40 NIPPON LIFE v CIR of P 457,500 representing the 20% final tax withheld.
CTA Case | Gross Income 7. Nippon Life received a total of P 5,490,000 as interest income n the Bond net
PETITIONER: Nippon Life Insurance Co.
RESPONDENTS: Commissioner of Internal Revenue
SUMMARY: Nippon Life insurance company bought treasury bonds from
Citibank which it sold to HSBC at a premium. It also collected interest income
on the bond. On the basis of the foregoing transactions, the total amount of taxes
withheld from Nippon Life’s income on the bond and remitted by the Bureau of
Treasury to the Bureau of Internal Revenue (BIR) for the years 1998 and 1999
was P 2,223,386.82.
BIR issued two rulings, providing that the interest income, yield or gain,
derived from bonds, debentures or certificates of indebtedness as deposit
substitutes, which are ordinarily subject to 20% final tax under Section
27(d)(i) of the NIRC, should exclude the interest income, yield or gain from
the gross income if the bonds, debentures or certificates of indebtedness have
maturities of more than five years.
On the basis of the foregoing rulings, Nippon Life filed with the Revenue District
50 of the BIR an administrative claim for the refund of the amount of P
2,223,386.82 as taxes erroneously withheld from its income from investment in
Fixed Rate Treasury Bond for the years 1998-1999.
DOCTRINE:
The exemption under Sec 32(B)(7)(g) of the 1997 Tax Code applies only to gains
from the sale of bonds, debentures or certificates of indebtedness. It does not
apply to gains derived from interest.
FACTS:
1. Nippon Life, an insurance company, purchased from Citibank, a 10 year
Fixed Rate Treasury Bond with face value of P20 million.
2. The Bureau of Treasury issued the bond originally to Citibank with interest
income on the bond payable semi-anually for 10 years.
3. Nippon Life purchased the treasury bond from Citibank at a premium (a price
higher than the bond’s face value)
4. Nippon Life’s total cash outlay to acquire the bond amounted to P
20,076,022.89
5. On June 16, 1999, Nippon life sold the bond to Hong Kong and Shanghai
Banking Corp (HSBC) at a premium for P 27,152,761.15. On this sale,
P890,726.20 was withheld as tax.
6. Nippon Life held on to the bond from December 1, 1997 to June 15, 1999.
On three separate occasions during this period, petitioner collected interest
income on the bond amounting to P 1,830,000 for each income payment, net
of Php 1,372,500 final withholding tax.
8. In addition, for accrued interest receivable was withheld as tax.
9. On the basis of the foregoing transactions, the total amount of taxes withheld
from Nippon Life’sury to the Bureau of Internal Revenue (BIR) for the years
1998 and 1999 was P 2,223,386.82
10. Subsequently, the BIR issued the BIR ruling no 166-99 and BIR Ruling No.
016-00
a. The rulings interpreted the tax exemption for gains from the sale of
bonds debentures and other certificated of indebtedness under Sec
32(B)(7)(g) of the 1997 Tax Code as applicable to interest income.
b. The rulings provided that the interest income, yield or gain,
derived from bonds, debentures or certificates of indebtedness
as deposit substitutes, which are ordinarily subject to 20% final
tax under Section 27(d)(i) of the NIRC, should exclude the
interest income, yield or gain from the gross income if the bonds,
debentures or certificates of indebtedness have maturities of
more than five years.
c. On the basis of the foregoing rulings, Nippon Life filed with the
Revenue District 50 of the BIR an administrative claim for the
refund of the amount of P 2,223,386.82 as taxes erroneously
withheld from its income from investment in Fixed Rate Treasury
Bond for the years 1998-1999.
ISSUE:
1. WoN Nippon Life is entitled to the refund of the P 2, 223, 386.82 total
withheld tax
RULING: PARTIALLY GRANTED. Nippon was able to refund only P890,726.20
representing 20% final withholding tax on the gain derived from the sale of the T-
bond.
RATIO:
Income from sale
1. Under Sec 32(B)(7)(g) of the 1997 Tax Code, gains realized from the sale or
exchange of retirement bonds, debentures or certificates of indebtedness with
a matiurity of more than 5 years shall be included in gross income and
should be exempt from taxation.
2. Therefore, the sale of the bond was exempt by clear provision of law. The
final taxes withheld by HSBC on the gain from sale realized by petitioner
totaling P 890,726.20 should be refunded to Nippon Life.
Income from interest

1. BIR Ruling No 166-99 and BIR Ruling No. 016-00 ARE WRONG
2. The exemption under Sec 32(B)(7)(g) of the 1997 Tax Code applies only to
gains from the sale of bonds, debentures or certificates of indebtedness. It
does not apply to gains derived from interest.
3. Sec 32(B)(7)(g) of the 1997 Tax Code particularly refers to “Gains form 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 or certificates of indebtedness with a maturity of more than 5
years.
4. 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 of
retirement of bonds, debentures or certificates of indebtedness with a
maturity of more than 5 years” that is excluded from gross income and
exempt from income taxation under Sec 32(B)(7)(g). Such “Gains realized
from the sale or exchange of retirement of bonds, debentures or certificates
of indebtedness with a maturity of more than 5 years” are different from
interest from bonds, debentures or other certificates of indebtedness which
fall within the general category of “interests” under Sec 32(A) of the Tax
code.