CTA Case No. 3517 (Decision)

"-"UBLlC OP lH� .-ttiLtP.Pll'P'~ C:OU.R.T OF TAX .~f'P.EAU a n QUJEOJt GENERAL MILLING CORPORATION, Petitioner, - versus ... C.T.A. CASE NO. 3517 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - ~ - - - - -- -- -- X DECI S I 0 N Petitioner, a domestic corporation organized under the laws of the Philippines, filed with this Court a judicial action for the tax refund or 'credit of the amount of 8493,110.20 alleged to have been erroneously paid transaction tax to respondent Commissioner of Internal Revenue in 1980. On November 29, 1979, petitioner had previously entered into an agreement with respect to the purchase and sale of commercial papers with Philippine American Life Insurance Company (hereinafter referred to as Philamlife) and the Philippine American Investment Corporation (hereinafter referred to as PAIC for brevity). In this agreement, petitioner is referred to as the issuer of the notes of indebtedness. Among the terms and conditions of the said agreement are: �

DECISION CTA CASE NO. 3517 1. The Issuer shall issue and the Dealer shall purchase the notes issued by the Issuer on each value date fixed in the Agreement at a price equal to the face amount of each note. 2. Upon purchase of the notes by the Dealer pur- suant to the Agreement, the Dealer shall sell and Philamlife shall purchase, for a price equal to their aggregate face amount, all of the notes so purchased by the Dealer from the Issuer. 3. The transaction tax provided in Presidential Decree No. 1154, on any amendment thereof, and charge- able on the sale of the Notes shall be paid by the Issuer on the date regioned by law. The Issuer shall furnish Philamlife with proof of payment of said tax within fifteen (15) business days from due dates of said tax. 4. The principal sum of the Notes shall be payable as provided for on Annex "B" of the Agreement. The Notes shall bear interest at the rate of ELEVEN AND FIFTY NINE THOUSAND PER CENT (11.059%) per annum. 5. In the event that the transaction tax referred to in Item (3) above is abolished and/or this transaction is exempted from such tax and Philamlife

DECISION CTA CASE NO. 3517 - 3- shall become liable for Income Tax, or a withholding tax on interest earned by Philamlife is imposed instead, Philamlife, shall have the right to require the Issuer and the latter stipulates to reimburse Philamlife for income and/or other taxes it has paid directly or in d i~ectly on the interest on the Notes. Accordingly, petitioner obtained, on January 2, 1980, a loan from PAIC in the amount of B50,000,000.00. Under the provisions of the loan agreement between petitioner and PAIC, the former shall pay quarterly interests to the latter beginning on April 1, 1980, and from out of these interest payments, petitioner paid respondent Commissioner of Internal Revenue, the sum of B493,110.20, equivalent to 35% tax on money market transactions and due on the interest earned on the promissory note issued by petitioner for the period October 1, 1980 to January 1, 1981 amounting to Bl,408,886.30, withheld under the provisions of Section 210(b) of the National Internal Revenue Code which was effective until its repeal on September 17, 1980 by PD 1739. In P.D. 1739, it provides, in Section 3 thereof, the imposition of 20% tax on interest from deposits and yield from deposit substitutes, and by all appearances,

DECISION CTA CASE BO. 3517 - 4- this law changed Section 210(b) of the National Internal Revenue Code and shifted the liability to pay the tax on money market transactions from the debtor/issuer to the lender/placer. Section 210(b) of the National Internal Revenue Code, before its repeal by P.O. 1739, and Sections 3 and 13 of P.O. 1739, repealing said Section 210(b) and amending Section 24 of the same Code, effective on the date of repeal on September 17, 1980 aforesaid, by insert- ing therein paragraph (cc), provides, respectively, as follows: "SEC. 2.LO. Percentage tax on certain transactions.- " (a) XXX XXX XXX. "(bJ Commercial paper transactions.- There shall be levied, assessed, collected and paid on every commercial paper issued in tne primary market as principal instru- ment, a transaction tax equivalent to thirty-tive percent (35%J based on tne gross amount of interest thereto as defined hereunder, which shall be paid by the borrower/issuer: Pro- vided, however, That in the case ot a long-term commerc1al paper wnose matur1ty exceeds one year, the bor- rower shall pay tne tax based on the amount of interest correspondent to one year, and thereafter shall pay the tax upon accrual or actual pay- ment (whichever is earlier) of tne untaxed portion of the 1nterest wnicn corresponds to a per1od not exceed1ng one year.

Dt;CISION CTA CA~E NO. 3~17 �- 5 - "The transaction tax imposed in this section shall be a final tax to be paid by the borrower and shall be allowed as a deductible item for pur- poses of comput1ng the borrower's taxable income." SEC. 3. Section 24 of the same Code 1s hereby amended by adding a new sub- section (cc) between subsections (c) and td) to read as follows: (cc). Rates of tax on interest from deposits and yiela from deposit substitutes. - Interest on Pnilipp1ne Currency bank deposits ana yield trom deposit substitutes received by domes- tic or resident foreign corporations shall be subject to a final tax on the total amount thereat as tallows: (a) 15% of tne interest on sav1ngs depo- sits; and (b) ~0 % of tne interest on time deposits and yield from aeposit subst1tutes which shall be collected and paid as provided in Sections ~3 and 54 of this Code: Provided, That if tne recipient of such interest is exempt trom income taxat1on, no tax shall be imposed and that, if the rec1pient 1s enjoying preferential income tax treatment, tnen the pre- ferential tax rates so prov1ded shall be imposed. SEC. lJ. Sect1on ~10 of the same Code is hereby repealed. On October 1, lYBO, petitioner paid a 35 ~ transact1on tax under Sect1on ~lO~b) of tne Tax Code 1n tne amount ot ~~93,110.20 ~Exns. D, D-2 and D-1, p. 68 C~A rec.J on account of the �50,0uO,OOO.OO note

DECISION - CTA CAS~ NO. 3517 - b- ot indebtedness issued in tavor ot the PAIC, and which was purcnased by Philam Life on the said date i.e. October l, 19~0. un Apri~ l, 198~, petitioner, aside trom the transaction tax of P49~,l~O.LO it paid under sa1d Sect1on 210{b) of tne Tax Code, reimbursed the Pnilam Lite, by way ot another amount of Pq93,llU.2U, wnich the Philam Life nad withheld and rem1tted to the Bureau of lnternal Revenue as 35% transaction tax prov1ded in the1r cred1t agreement. ~see Exn. F; p. 3. Memorandum of Petitioner, pp. 98, 111-112, CTA rec.) On August 3, 19~2, within the 2-year period allowed by law, petit1oner filed a claim for retund or tax credit with respondent, counted from the date of pay- ment of saia 35 ~ transact1on tax with the Commissioner of Internal Revenue aforesaid in tne amount of Pq93,llU.20 (Exh. E, p. 69 CTA rec.), which was paid on account of the aforesa1d loan transaction obta1nea from PAIC 1n the sum ot P50,000,000.00, ana based o n tne interest due and payable in the amount of ~1,40~,8~6.~0 for tne period from uctober l, 198u to January l, 1981, the period in which the loan was

DECISION - CTA CASE NO. 3~17 - 7- enforced. The aforesaid letter or claim for refund or tax credit is quoted hereunder for purposes of clarity: Tne Commissioner ot Internal Revenue Quezon City Attention: Chief , Appellate Division Si r This refers to our erroneous remittance to the Bureau of Internal Revenue of �4~3 , Ll0.20 as 35 % transaction tax on October l, l9UO which we are now claiming for refund or tax credit memo. On January 2, 1980, we obtained a loan amounting to �50,000 , 000.00 from the PhilippineAAmerican Invest- ment Corporation and for the quarter October l, 19~0 to January l, 19~1 on our interest payment of �1,408,8U6.30, we withheld and paid erroneously the BIR the amount of �4 93 , 110.20 as 35% transaction tax under Confirmation Receipt No. A-5148681 dated October l, 1980. On April l , 1981, we reimbursed our creditor the identical sum of �4 ~ 3,Ll0 . 20 as ~5 % witnholding tax on the same transaction as provided for in the credit agreement but they informed us that they have paid the BIR already because under Presidential Decree No. l/39 which took effect on September 17, 1~80, they are the ones liable to the withhoLding tax on interest earnings of commercial papers and deposit substitutes and therefore , our remittance of the 35 % transaction tax is erroneous as we are no longer liable thereto under the aforesaid decree . Consequently, a clear case of double payment of the 35% transaction tax on the same transaction for the same taxable period arose, hence we are now cLaiming for retuna or tax credit of the overpayment amounting to �4~3 , 110.20. Attached herewith are xerox copies of the official receipts and borrower's return ot remittances In support of our claim.

~ECISION CTA CASE NO. 3517 - 8- We trust that you will act on this claim favorably and hope to receive your refund or tax credit soon. Very trulyuyours, GEORGE K. YOUNG Executive Vice-President Prior to petitioner's alleged erroneous payment on October l, 1980 of the ~493,110.20 35 % transaction tax due from the loan secured from the PAIC aforesaid, Section 210(b) of the Tax Code imposing said tax was, however, repealed by PD 1739 on September 17, 1980, the date of effectivity of the latter law. As far as the records indicate, the payment of the transaction tax by petitioner was made on October l, 1980, which payment was made at a time when the law /(Section 210(b)/ imposing a transaction tax on the debtor;placer had already been repealed by P.D. 1739 on September 17, 1980. (Underlining ours.) Moreover, when petitioner paid the 35 % transaction tax aforesaid, PAIC itself paid the transaction tax since it was, under P.D. 1739, liable to pay the said tax as it was then the lender/placer (see Exhs. E & F, pp. 69 and 70, CTA rec., respectively) and wh1ch the tormer was bound under their contract to reimburse, and in fact had

DECISION - CTA CASE NO. 3517 - Ql - reimbursed the same. There was, therefore, clearly, and in effect, a double payment of the 3~ % transaction tax made by petitioner. Hence, the instant judic1al claim of petitioner for refund or tax credit of its alleged erroneous transaction tax payment. There was no disclaimer made by respondent that Philam Life did not pay to him the other 35% transaction tax of ~493,110.20, which resulted in the aforesaid double tax payment. (See t.s.n., pp. 9-10, 13-14, of witness Asst. Vice Pres. Angelica de Leon, May 31, 1983; t.s.n., pp. 17-19, 21-22, witness Romeo 0. Real, May 31, 1983.) And evidence clearly showed that peti- tioner actually paid to respondent Commissioner of In- ternal Revenue the 35 ~ transaction tax on October 1, 1980, which was after September 17, 1980, the date when Section 210(b) imposing 35 ~ transaction tax on the debtor/placer was repealed. Notwithstanding these facts, respondent Commissioner of Internal Revenue still doggedly insists that- "Pursuant to BIR Rulings Nos. 189-82 and 190-82, however, both dated June J, 1982, issued in connection with the repeal of Section 210(b) of the Tax Code, in the case of long-term commercial papers issued prior to September 17, 1980 and maturing thereafter for over one (1) year, the transaction tax is to be paid by the borrower, based on the inter~st for the first year at the rate of 35 %.

DECISION - CTA CASE NO. 3517 - 10 - We quote BIR Rulings Nos. 18~-82 and l9U-8~, both dated June J, 1982: "Under the abovequoted provision, it seems clear that the 35% transaction tax is due upon the issuance of the com- mercial paper (Sec. 3, Rev. Regulations No. 7-77). Consequently, interest earned on short-term commercial paper issued be- fore the repeal ot the said provision on September 17, 1~80 is subject to the 35 % transaction tax, even if the note matures after said date. This conclusion finds support in the fact that in the case of said short-term commercial paper maturing for one year, which includes one issued before September 11, 1~80 and maturing thereafter, the 35% transaction tax is a final tax based on the amount of interest corresponding to one year to be paid by the borrower �� at the time of the issuance of the commercial paper. "In the case of a long-term com- mercial paper issued prior to Septem- ber 17, 1980 and maturing thereafter for over one (l) year, the 35% tran- saction tax shall be paid by the borrower based on the interest for the first year. Thereafter, if the untaxed portion of the interest accrued or was actually paid after September 17, 1980, the same shall be subject to the 20% final tax to be paid by the lender/placer in accordance with P.D. No. 1739". Notwithstanding the profference of respondent, the facts clearly stand out, however, that the �50,00u,ouo note of indebtedness was renewable or issued every 3 months (p. 3, Petitioner's Memo, p. 98 CTA rec.) and that the

DECISION - CTA CA~E NO. 3~17 - ll - interest due the per1od October l, i98U to January l, 1981 amounted to Pl,408,886.3U for which the J5% transaction tax was withheld. {p. 98, CTA rec.) Consequently, the interest of Pl,40H,8H6.30 aue on the loan of P50,00U,OUO was actually interest income, upon which the questioned 35% transaction tax ot P493,llU.2U was withheld and which indebtedness, is to our mind, considered as short term ioan as it was covered by a promissory note, or note of indebtedness enforced only for 3 months, or iess than l year. It is obvious tnat petitioner paid the 35% transaction tax on October l, 19~0, based upon a note ot indebtedness issued on the same date, It not having been disputed that the interest of Pl,408,886.3U on the note of indebtedness was due during the period from October l, 1980 to January l, l9Hl, and the tax 1n tne sum ot P493,ll0.20 thereon due beginning October l, l9HO and aiso the date in which petitioner paid the questioned tax to respondent Commissioner of Internal Revenue, the said J5 % transaction tax was erroneously paid since it was paid after Section 2lO{b) had been repealed, i.e., on September 17, 1980. When petitioner reimbursed the Philam Life which the latter paid as transaction

DECISION - CTA CASE NO. 3~17 - 12 - tax, petitioner had therefore doubly paid as transaction tax due the government. Justice will never allow, an absurd and unjust situation to prevail, as in this instant case, to tne disadvantage ot the herein taxpayer. Hence, petitioner is hereby entitled to tne refund or tax credit of the erroneous payment of the 35% transaction tax ot ~493,llU.2Q. WHEREFORE, respondent Commissioner of Internal Revenue 1s hereby ordered to grant tax refund/or credit of the sum of ~493,110.~0 to petitioner-claimant General Milling Corporation. Without pronouncement as to costs. SO ORDERED. ,j Quezon City, Metro Manila, Febr):fary 19, 1987. CO~ .-;;;,AQU IN Associate Judge WE CONCUR: /