CTA Case No. 3015 (Decision)

lliPOat.IC OF TBE PRit.IPPilftS COURT OF TAX .APPEALS Ol.'lt7.0N CITY 'I MITSUBISHI METAL CORP. AND ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, Petitioners, ... versus - C.T.A. CASE NO. 3015 COMMISSI01~ OF INTERNAL REVEN1JE, Respondent. X- - - - - - - - - ~ - - - X DE C I S I 0 N This is a c~im for tax credit by Atlas Con~ solidated Mining and Development Corporption (here- /. inafter re fe rred to as Atlas for short) of the amount of ~439,167.91, representing withholding tax at source alleged to have been erroneously collected on interest income derived from loans exten ded to it, through its a gent, Mitsubishi Metal Corporation (hereinafter referred to as Mitsub ishi for short) and obtained from the a Export-Import Bank of Japan, financing insti- tution owned by the Japanese Government, and the consortium of Japanese banks enjoying refinancing from the Japanese Government, which interest income is allegedly exempt from \li thhold ing tax under Section 29 <b) (7) (A) of the National ,.:.,. I:"' Internal Revenue C9_~e~ '- which provides as followsa Seco 29. ' o' s s Income. ~ xx Gr x (b) ~clijsion fromwoss income.- The following Ftems�� sha11' not be included in gross income and �: Shall be exempt from taxation under this . Titlez ',,.>, l -- �- i - .. - - � <( -,

DECIS IO1'J - C '~ A CASE 1!G. 301 5 - 2- (7) :.:is c ell a n eou s Items . -� (A) Income rec eived .fror.1 t h e ir i nvest- me nt s i r!._ tl1c Ph~:Ll i pDi n c s i~ loans , stocl\:s , b on ds , or other dome s ti c s e curi ties, or fr�ou intere s t on t heir denosits in b anks .i.n t l1c Philipp i n es Qy ( l ) ~ fo:ce~ gn gov~rl1in e n ts ~ ( 2 ) fium c if1J;; i n stitutions O\'lnecl , corl"Eroj_Iea , .or e r.-wo-=-r]ng- re1'inq.riC}IiT7'rom them , a nd (J)- i nt e r national or r egional financing insti- tut i ons e stablished o y governments . ( ~m phasis Supplied) . � Ba s ed fi' om t he evidenc e , both testi :nonial and do cw11ent a ry , the pl e a d i ngs and the Bu r e au of Internal :tevenue re co r d , it v :i.ll s :10H t!m t Ei tsu - b ls h i , a Japanese c orp or <.:'.t io n du l y lic ensed t o e ~1gngc in bu s i :lc;; s s i n t he P1li l -Lpi) i nes , on April 17 , )70 , j1ave entered i nto c ontra ct viith t h e Atl as , v!h e re :Ln i t Hil l a r range , a s ag ent , to sc~ - cu r e a l oan f or tLe l atter i n t h e a mount of ~2o , ooo , ooo . o o to f i nanc e t h e in stall ati on of a :W\�T co n c e:1 tra to r in tJ:1e l atte r 1 s Bi ga .Area , \vh ic h HG.s i n t c 2�1ded to e ~~pand t~:c pr odu ctive c a.p aci t y o f tl':e .L' ol edo ".ine s , and t hal. the ln. tc er ar;r e .:d t o se ll t o tlle ::'o r cor t!1e en tir e co pl) C~c co n ce ntrates pr oduced f r o0 sui d c onc entrator f or a period of f i fteen (1 5' ) year s . Cf ti1e S c~ i d l oan , <,>9 , COO , OOO . OO s��lc::.l__L cc used r' or t:l:e pur c.lw.se o ~ t Lc con c entr a�tor Ll a c :i~inery 1-:' r o: . .~,-c:.p an . p p � ~ J.. - )Lf- , :G Lt f'..e c � , CfA C[ s e 2GOl ) . In a c co ~d an ce wi t h t h e i r contr a c t , t o a c com,!Od8 te Atlas . Snb s �J quen t ly , t hrou gh the G..[!;C tl C Y o:f:' Atlz.s ]1 loc:.n apfJl ic a tio n s \�Te:. e ;:tppr ov e cl

- DECISION - CTA CASE NO. 3015 -3 - by the Expo rt-Import Bank of J a pan in the amounts of �4- , 320,000,000. 00 and �2, 880,000,000.00 (\vhich is equival ent to the sa i d loan of $20,000,000 .00). For taxable yea rs 1977 and 1978 , the corres- pond i ng 157~ quarterly income tax payments were wi thhel d on the corresponding i nterest payments of Atlas, pursuant to Secti on s 24- (b) (1) and 53 (b) (2) of the Tax Code , a s amended by Presidential De cree No . 131, effec t ive January 1 , 1973, and wer e remitted to the Govern.rnent in the total swn of F4-39,167 . 91 itemi zed as :fol l ows : O. H. No. 15181 213 dated 1/ 4-/78 Fl36,228 .63 O.R. No . 12738213 dated 10/3/77 Pl4-6,788.16 O. R. No. 09598186 dated 7I 5I 7'7 K.J-29illl .12 Total =P4-3-9--'-16-�-7-=.91 These remittances were covered by Official Receipts i s sued by t h e Central Bank of the Philippines. (EL~s. C- 5 , B- 5 and B-3 , pp . 7 , 13 and 15 , BIR Rec.). In suppor t of t he :L:r cl aim fo r t ax cr c:_di t, t he claimant s (petitioners herein ) contended t hat in::tsmuch as the coopera t i ve l oans were secured f :ro:n the Export-Import Bank of J a pan, a financing i nst i tution owned by the J apanese government, and t h e consort iw-n of J apanese banl::s en joyi ng refi- nanc tng f rom the Japanese gover nment, t he i n t er e st ineo :1e or1 such l oans is exempt from the Hithhol- d ing tax pursu an t to Se c tion 29 (b) ( 7 ) of t he Tax Code. 3

DE CI S IO Jl- CJ: A c;. sE - ~o . 301 5 -4- '.::'he loan o f (j 2 0 , 0 0 0 , 0 00 . 0 0 to At las , t hr ough tl e lii l:.subi s h :L , vlr~s secur ed pu rsua nt to the l oan a~ 1d SrLle s c on tr a c t da ted Apri l 17 , l :;/ 7 0 be b �Jee n Ll tsub i shi c.2.r:.u k Ll a s a f ore sa id , a n d which 1:/a s in- te r.td e d. t o f i 1~u::1 c e tllG expans:Lon pr o je c t of Atl as , a nd this wa s c er t ifie d t o by Di r e c to r Ken jo Kado - Vla 'ci of t 1'1G ov�erse a s I r1V8 St me n t Loan De partment of t lle K;c po rt - :u~;p ort Ban l~ of .Ta oan ( p . 1 8 DDi. re c . , C ~ L c ~~c 2301 ), nnd the i nt e r e st p a i d b y o : private K .. L~ s vr:1ic h e x te nd ed ~h e loa n . ( E~.;:hs . N 1 3)' - l3 G, � ~G t ~le e . , CTA Ca s e 2 8 01) . Cu1 im gust 27 , 1 7) ~/6 , ~. itsub :Lshi exe c u t ed a �~iu i�.r e .r 0.11u cl .Ls c laii!l e r o: its i n te r e s t .i n t h e pen - djy_ g c l L..i :1 fol' L<:G cr e d :L"'c:. i n f avor o ~ Atl a s ina s - cu c h a s , ~n0. er Liw t erms o..: t !1eir c o nt ra c ~. ;� i ..tlL.. s l o:.:ns cxtc :::.cled �~o A~lc. s ls e z e:r.tp t f:cor,l Hoi t hhold:Lng t a x pursu<-:..lC 'c:. o Se ct,i o o 2 ) ( b ) ( 7 ) (A ) o T t he ~his i s s u e i s n ot n ew , it b ein g ide n ti c a l t o the s c..nw .Lssu c res olved l)Y t hi s Court in i ts d e c is ion d ~ ted Apr i l 18 , l ) GO, i n a c a s e betwee n

DECISIO!\l - CIA CASE NO . 3015 -5- the same parti es entitled "Mitsubishi Metal Cqrpo- ration and Atlas Consolidated Mining and Develop- ment Corporation vs. Commissioner of Internal Re- v enue ", in CIA Case No. 2801. In resolving the i ss ue, this Court , in its afore said decision in CIA Case No . 2801, held that the interest income being an e arning or the Expo rt-Im port Bank of Ja pan, and not of Mitsubishi or t he consortium banks, and t he Export-Import Bank of Japan being a financin g instituti on owned and controlled by the Ja panese government , it is exempt from with- ho ldin g i ~ c om e t ax unde r Se ct ion 29 (b) (7) (A) of the Nat iona l Internal Revenue Code. This Court said: The law is clear and specific. It merely calls for application as thus worded. Adverting to the terms of the applicable prov i sion, it is appa ren t that income re- ceived from investments in the Philippines in loans ( 1) by a� financing institution owne d or controlled by a forei gn gov e�r n- ment or ( 2 ) by a financin g institution en- joying refinancin g from a forei gn govern- ment is not included in gross income and is e xemp t fr o~ i nc om e taxation. Consequently, the interest inc ome .is exempt from the with- ho l di ng tax. Respondent does not quarrel with peti- ti oner s t ha t the Ex port-Imp ort Bank of J a- pan is a fin an ci ng institutio n owned and c ontro ll ed by the J apa nese Government; and th at the c on sortium. of priv ate banks are fin ancing ins titutions and the lo ans exten- ded by them to Atl as Consolid ated Mining & Devel opme nt Cor por at ion ori ginated f rom the Ex port - Imp ort Bank of Ja pa n. In other words, the consortium of private Japanese banks enjoy the use of funds of the Export-Import Bank of J apa n for their lo an s to Atlas

Dt.CI SI Q\l - CTA CASE NO. 3015 -6- Consolid ated Mining & Deve lopment Corp o- r at io n. The collis i on oc c urs, however, at th e part ici pat i on of Mitsubi shi Metal Corp oratio n i n the l oan tr ans acti on s . . Re s pon dent cont end s , cit i ng par agr aph 4 of the loan and s al e s contract entered into on Apr il 17 , 1970 by and betwe e n Mit- subi shi Met al Cor por ati on ( fo r merly Mit- subishi Metal Mi ni ng Co ., Ltd .) and Atla s Cons ol i d ated Mining & De vel opme nt Corpo- r ation ( Exh . G, pp . 34 - 54 , BI 3 Re cords) wh i ch rea ds : AND WHEREAS , the pa rt i es h av e entered pr ov isional ly int o a long term Lo an and Sa les Cont r act dat ed Novembe r 7 , 1969, and Let ter Agreement dated Oct obe r 23 , 1969 , under wh ich ATLAS sh al l borr ow f r om MITSU BI SHI the s urn of TWENTY hU LLI ON DOLLAHS ( ~ 2 0 , 000 , 000 . 00) in Uni t e d St ates Cur r ency to install a new concentr a - tor in the ATLAS Biga Area for the pur pose of ex pa nding the pr oduct i ve c apacity of t he Toledo Mine, and shal l s e ll t o MI TSU BI SHI the ent ire pr odu ct io n of copp er concent r at e s produc ed fr om th e s ai d c oncentr ator f or a term of FIFTEEN (15 ) years. (Par . 4 , p . 5 3 , B I~ Re co rds ). t hat //,i t sub i shi J'vlet al Corpo r ati on is t he creditor . And as cre di t or , it is not a (1) fi n anc i ng i nstit ut i on owned , control l ed, or enjoy i ng re fin anc ing from f ore i gn go vern- ments ; ( 2) i nternational or r egional fin an- cing insti tu tio n estab l ished by governm ent s ; much l es s ( 3 ) a f or e i gn gov e rnme nt, as con- t emp l at ed un de r Sec t ion 29 ( b) (7 ) of t he Nat ion a l I ntern al �Hev e nue Code , wh ose in c ome r ec e ived fr om their i nvestment s in the Phi - l i pr i nes should be excl uded from gr oss in - c ome, and t herefor e , exemp t from Phili pp in e i nc om e t ax . Ac cord in gl y, r es pondent arg ues t hat s i nce j,\ i t s ubi s hi i�:\ et. al Corpor atio n does no t f all wi t hi n the sco pe of the pr ovisi on of Sec tio n 29 ( b) � ( 7) of the Ol d Rev en ue Code , it i s li ab l e to t ax and theref ore the int ere s t paym ent s mad e by Atlas Con solid at ed Mi ning a Devel opm ent Cor por at i on on the l oa~s obt ai ne d from Mit s ubishi Met al Cor por at i on are s ubje ct t o withh ol din g t ax at sou r ce. It bears emphas i s that pet i tioner s do not base t heir c l aim for t ax credi t on -t he G

DECISICN - CIA CASE NO . 3015 -7- pr emis e t hat the lo ans were made by Mitsu- bishi Met al Corporation or directly by the consortium of private Japanese banks; rather, t hey an cho r t he ir cl ai m on the fact t ha t t he loa ns were actually and ultimately made by the Export-Import Bank of J ap an. And in t he li gh t of the f act s adduced during the trial whi ch were never contradicted by res- pondent ; the records of the case, s pecially the records of the Bure au of Internal Reve- nue; an d the alle gatio ns in the petition for review, the truth of which has not been disputed but deemed admitted by res pondent, as al rea dy discussed above, ii_�.~ems~1~.2I: ~gy_on_q_any:__...Qouqt _that_ih~_yl tifl]at~_ creqi tor i;L_t l'}g___g6.122Kt.=IffiQo rt__� _c2nk _Qf..._.,L~Q_a f'l � ~11_th~ Q.QQ.er.�._c2nQ_Q.9C1dl!lent,?_Q.ert aininq to the l:.9al} QL�4~.~2QJ..QQQ_,_QOO..!.OO th!:pugh_hlj tsubishi ~ et a l Co�QQra1iQIL con~lg�.ively show that t bg__if) en:t.i!Y__Qf_i_l}g_m on ey_1. oc1ned _b_y_the :g~ort - IIT}Q..Q�1_.? an k of __J.�R.QJ} _~-~-�.. to-~t l.Q�. Consoliq.Qted~i ni ng_~_Qgy~1Q12m ent~Q�QOr.Q tiQil! And with re spect to the loans through the c onsortium of priv ate Ja panese banks in the sum of �2,880, 000 , 000 . 00 to Atlas Con- solidated Mining & Develcipment Corporation, the records reveal that they originated fr om the Ex port - Import Bank of Ja pan as evidenced by the sworn certification execu- te d by tasunori Saka i, ma na ger, Manila Of- fice of Mitsubishi Metal Corporation . (Exh. J, pp . 7-9, BI R Records). In other words, the �act ual and ultima te cre di tor is the Ex port-I mp ort Ban k of Ja pa n, the borrower is At l as Cons olidated hl ining & Development Corpor at ion, the interest paid on t he loans by the l atter was receive d by the former, and Mitsubishi Met al Corpo r ation, as well as the co nsort ium of private ban ks, was merely the arranger or c onduit through which the loans f l owed fr.om the credi tor Export- Im port Bank of Ja pan t o the debt or Atlas Con s olidat e d ~ ining & Dev e l opme nt Co r pora- ti on . Farentheti c ally, it may be s t ated t hat the t ot al loan of �7, 200 , 000 ,000 .00 (�4, 320, 000 ,000 . 00 plus � 2�, 880 , 000 , 000 . 00) is e qua l to U. S . ~ 20 , 000 , 000 . 00 . Thi s ~ 20 milli on loan is the amount referred to in all the documents se cured from t he Ex port-I mro rt Bank of Ja pan and fr om t he To ky o head of f ic e of ~ its u b is hi Met al Cor poration, toget her with the documents of certifi c ations execu- te d by Ya sunori Sakai (Exh . J , �.1dlrra) . .,� 7

DECI SICN- CTA CASE NO. 3015 - 8- Since the int e re s t in c om e involved here i n is th e frui t of a l oan (or l oans) attri - tut cd t o the Export - I mrort Ba nk of J apa n fr om whi c h it grew , and not t o t he Mi t s u- bis hi. i. et al Co r rn r ,:lti on or th e c ons or tium of ba nks , and i~ c om e is t ax ab l e to the r ers r n wh o e arne d it despi t e Ant i c ip atory arr an<::em en ":..s , suc h inte rest in com e would c le urly be t ax able to the Export - Imp or t Bank of Japa n . Howev e r , as already s hown above, the Ex port-Im port Bank of Japan is a financing institution owned or control l ed by t he Jap anese Government exempt from in- come t ax under Section 29 (b) (7) of the National Intern al Revenue Code. (Underli- .Dj ng SQP..Q lied). ---- Acc ~~di n gly, i n line wi th and on the strength of our previous de c is io n in CTA Case No . 280 1, t he c laim of petitio ne r s Mit s ubishi and Atl as for tax cr ed it i n t he amo unt of P439 , 167. 9l i s gr anted. W HE>J.:fu~-lE , res pe ndent is her e by ord e red t o credit petit i oner Atlas Consol id at ed Mi ni ng & D evel op~ ent Co r poration in the t ot al amount of ~439 ,1 6 7. 9 1, re pr es e nting quart e rly in c ome t ax e rron eo usly withh el d at sour ce and pa i d upon in- terest inc om e e a r ned in .the ye ars 197 7 and 1978 by t he Ex por t-I mpo rt Ba nk of Japa n. ~ ith out r ro nouncement as to c os ts . Jfary SO GHDE:i.ED . 15 , 1981. Quez on City , l'tetro 1,\anila , ~~ CONSTANTE C. ROAQJ I N .As s oc iat e J udge WE CCNCUH. : ~w Presiding J u d~l e ~~~ As so ci 2t e J udge 8