REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

SECOND DIVISION

CONAL HOLDINGS CTA Case No. 9099

CORPORATION,
Petitioner,

Members:

CASTANEDA, JR., Chairperson,

CASANOVA, and
MANAHAN, JJ.

-versus-

COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent JUL 1 7 2017 /
l / 1 :K .... .
x------------------------------------------------------------------------~--------x

DECISION

CASTANEDA, JR., J.:

THE CASE

This is a Petition for Review filed by Conal Holdings Corporation

praying for the cancellation and withdrawal of the deficiency expanded
withholding tax (EWT) assessment issued by the Commissioner of
Internal Revenue against it in the aggregate amount of
P291,875,839.72, arising from its purchase of the Iligan Diesel Power
Plants from the City Government of Iligan in 2013. ~
DECISION
CTA Case No. 9099
Page 2 of 19

THE FACTS

Petitioner Conal Holdings Corporation is a corporation duly

organized and existing under the laws of the Republic of the
Philippines, with principal place of business at the 4th Floor, Alphaland
Southgate Tower, 2258 Chino Races Avenue corner EDSA, Makati
City .1 It is a registered taxpayer of the Bureau of Internal Revenue
(BIR), Large Taxpayers Service, as shown by its Certificate of
Registration dated July 31, 2015, with Taxpayer Identification Number
005-182-763-000. 2

On the other hand, respondent is the duly appointed

Commissioner of the Bureau of Internal Revenue vested under the
appropriate laws with the authority to carry out the functions, duties
and responsibilities of said office including, inter alia, the power to
decide disputed assessments and to cancel and abate tax liabilities,
pursuant to the pertinent provisions of the National Internal Revenue
Code (NIRC) of 1997, as amended, and other tax laws, rules and
regulations. He holds office at the BIR National Office Building, Agham
Road, Diliman, Quezon City.

On August 26, 2014, petitioner received a copy of the Preliminary

Assessment Notice3 (PAN) dated August 20, 2014, which alleged that
petitioner was liable for deficiency capital gains tax (CGT) and
documentary stamp tax (DST) in connection with the purchase of
buildings, machineries and equipment comprising two (2) foreclosed
National Power Corporation (NPC) diesel power stations, collectively
known as the "!ligan Diesel Power Plants", in the amounts of
P282,961,279.54 and P122,252,314.88, respectively. 4

On September 9, 2014, petitioner filed its Reply5 to the PAN, and

raised therein legal and factual objections to the proposed CGT and
DST findings. 6

On October 8, 2014, petitioner received a copy of the Amended

Preliminary Assessment Notice7 dated October 1, 2014 which cancelled JiL

1
Par. 1, Stipulated Facts, Joint Stipulation of Facts and Issues (JSFI), docket, vol. I, p. 408; Exhibit
"P-1", docket, vol. II, pp. 455-475.
2
Par. 2, Stipulated Facts, JSFI, docket, vol. I, p. 408; Exhibit "P-1-b", docket, vol. II, p. 477.
3
Exhibit "P-2", docket, vol. II, pp. 478-481; Exhibit "R-1", BIR Records, pp. 382-385.
4
Par. 4, Stipulated Facts, JSFI, docket, vol. I, p. 409.
5 Exhibits "P-3" and "P-3-a", docket, vol. II, pp. 482-492.
6 Par. 5, Stipulated Facts, JSFI, docket, vol. I, p. 409.
7
Exhibit "P-4", docket, vol. II, pp. 493-498; Exhibit "R-2", BIR Records, pp. 467-472.
DECISION
CfA Case No. 9099
Page 3 of 19

the assessment for CGT and DST but then assessed EWT in the amount
of P290,255,010. 77 in connection with the purchase of the !ligan
Diesel Power Plants instead. 8

Petitioner filed its Reply9 to the Amended PAN on October 21,

2014, which alleged that despite the change in theory, petitioner is still
not liable for EWT amounting to P290,255,010.77. 10

On November 4, 2014, petitioner received a copy of respondent's

Formal Letter of Demand 11 (FLD) dated October 24, 2014. In the FLD,
respondent requested petitioner to pay the alleged deficiency EWT in
the amount of P291,875,839.72 in connection with the purchase of the
!ligan Diesel Power Plants, broken down as follows: 12

Basic Expanded Withholding Tax P184,875,803.03

25°/o Surcharge 46,218,950.76
20°/o Interest per annum 60,781,085.93
Total Amount Due and Payable P291,875,839.72

Petitioner filed a letter of protest 13 against the FLD on November

24, 2014, which raised legal and factual objections to the assessment
for alleged deficiency EWT. Petitioner requested a reinvestigation of
the assessments and the cancellation and withdrawal of the
assessment for alleged deficiency EWT. 14

On December 19, 2014, petitioner filed relevant documents in

support of its protest. 15

In view of respondent's inaction on its protest, petitioner filed

the instant Petition for Review before this Court on July 15, 2015.

In his Answer 16 filed on September 28, 2015, respondent raised

the following special and affirmative defenses: ;e.-
8
Par. 6, Stipulated Facts, JSFI, docket, vol. I, p. 409.
9 Exhibits "P-5" and "P-5-a", docket, vol. II, pp. 499-505.
10
Par. 7, Stipulated Facts, JSFI, docket, vol. I, p. 409.
11
Exhibit "P-6", docket, vol. II, pp. 506-513; Exhibits "R-3" and "R-4", BIR Records, pp. 493-499.
12
Par. 8, Stipulated Facts, JSFI, docket, vol. I, pp. 409-410.
13 Exhibits "P-7" and "P-7-a", docket, vol. II, pp. 514-524.
14
Par. 9, Stipulated Facts, JSFI, docket, vol. I, p. 410.
15 Exhibits "P-8" and "P-8-a", docket, vol. II, pp. 525-556.
16 Docket, vol. I, pp. 121-130.
DECISION
CTA case No. 9099
Page 4 of 19

Petitioner is legally bound to

withhold taxes from the sale of
the !ligan Diesel Power Plants.

5. At the outset, it must be emphasized that the

National Internal Revenue Code of 1997 (Tax Code)
imposes a duty upon petitioner to withhold taxes
from the income payments it made to the City of
!ligan. It states:

SEC. 57. Withholding of Tax at Source. -

XXX XXX XXX

6. As can be gleaned from above, the mandate of the

law is clear - that is all withholding agents of the
government are legally bound to withhold a
creditable income tax from income payments it made
to corporations arising from the sale, exchange or
transfer or real properties.

7. Thus, simply applying the provisions of the Tax Code,

it cannot be denied that petitioner should have
withheld taxes from the income payments it made to
the City of !ligan.

Petitioner is liable for

deficiency Expanded
Withholding Tax (EWT), not in
its capacity as a taxpayer,
rather as an agent of the
government who failed to
comply with its legally
mandated duty to withhold
taxes.

8. As explained above, there is no exception to the duty

to withhold on income payments arising from the
sale, exchange or transfer of real properties.l<--
DECISION
CfA case No. 9099
Page 5 of 19

9. Thus, as penalty for petitioner's failure to comply

with its legally mandated duty to withhold taxes, it is
being assessed for deficiency EWT.

10. To be clear, petitioner is not being assessed for

deficiency EWT as a taxpayer, but rather being
penalized as an agent of the government who failed
to comply with its legally mandated duty to withhold
taxes.

11. The fact that the amount sought to be collected from

the withholding agent is not a tax, despite the
nomenclature "deficiency tax", but rather a penalty,
has long been emphasized by the Honorable
Supreme Court stating:

XXX XXX XXX

12. As clearly stated by the Highest Court, the imposition

on the withholding agent for non-withholding and
non-remittance to the government is just a mere
penalty for its failure to comply with the withholding
tax provision.

13. It need not be stressed that in an assessment for

deficiency withholding taxes, as provided by the
aforecited jurisprudence, the amount sought to be
collected from petitioner is not the tax itself.
Logically, it would be ridiculous to collect the said tax
from petitioner when no income flowed into its
person and jurisprudence affirms the same. It is
merely an agent and not the statutory taxpayer. In
the case of Commissioner of Internal Revenue vs.
The Court of Appeals, Court of Tax Appeals and A.
Soriano Corp. it was provided:

XXX XXX XXX

14. It bears emphasis that withholding agent merely

holds in trust the amount of tax it withheld and as a
trustee, it is duty bound to remit to the government~
DECISION
CTA case No. 9099
Page 6 of 19

the proper amount of tax withheld. Thus, Section

58(A) of the Tax Code succinctly provides that:

XXX XXX XXX

15. The tax deducted and withheld by withholding

agents under the said provision shall be held as a
special fund in trust for the government until paid to
the collecting officer.

16. In instances of non-withholding or non-remittance of

the tax, such as the case herein, the liability of the
withholding agent becomes separate and distinct
from the liability of the person on whom the tax is
primarily imposed because the cause of action
against the withholding agent is not for the collection
of the tax but for the enforcement of the withholding
tax provision of the Tax Code. The same abovecited
case provides:

XXX XXX XXX

17. Clearer than day, in case of breach by the agent of

his legal duty, he is assessed not for the collection of
tax. He is merely penalized for failure to comply with
the withholding tax provision. Therefore, in case of
such breach, and no income taxes were withheld by
the agent, the agent is penalized. The tax cannot be
collected from the agent because as stated in the
above case, "(t)he agent is not liable for the tax as
no wealth flowed into him- he earned no income."
The cause of action against the withholding agent is
not for the collection of the tax but for the
enforcement of the withholding tax provision of the
Tax Code.

18. As a matter of fact, the Highest Court even

pronounced that despite the liability of the
withholding agent for its failure, the tax itself may
still be collected from the payee, stating: tz-
DECISION
CTA Case No. 9099
Page 7 of 19

XXX XXX XXX

19. As can be seen, the Supreme Court itself provided

that while the agent may be held accountable for the
penalty, the actual tax may still be collected from the
payee.

20. Prescinding from the foregoing circumstances,

petitioner is clearly liable for deficiency Creditable
Withholding Tax for its failure to comply with the
withholding provisions of the Tax Code and its
implementing rules.

Assuming arguendo that

petitioner is being assessed for
taxes and not penalties for
violation of the withholding
tax provisions of the Tax Code,
exemptions from taxation can
only be invoked by the
taxpayers legally entitled to
the exemptions.

21. Petitioner argued that it was not duty bound to

withhold taxes from its income payments to the City
of !ligan since the latter allegedly performed
governmental functions.

22. Assuming arguendo that petitioner is being assessed

for taxes and not penalties for violation of the
withholding tax provisions of the Tax Code,
petitioner's argument is flawed.

23. In the first place, petitioner is not the one entitled to

the alleged exemption.

24. It has been consistently held that an exemption

being enjoined by one entity cannot be invoked by
another entity not legally entitled to said exemption. jt-
DECISION
CTA case No. 9099
Page 8 of 19

25. The Honorable Supreme Court in the case of CIR v.

Guerrero explained:

XXX XXX XXX

26. In the instant case, petitioner invoked Section 32 (B)

(7) (b) for its alleged exemption from Creditable
Withholding Tax. It states:

XXX XXX XXX

27. The above quoted prov1s1on is clear, it is the

Philippine Government or its Political Subdivisions
that is entitled to exclude from its Gross Income any
income it derived from the exercise of governmental
functions, not petitioner.

28. As admitted by petitioner, it is corporation duly

organized and existing under the laws of the Republic
of the Philippines. It is neither the Philippine
Government or any of its Political Subdivision.

29. Thus, clearly, Section 32 (B) (7) (b) of the Tax Code
does not apply to petitioner and it has no legal
standing to invoke the same.

30. Second, assuming arguendo, that petitioner has the

legal standing to invoke the exemption clearly vested
to the Philippine Government or any of its Political
Subdivision, the sale of the Iligan Diesel Power Plant
did not satisfy the essential requisites before it may
be treated as excluded from the Gross Income of the
City of Iligan.

31. Before the City of Iligan be allowed to exclude any

proceeds of its sale of the Iligan Diesel Power Plants,
the following requisites must concur:

a. That the income be derived by the

Philippine Government or any of its ~
DECISION
CTA Case No. 9099
Page 9 of 19

Political Subdivision from any of its

essential government functions; and

b. That the income accrued to the Philippine

Government or any of its Political
Subdivision.

32. Elementary is the rule that exemption from taxation

is not favored and is never presumed, so that if
granted it must be strictly construed against the
taxpayer.

33. In the instant case, petitioner unilaterally stated that

the City of !ligan was exempt from taxation and it
presented no proof whatsoever.

34. This cannot be done.

A Notice of Pre-Trial Conference was issued by the Court on

September 30, 2015, setting the case for pre-trial conference on
November 12, 2015 17, but was reset to December 10, 2015 18, and later
reset to January 21, 2016 19, upon respondent's motions20 •
Accordingly, Petitioner's Pre-Trial Brief2 1 was filed on November 6,
2015; while Respondent's Pre-Trial Brief22 was filed on January 15,
2016.

The parties submitted their Joint Stipulation of Facts and Issues23

on February 19, 2016. Thereafter, on March 1, 2016, the Court issued
a Pre-Trial Order 24 approving and adopting the joint stipulations and
terminating the pre-trial.

During trial, petitioner presented Atty. Ranulfo D. Cenas25, the

City Environment Management Officer of the City Government of I ligan JL-.
17 Docket, vol. I, pp. 132-133.
18 Order dated November 11, 2015, docket, vol. I. p. 139.
19 Order dated December 8, 2015, docket, vol. I. p. 375.
20 Urgent Motion to Defer Pre Trial Conference filed on November 9, 2015, docket, vol. I, pp. 134-

137 and Motion to Defer Pre Trial Conference filed on December 7, 2015, docket vol. I, pp. 370-
373.
21 Docket, vol. I, pp. 141-154.
22
Docket, vol. I, pp. 381-384.
23 Docket, vol. I, pp. 408-421.
24 Docket, vol. I, pp. 428-432.
25 Minutes of the Hearing dated March 2, 2016, docket, vol. I, p. 433; Exhibit "P-19", docket, vol.

I, pp. 174-182.
DECISION
CTA Case No. 9099
Page 10 of 19

and former Chief of Staff of Mayor Lawrence Ll. Cruz; and Mr. Tirso G.
Santillan, Jr. 26 , petitioner's Executive Vice President, as its witness.

Petitioner filed its Formal Offer of Evidence27 on May 4, 2016. In

the Resolution 28 dated June 2, 2016, the Court admitted all of
petitioner's evidence.

On the other hand, respondent presented Revenue Officer

Maricel 0. Develos29 • Respondent made an oral formal offer of
evidence and the Court admitted all of respondent's evidence. 30

The case was submitted for decision on October 17, 20163\

considering petitioner's Memorandum 32 filed on October 3, 2016 by
registered mail and received by the Court on October 12, 2016 and
respondent's Manifestation 33 filed on September 5, 2016, adopting his
Answer as his memorandum.

THE ISSUES

The sole issue presented by the parties for this Court's resolution
is whether petitioner is liable for deficiency EWT, inclusive of interest
and surcharge, in the aggregate amount of P291,875,839.72 for its
purchase of the I ligan Diesel Power Plants. 34

THE COURT'S RULING

In the FLD35 , respondent is assessing petitioner for deficiency

EWT on its purchase of real properties owned by the City Government
of !ligan, basically computed as follows: fr-

26 Minutes of the Hearing dated April 11, 2016, docket, vol. I, p. 434; Exhibit "P-20", docket, vol.
I, pp. 158-170.
27 Docket, vol. II, pp. 443-454.
28 Docket, vol. II, pp. 645-646.
29
Minutes of the Hearing dated July 20, 2016, docket, vol. II, pp. 649-650; Exhibit "R-5", docket,
vol. I, pp. 391-396.
30 Minutes of the Hearing dated July 20, 2016, docket, vol. II, pp. 649-650.
31 Resolution dated October 17, 2016, docket, vol. II, p. 713.
32 Docket, vol. II, pp. 692-709.

33 Docket, vol. II, pp. 659-661.

34 Issue, JSFI, docket, vol. I, p. 410.
35 Exhibit "P-6", docket, vol. II, pp. 506-513; Exhibits "R-3" and "R-4", BIR Records, pp. 493-499.
DECISION
CTA Case No. 9099
Page 11 of 19

OCT/TCT Tax LOCATION OF CLASS. Fair Market Value

OCT No. Declaration PROPERTY (FMV) per Tax
No. (TO) Declaration
00069 02-009-08702 Dali12_uga1 Iligan City Mach.-Ind. 1_L219_L843_L126.69
00072 02-009-08703 Dalipuga, Iligan City Misc.-lnd. 562,427,853.28
03702 02-009-08695 Dalipuga, Iligan City Mach.-Ind. 1_L466_L440/_236.07
3,248,711,216.04

EXPANDED WITHHOLDING TAX

(On other real properties,
i.e., machineries)
Taxable Base 3 248,711,216.04
x Tax Rate 6°/o
Tax Due 194,922,672.96
Less: Basic Tax Paid per Return 10,046,869.93
Basic Tax Still Due 184,875,803.03
Add:
25% Surcharge 46_L218,950.76
20°/o Interest p.a. (03/10/13 to 10/31/14) 60,781,085.93
TOTAL AMOUNT DUE AND PAYABLE 291,875,839.72

According to the Details of Computation, pursuant to Section 4( c)

of Revenue Regulations (RR) No. 07-0636 RE Applicable Taxes on Sales,
Exchange or other Disposition of Real Property in case of Domestic
Corporations, there are three possible scenarios, to wit:

Nature Tax Rate/ Base

Sale, exchange or disposition of 6°/o Capital Gains Tax based on
lands and/or buildings classified the gross selling price or current
as capital asset FMV as determined in accordance
with Section 6(E) of the Tax
Code, whichever is higher.
Sale of lands and/or building Creditable withholding tax
classified as ordinary asset (expanded) under Section
2.57.2(J) of RR 2-98, as
amended[ and consequently, to

36 Should be RR No. 07-03 (Providing the Guidelines in Determining Whether a Particular Real
Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the
National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax under
Sections 24(D), 25(A)(3), 25(8) and 27(D)(5), or the Ordinary Income Tax under Sections
24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(8)(1), or the Minimum Corporate Income Tax (MCIT)
under Sections 27(E) and 28(A)(2) of the same Code). RR No. 07-06 pertains to "Further
Amending Certain Provision of Revenue Regulations (RR) No. 6-2005, as Amended by RR 10-
2005, Implementing the Provisions of Executive Order No. (EO) 399, as Amended by EO 422,
Otherwise Known as the 'No Audit Program (NAP)."'
DECISION
CTA Case No. 9099
Page 12 of 19

the ordinary income tax under

Section 27(A).
Sale of other real property Creditable withholding tax
regardless of classification (expanded) under Section
i.e. capital asset or ordinary asset 2.57.2(J) of RR 2-98 I as
amended, and consequently, to
the ordinary income tax under
Section 27(A).

Based on the foregoing, respondent avers that the

sale/disposition of machineries-industries and miscellaneous-industries
belongs to the third category, i.e., sale of other real property
regardless of classification, which is subject to creditable withholding
tax (CWT) and consequently to ordinary income tax. The machineries
in question, which are essential and principal elements in the industry,
are considered real property pursuant to Article 415(5) of the Civil
Code; thus, subject to CWT.

On the other hand, petitioner argues that its income payments

to the City Government of !ligan for the purchase of the !ligan Diesel
Power Plants are specifically excluded from the coverage of
withholding tax pursuant to Section 2.57.5(A) of RR No. 2-98, as
amended, which provides that income payments made to a city
government is not subject to EWT.

In this connection, petitioner further argues that the City is a

public corporation/local government unit created under Republic Act
(RA) No. 525. As such, it possesses taxing powers granted by the
Constitution and RA No. 7160 or the Local Government Code (LGC).
Thus, any income that the City may realize in the course of performing
its functions as a local government unit should be exempt from
taxation pursuant to Section 32(B)(7)(b) of the NIRC of 1997, as
amended. Petitioner submits that the City's income from the sale to
petitioner of the !ligan Diesel Power Plants arose from the exercise of
an essential government function.

According to petitioner, the !ligan Diesel Power Plants were

formerly owned by Northern Mindanao Power Corporation
(NMPC)/National Power Corporation (NPC). The City assessed NMPC
with real property taxes (RPT) covering the period from the 3rd quarter
of 2003 up to the 1st quarter of 2007. However, NMPC did not pay the
RPT, but instead contested the assessment on the ground that it is
exempt from RPT. NMPC's protest against the RPT eventually reached /k-
DECISION
CTA Case No. 9099
Page 13 of 19

the Central Board of Assessment Appeals. During the pendency of the

appeal, the City issued Warrants of Levy on the Iligan Diesel Power
Plants in accordance with Sections 258 and 231 of the LGC. The City
auctioned the Iligan Diesel Power Plants at the tax delinquency sale of
NMPC properties on April25, 2007. However, the City was unsuccessful
in trying to sell the Iligan Diesel Power Plants at a public auction. As a
consequence, the City bought the properties in accordance with
Section 263 of the LGC. Since NMPC failed to redeem the property
within one year from the sale, the ownership of the I ligan Diesel Power
Plants was vested to the City by operation of Section 263 of the LGC.

Petitioner avers that considering the City could not operate the
Iligan Diesel Power Plants, the Sangguniang Panlungsod of the City
resolved to sell the same at a public action pursuant to Section 264 of
the LGC, and through Sangguniang Panlungsod Resolution No. 08-611
and City Ordinance No. 08-5367. In 2008, the City again offered the
Iligan Diesel Power Plants for sale through public bidding. Despite the
required notices and publications, however, only one bidder
participated which resulted in a bidding failure. Upon its declaration
of bidding failure, the City proceeded to negotiate the sale of the I ligan
Diesel Power Plants. Petitioner approached Mayor Lawrence Ll. Cruz,
then City Mayor of Iligan, and offered to purchase the Iligan Diesel
Power Plants from the City for a price of P300,000,000.00. On
September 6, 2010, the City's Sangguniang Panlungsod passed
Resolution No. 10-551 which authorized Mayor Cruz to enter into a
Memorandum of Agreement (MOA) with petitioner for the sale of the
Iligan Diesel Power Plants to petitioner, subject to a Swiss-Challenge.
On December 3, 2011, the City, through Mayor Cruz, and petitioner,
signed the Memorandum of Agreement. Pursuant to the MOA, the City
was to sell the Iligan Diesel Power Plants to petitioner to address the
power shortage in Mindanao, and that petitioner was to rehabilitate,
run and operate the Iligan Diesel Power Plants to generate additional
power.

Petitioner further narrates that on December 12, 2011, the City's

Sangguniang Panlungsod passed Resolution No. 11-1134 awarding the
sale of the Iligan Diesel Power Plants to petitioner, but subject to
review by the Commission on Audit (COA). The resolution further
authorized Mayor Cruz to issue the Notice of Award in favor of
petitioner. Pursuant to the Commission on Audit Decision No. 2012-
146 dated September 21, 2012, the Iligan Diesel Power Plants were to
be sold to petitioner for a consideration of P386,911,780.44. On
January 28, 2013, the Sangguniang Panlungsod passed Resolution No.
13-78 and enacted City Ordinance No. 13-5989. Resolution No. 13-78~
DECISION
CTA Case No. 9099
Page 14 of 19

reiterated the City's decision to sell the !ligan Diesel Power Plants to
petitioner, incorporating therein the recommendations of the COA.
City Ordinance No. 13-5989 reiterated the mandate in City Ordinance
No. 08-5367 to authorize the sale of the !ligan Diesel Power Plants,
amended a portion of Resolution No. 11-1134, and awarded the sale
in favor of petitioner. On February 27, 2013, petitioner and the City
executed a Deed of Sale and an Amended and Restated Memorandum
of Agreement covering the sale of the Iligan Diesel Power Plants for a
consideration of P386,911,780.44.

Petitioner argues that the above-discussed events clearly show

that the City originally acquired the !ligan Diesel Power Plants from
NMPC due to its failure to settle its RPT liability to the City. The
collection of RPT from taxpayers is undeniably a governmental function
of the City. The above discussion also proves that the City sold the
subject power plants to petitioner because the City is not in the
business, and is not capable of operating a power plant. Moreover, the
proceeds of the sale to petitioner were appropriated in the City's 2013
General Fund. Verily, the City performed essential governmental
functions when it sold the !ligan Diesel Power Plants to petitioner in
order to recover deficiency RPT originally due from NMPC and to
increase the power supply in Mindanao.

Pursuant to Section 57(8) of the NIRC of 1997, as amended, the

Secretary of Finance may, upon the recommendation of the
Commissioner, require the withholding of tax on items of income
payable to any person, natural or juridical, residing in the Philippines,
to wit:

"SEC. 57. Withholding of Tax at Source. -

XXX XXX XXX

(B) Withholding of Creditable Tax at Source. - The

Secretary of Finance may, upon the recommendation of
the Commissioner, require the withholding of a tax on the
items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent
(1 °/o) but not more than thirty-two percent (32°/o) thereof,
which shall be credited against the income tax liability of
the taxpayer for the taxable year."~
DECISION
CTA case No. 9099
Page 15 of 19

Pursuant to the above authority, RR No. 2-98 was issued,

implementing the said provision.

In relation thereto, Section 4(c)(ii) of RR No. 07-03 provides that

sale of other real property (other than land and/or building treated
as capital asset), regardless of the classification thereof, located
in the Philippines, shall be subject to creditable withholding tax
(expanded) under Sec. 2.57.2(J) of RR No. 2-98, as amended, to
wit:

"SECfiON 4. Applicable Taxes on Sale, Exchange or

Other Disposition ofReal Property. -Gains/Income derived
from sale, exchange, or other disposition of real properties
shall, unless otherwise exempt, be subject to applicable
taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or
ordinary assets.

XXX XXX XXX

c. In the case of domestic corporations. -

XXX XXX XXX

(ii) The sale of land and/or building classified as

ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of
the classification thereof, all of which are located in the
Philippines, shall be subject to the creditable
withholding tax (expanded) under Sec. 2.57.2(J) of
Rev. Regs. No. 2-98, as amended, and consequently,
to the ordinary income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income tax, however,
domestic corporations may become subject to the
minimum corporate income tax (MCIT) under Sec.
27(E) of the Code, whichever is applicable. II r
DECISION
CTA case No. 9099
Page 16 of 19

On the other hand, Sec. 2.57.2(J) of RR No. 2-98, as

amended, provides:

"SECTION 2.57.2. Income Payments Subject to

Creditable Withholding Tax and Rates Prescribed
Thereon.- Except as herein otherwise provided, there
shall be withheld a creditable income tax at the rates
herein specified for each class of payee from the
following items of income payments to persons
residing in the Philippines:

XXX XXX XXX

(J) Gross selling price or total amount of

consideration or its equivalent paid to the seller/owner for
the sale, exchange, or transfer of real property classified
as ordinary asset- A creditable withholding tax based on
the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon
the withholding agent/buyer, in accordance with the
following schedule:

A. Where the seller/transferor is exempt

from creditable withholding tax in
accordance with Sec 2.57.5 of these
regulations Exempt

XXX XXX XXX

C. Where the seller/transferor is not

habitually engaged in the real estate
business 6.0°/o"

Based on Section 4(c)(ii) of RR No. 07-03, sale of other real

property regardless of classification (whether capital asset or ordinary
asset), is subject to EWT under Section 2.57 .2(J) of RR No. 2-98, as
amended, and when the seller is not habitually engaged in real estate }'<-
DECISION
CfA Case No. 9099
Page 17 of 19

business, the income payment is subject to 6°/o creditable withholding

tax.

However, respondent failed to take into consideration

subparagraph A of Section 2.57.2(J) of RR No. 2-98, above-quoted,
which provides that where the seller/transferor is exempt from
creditable withholding tax in accordance with Section 2.57.5 of RR No.
2-98, then the income payment is exempt from creditable withholding
tax.

A reading of Section 2.57.5(A) of RR No. 2-98, as amended,

shows that the withholding of creditable withholding tax shall not apply
to income payments made to the National Government and its
instrumentalities, including provincial, city or municipal governments
and barangays, to wit:

"Sec. 2.57.5. Exemption from Withholding. - The

withholding of creditable withholding tax prescribed in
these Regulations shall not apply to income payments
made to the following:

(A) National government agencies and its

instrumentalities, including provincial, city, municipal
governments and barangays except government-owned
and controlled corporations."

In the present case, there is no question that the sale of other

real property was made by the City Government of !ligan. Section
2.57.5(A) of RR No. 2-98, as amended, clearly states that the
withholding of creditable withholding tax prescribed in Section
2.57.2(J) of RR No. 2-98 shall not apply to income payments made to
the city government. Hence, pursuant to Section 2.57.5(A) of RR No.
2-98, implementing Section 57(8) of the NIRC of 1997, as amended,
income payments made to the City Government of !ligan is exempt
from the payment of creditable withholding tax. Consequently,
petitioner is not liable to the deficiency EWT assessed by respondent
on its income payments made to the City Government of !ligan.

Section 2.57.5(A) of RR No. 2-98 is clear and unequivocal,

leaving no room for interpretation. A regulation adopted pursuant to /k-
DECISION
CTA case No. 9099
Page 18 of 19

law is law. 37 And where the law speaks in clear and categorical
language, there is no occasion for interpretation; there is only room
for application. 38

WHEREFORE, premises considered, the instant Petition for

Review is GRANTED. Accordingly, the Formal Letter of Demand dated
October 24, 2014 and Audit Result/Assessment Notice No. RR16-101-
182-14 dated October 24, 2014 assessing petitioner for deficiency
expanded withholding tax in the aggregate amount of
P291,875,839.72, inclusive of surcharge and interest, arising from
petitioner's purchase of the !ligan Diesel Power Plants from the City
Government of !ligan in 2013 are CANCELLED and WITHDRAWN
for lack of legal and factual bases.

SO ORDERED.

~~C-~~ Q
<niANITO C. CASTANED~fJR.
Associate Justice

WE CONCUR:

CAESAR~ANOVA
Associate Justice
~ 7- /k•••144f~....~--,__..­
CATHERINET.MANAHAN
Associate Justice

37
Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, G.R. No. 159647, April
15, 2005.
38
Rizal Commercial Banking Corporation vs. Intermediate Appellate Court, eta!., G.R. No. 74851,
December 9, 1999.
DECISION
CTA case No. 9099
Page 19 of 19

ATTESTATION

I attest that the conclusions in the above Decision were reached

in consultation before the case was assigned to the writer of the
opinion of the Court's Division.

5lt~X> C~~~
JOANITO c. CASTANEDA, JR.
2..
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the

Division Chairperson's Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation before
the case was assigned to the writer of the opinion of the Court.

(J
Presiding Justice