treatment.

Respondent’s Contentions

Respondent contended that the statutory phrase “similar arrangements” is not limited to banks and therefore includes cooperatives that receive members’ deposits. Respondent urged the maxim ubi lex non distinguit nec nos distinguere debemos and argued that tax exemptions are disfavored and strictly construed against taxpayers. Respondent also emphasized that the assessments were against petitioner as a withholding agent rather than as a taxpayer.

Supreme Court Ruling

The Supreme Court found merit in petitioner’s petition and granted relief. The Court reversed and set aside the December 18, 2007 Decision of the Court of Tax Appeals and the April 11, 2008 Resolution, and it cancelled the assessments for deficiency withholding taxes on interest from the savings and time deposits of petitioner’s members for taxable years 1999 and 2000, together with the 20% per annum delinquency interest. The Court emphasized that the State’s power of taxation must yield to legislative and constitutional policies that foster the creation and growth of cooperatives.

Legal Basis and Reasoning

The Court placed controlling weight on the administrative rulings of the Bureau of Internal Revenue. It affirmed the applicability of BIR Ruling No. 551-888 (November 16, 1988) and BIR Ruling [DA-591-2006] (October 5, 2006), which construed members’ deposits with cooperatives as not falling within the statutory phrase “currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements” in Section 24(B)(1) and the parallel provision for corporations. The Court observed that the BIR’s interpretation declared that members’ deposits with cooperatives are not currency bank deposits nor deposit substitutes and that administrative interpretations in charge of enforcing a law are entitled to great weight unless they sharply conflict with statute or the Constitution. The Court rejected the CTA’s reading that the BIR ruling applied only where deposits were maintained in a bank, concluding instead that the BIR ruling contained no such limitation.

The Court read Section 24(B)(1) in light of the cooperative statutory scheme. It relied on Articles 61 and 62 of RA 6938, which grant cooperatives and their members preferential tax treatment, and on Article 126 of RA 6938, which directs liberal construc

Case Syllabus (G.R. No. 182722)

Parties and Procedural Posture

DUMAGUETE CATHEDRAL CREDIT COOPERATIVE (DCCCO) filed a Petition for Review under Section 11 of RA 9282, in relation to Rule 45 of the Rules of Court, from a decision of the Court of Tax Appeals (CTA) dated December 18, 2007 and a Resolution dated April 11, 2008.
Commissioner of Internal Revenue answered the petition and defended the deficiency withholding assessments imposed on DCCCO as withholding agent.
The petition to the Supreme Court raised the sole issue of liability for deficiency withholding taxes on interest from members’ savings and time deposits for taxable years 1999 and 2000 and the attendant delinquency interest under Section 249(C) of the National Internal Revenue Code (NIRC).
The CTA First Division rendered judgment partially granting relief and the CTA En Banc denied petitioner’s petition for review and motion for reconsideration before the appeal to the Supreme Court.

Key Factual Allegations

DCCCO is a credit cooperative duly registered with the Cooperative Development Authority and established on February 17, 1968, whose objectives included mobilizing member savings and extending loans to members.
The Bureau of Internal Revenue issued Letters of Authority authorizing examination of petitioner’s books for taxable years 1999 and 2000.
The BIR issued Pre-Assessment Notices and later Letters of Demand asserting deficiency withholding taxes covering honoraria, security and janitorial services, professional fees, commissions, and interest on members’ savings and time deposits.
DCCCO paid assessed withholding taxes on compensation-related items under the VAAP totaling P105,574.62 and P143,867.24 for 1999 and 2000 respectively but protested the assessments on interest income.
The BIR issued Transcripts of Assessment ordering payment of P1,489,065.30 and P1,462,644.90 for 1999 and 2000 inclusive of penalties.

Administrative Proceedings

DCCCO timely protested the Letters of Demand to the Commissioner of Internal Revenue on May 9, 2003, and filed a petition with the CTA on December 3, 2003 after the CIR failed to act within 180 days.
The BIR maintained that the cooperative, as payor of interest, was the proper withholding agent obligated to deduct and remit final withholding tax under Section 24(B)(1) of the NIRC.
DCCCO invoked administrative rulings favorable to cooperatives, including BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006], which opined that members’ deposits with cooperatives are not subject to the 20% final withholding tax.

Proceedings before the CTA

The CTA First Division modified the assessments by canceling withholding on compensation-related items but affirmed assessments for deficiency withholding taxes on interest and ordered payment of P1,280,145.89 and P1,357,881.14 for 1999 and 2000 with 20% delinquency interest from May 26, 2003.
The CTA First Division reasoned that BIR Ruling No. 551-888 applied only when deposits were maintained in banks and that a cooperative acting as payor became the withholding agent for deposits maintained in the cooperative.
The CTA En Banc affirmed the First Division and held that Section 57 of the NIRC and Revenue Regulations required withholding at source and that the phrase “similar arrangements” embraced cooperatives acting as depositories.

Issues Presented

Whether DCCCO was liable as withholding agent to pay deficiency final withholding taxes at twenty percent on interest from savings and time deposits of its members for taxable years 1999 and 2000 under Section 24(B)(1) of the NIRC.
Whether the assessments for the 20% delinquency interest under Section 249(C) of the NIRC should be imposed.