CTA Case No. 4163 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY P & N CORPORATION <MANILA BRANCH OFFICE>, Petit i onet~, C.T.A. CASE NOS~ 4163 4293 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - -X DE C Cl N 'It-lese consolidated cases involve claims fot~ t~efund of allegedly et~ t~oneous 1 y collected contractor's and withholding taxes. Petitioner is a Japanese corporation duly licensed to do business in the Philipines. On Jam.lat~ y 11, 1'385, i t entet~ed into a contrC\~j; rlith the Philippine Govet~nment for the supply, installation, commissioning, testing and rna i nt enance of a Traffic Contro 1 System and associated works in Metro Manila designated as Contract No. PL-TCC (85)-1. For the work performed dut~inq the pet~iods from June 1, 1'385 to Mat~c h 31, \ I /

DECISION CTA CASE NUS. 4163 & 4293 -2 l~~b <ClH Lase No. 41b3J~ and Uctober 19~6 to March 1 '::18~ ~c � 1 R Case No. 4 2'33 ), the Govet~nment thro�.1gh the l�linistt~ y of Public Wot~ ks and Hiqhways, deducted and withheld from petit i onet~' s accomplishment billinqs contractor's and withholdinq taxes in the amounts o f P940,299.70 and P~43,663.78 respectively tor each period totaling P1,883,963.48 and paid the same to the Bureau of Internal Revenue, Pet it ionet~ now seeks the recovery of said amounts on the qround that it is exempted from payment thereor. Petitioner filed a claim for refund on October 14, 1 '~88 fot~ ClR Case No. 4153, and on Aug�.tst Respondent failed to act on said claims ~1ence the Petitions for Review wet~e tiled on J�.me 18, 1'~87 and Septembet~ 5, 1988 for CIR Cases Nos. 4163 and 4293 respectively. Petitioner bases its claim of exemption ft~om contt~actot~' s and income tax on Rt~ ticle 17 of i t s contract, an Exchange of Notes between the Japanese and J:..'hilippine govet"nments dated J1..me '3, 1981, and BlR Ruling 1\lo. 138- 88 dated April 14, pot"t ions of the BlR Ruling, which likewise reproduces the provisions of the Contract and Exchange of Notes involved herein, is reproduced below=

DECISJON CTA CASE NOS. 4163 & 4293 -3 April 14, 1988 Cc:n~pio, Villat~aza and Ct~uz Law Offices 5th Floor, LTA Bldg., 1189 Peres St., Legaspi Village, Makati, Metro Manila H:tt._n_; ___ . BtJ:._y_~---���Hn.:tQ.D LQ____I__~r_.QJ.______C._~.r.P.j_.Q._ Gentlemen: This refers to your letter dated tvlarch 1, 1988 requesting confirmation of your opinion to the effect that your c 1 i ent, P & N Corporation and its per~ sonnel are exempt from Philippine taxes in connect ion with the fi 1 ing of corpor~ate and individual income tax returns on income derived from the project. It is represented that your client is the prime contractor of the Establishment of Floot" Forecasting and Wat~ning System for Dam Operation Project and the Supply, Installation, Commis~ioning, Testing And Maintenance of the Traffic Control System and Associated Works in Metro Manila Phase II Project under PL-PAGASA (84)-1 and PL- TCCC85)-1 respectively, entered into between your client and the Government of the Republic of the Philippines; and that both projects are funded by the Exchange of Notes between the Philippine Governm~nt and the Japanese Government. In reply thereto, I have the honor to inform you that pursuant to paragraph 5(2) of the Exchange of Notes dated June 9, 1981 between the Philippine Government and the Japanese Government and Article 14 of Contract PL-PAGASA (84>-1 Loan Agreement No. PJ-P53 as well as Article 17 of contract PL-TCCC85>-1 Loan Agreement No. PH-P54 of pertinent portions of which are quoted hereunder as follows� \

DECISION CTA CASE NOS. 4163 & 4293 -4 "5. (1) XXX "(2) The government of the Republic of the Philippines will, itself or through its executing agencies or ins- tr�.lmentalities, assume all fi!!lcal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as supp 1 i er!!l, contractors Ot" con s u 1 t ant s Q.JL _____ - -----~-n9 _(__gr. ................jn. c _o nn e_c;t;__j.__p_n ........\1J._t _b_____E.T1..Y____~..Dq9.J!LI:.?......_..t..b.~.t .l!.l..i\i'...Y. .........~--~q_~~~-l;?.________f_..r_g_!!!.__ _t__~----~-l,l_p_Q_!__y_____p_f pr o d. uqj;__$._______ i!i'.D d./_Qr__.. ~-~-~-Y.. tG.. ~ !L__ _t.__Q______b._l! pt~_o vJ c;t,d .. ..... ..~,, _nd. .t?.r.. . . .... j;IJ~..................b. 9.~n-~_ �� <Emphasis supplied) "ARTICLE 14 XXX 8.RI IG.k.~....l:Z.!.. . -----�-�-�-IB..X~.S. .....B..N..Q_____QJJi.~ ~ CHAR G..~~----8J~.tLJ,,_u;;_~_!'!$.~.t:i 17.1 XXX 17.2 The CONTRACTOR shall be exempted from customs d�.1ties and other import taxes on the Goods, and on CONTRACTOR'S vehicles, supplies and equip- ment which will be imported into the Philippines solely for the p�.1rpose of cat"t"ying out the contt"act. The Goods shall in- clude those to be brought in the Philippines for replacement and/or repair of defective parts covering the entire period stated in Article 5. 17. 3 Ih..~---------- CONI.B..HC..IQ.B ______~_n_q_ m..~.m. b.~ t.~-~---�����9. f__1t -~ ----~-t.~ f.f__ w_b. 9......~J~J1L ....n..9..t PJ.t ..~. ~.'-.:0 1!1 ............... 9. ..f ...............:tb.~---�--- J?..h__i_.J.j..P..Q.tD.t:.?.. ~- .$....0.~. t .~----�J~.!L......___~--~.Jti!!.P.t..t?..d._..... ._f..r_p_m____~-l-~- f.l.-. q ~ L . ..J g .Y...i -~ $. ........Clr........ _t; ~-~ -~-'--� � __t.m.P.9...~..1:.?. .d. ~JJ.... . ...______:t;_bJL.................. .B.~p_q_bJ. i,c; .... .......... 9 f.. ..................tb. ~-

DECISION CTR CRSE NOS. 4163 & 4293 -5 Pb tl .~..P.P.ln..~.~- i n r e s p e ct t o all the Wot~k cat~t~ied out in the Philippines in connection with this Contt~act, including the following taxes and duties� 17. 3. 1 Personal and in- come and business taxes; 17.3.2 e Cot~pot~at income and business taxes nationals or local includ- ing fees or any charges imposed by the national and local govern- ment, 17.3.3 Sales Tax; 17.3.4 The CONTRACTOR'S tax and muni- cipality taxes, 17.3.5 Stamp duty fo'r"' the Contract, 17.3.G lmpo'r~t taxes and duties for per- sonal effects. Japanese contractor and their foreign personnel are exempt from Philippine taxes. Such being the case, P & N Corporation of Japan which is undertaking UECF-assisted projects in the Philippines is exempt from the co't~po'r"ate income tax imposed under Section 25(e) (1) of the Tax Code, as amended, on resident forei. ~~ n corporations engaged in trade or business within the Philippines; from the 10~ vallle-added tax on its impo.,~ted eq�..tipment as well as for its sale of services relative to the aforementioned projects p�.lt~sl\ant to Sections 101 and 102 of the Tax Code, as amended. Moreover, its foreign personnel shall also be exempt

. DECISION /, CTA CASE NOS. 4163 & 4293 / ~ -G - from the individual income tax pt~escribed und@r Section 22 of the same Code, as amended. Finally, P & N Corpot~ation is not required to file quarterly income tax returns and final or adjustment returns on income derived from the aforesaid project. Likewise, its foreign personnel are not also required to file individual income tax returns on income also derived from the said project. Ver~ Truly yours, BIENVENIDO A. TAN JR. Commissioner of Internal Revenue f~e s pendent cant ends that the petitioner has failed to show any statute, legislative grant at~ treaty binding on the Philippine Government exempting it from income tax and cant t~act at~' s tax; that the Exchange Notes and the Cant ract can not be cons i det~ed the 1 aw ct~eat i ng petitionet~'s t~ight to be exempted ft~om Philippine taxes; and, although respondent issued the BIR ruling to the effect that petitioner and its foreign personnel are exempt from Philippine taxes, the same does not bind the government because said opinion contravenes the well settled doctrine that one who � claims to be exempt from payment of a tax must do so Ltnder clear and unmistakable terms found in a statute. Petitionet~ , in reply thet'eto alleges that the 1'373 Constitution, which was in effect when the

DECISION CTA CASE NOS. 4163 & 4293 -7 Exchange of Notes and the C ontt~act was executed, allows the President to enter into international aqreements, that an exchange of notes is an executive ar::weement, and thus, having been validly entet~ ed into by the president, it is binding on the Philippine Government and partakes of the nature of the law; and that having already issued a ruling on this mattet~ , respondent can not take a position inc onsistent with one previously taken. Respondent's contention that petitioner has f ailed to show any statute, legislative grant or treaty binding on the Philippine government, expt~ essly exempting petitioner ft~ om income taxes and contt~ actot~' s tax is unavailing. The Exchange of Notes in this case is the source of petitioner's t~ iqht to the exemption. An Exchange of Notes is defined as: 11 an infot~ mal method whereby states subscribed to certain understandings or recognize cet~ tain obligations as binding upon them. 11 <Salonga & Yap, Public International Law [4th Ed.J p. 304). 11 an intet~change of diplomatic notes between a diplomatic representative and the Ministry of Fot~eiqn Affah~ s of the Senate to which he is accredited. Not inft~equently, agreements at~ e concl�.tded between States by means of Sl..lch exchange of notes." <Coquia & Defensor- Santiago, Public International Law. ( 1'384 >, p. 584 >.

DECISION CTA CASE NOS. 4163 & 4293 -a And this kind of cot~t~espondence is included undet~ the genet~al term "Executive Agt~eements". As petitioner cited: "On the basis of American pt~actice, executive agreements may be classified into two qroups: (1) agreements made purely as executive acts affecting extet~nal relations and independent of legislative authorizations, <2> and aqreements entered into in pursuance of acts of Congress. The first class of executive agreements may cover a multitude of subjects affecting pt~imarily external t~elations. They at~e often used in est ab 1 ish i ng a !!LQ .Q_L_~_ ___yj_ y_~_ng_t with other govet~nment s or in the settlement of pecuniat~y claims of citizens againc;t foreign countries for violation of rignc~ protected by treaties or by rules of international law. Sometimes they are made to s�.1pply the details necessat~y for the execution of treaties previosly ent et~ed into or to furnish a g�Jide for theh~ intet~pt~etation. They need not conform with the national policies declat~ ed by Congt~ess unless they involve constitutional right of the individuals within the co�.mtt~y. They may take the fot~m of protocols, exchange of notes, or other types of documents and are often tempot~at~y in chat~ actet~." <Sinco, Philippine Political Law C19G2J, p. 296). to Coquia & Defensor-Santiago, (supt~ a. p. 595) "Due to an expansion of intercourse among states especially in the economic and technical fields, States now �.1se less fot~mal ,types of international such as executive aqreements of exchange of notes, usually intended

DECISION CTA CASE NOS. 4163 & 4293 -9 to be binding upon signatLn~ e alone. 11 And, "ft~om the point o f view of international law, there is no d i ff et~ en c e between treaties and executive agreements in their binding effect upon the states ed c on c et~ n 11 <Sinco, supra. , p. 2 '37) � Th t.IS the ex c hange of notes, being an exec�.1t ive agt~eement, binds the government and thus partakes of the nat Lire of 1aw. In USAFFE Veterans Association, Inc. vs. The Treasurer of the Phi 1 i ppi nes, et al., <105 Phi 1. 103 0, June 30 , 1'35 '3), the Supt~ eme Co�.1rt appat~ ently held that executive agreements may be entered into with other states, and are effective without legislative concurrence. Likewise in Co��issioner of Internal Revenue vs. John Gota�co & Sons, Inc. <148 SCRA 3 5, Febt~uary 27, 1'387>, the Supreme Court upheld the entitlement of the World Health Or ganization to tax exemption under the Host Agreement entered into by the Philippines with WHO despite the fact that said agt'eement was 1 ikewise not submitted to the Senate for ratificatio r.. - ~ he Court held therein that 11 CWJhile treaties are required to be ratified by the Senate under the Constitution, less formal types of international atweement s may be ent et' ed into by the Chief

DECISION CTA CASE NOS. 4163 & 4293 - 10 Exec1.1t i ve and become binding without the conct.tt~t~ence of the legislative body. 11 The Militcn~y Bases agreement, for one, grants tax exemptions although it is purely an executive agreement. It must be remembered that "tax exemption is fol.tnded on public pol icy at~e gt~ant ed on the ground that they will benefit the public generally, or as or compensation for services rendered in the performance of some function deemed socially desirable are favored on the theot~y that the concession is dl.te to Ql,!..t~L..P..t~..Q�..._Q..!.\.9.. for the performance of services essentially public by which the State is relieved p_r._.Q___.:t._~..D.t..Q. from perft q" (84 C.J.S. No. 215, pp. 413- 414). Tht.ts it is impot~tant to note that the exchange of notes in this case was entered into in pursuance of a loan agt~eement with Japan. Under the Constitution, in fot~ ce at that time, the President may contt~act and g�.tat~antee foreign and domestic loans on behalf of the Republic of the Philippines subject to such limitations as may be provided by law <Art. II, Sec. 12, 1973 Constitution, as amended). Therefore having validly ent et~ed into loan agreement tht~ol.tgh the exchange of notes, the terms therein necessat~i ly exec�..tt ion � -.. \ rr , Ttof governs the

, DECISION / CTA CASE NOS. 4163 & 4293 / - 11 / the loan agreement. The contt"act, involved in this case which was entered into pltrsuant to the loan // merely embodied the exemption provision in s aid ex c hanqe of notes. / The BIR Ruling dated Apt"il 14, 1'388 further buttt"ess petitionet"'s claim for ref�.tnd. The law presltmes that official dltty has been performed and th e t"efot"e. befot"e isslting said ruling, the r espondent is considered to have gone over the laws applicable and found that petitioner is indeed entitled to tax exemptions. If t"espondent thinks petit i onet" is not in fact entitled to the exempt ions, he could have had the t"ltl ing revoked. l he respodent neither assailed the validity of the not" sought its 'r"evocat ion in petitions. Instead, he met"ely stated that he is not bound thet"eby because it will allegedly c ontravene the principle that a tax exemption must have a basis in statLtte. As already discl\ssed, statLttes are not the exclusive repositot"Y of tax exempt ions. Contt"acts and treaties have likewise been constant so Ln"ces of tax exemptions. A mere allegation in the pleading that the respondent can not be bound by said t"uling for being contra'r"Y to law would be taking an incosistent position to the

DECISION CTA CASE NOS. 4163 & 4293 - 12 prejudice of the petitioner. Thus, not having been validly ~~ evoked, the ruling remains in force and effect. A$ to petitione~~'s prayer for interest, the same is denied following the well settled doctrine that Govern ment can not be made to pay interest on an amount deemed to be refundable in the absence of a statutot~ y p~~ovision expt~ essly authorizinr: ~ uch payment of and in the absence of arbit~~ at~ iness in the co ll.ect ion of the tax. The prayer for costs of suit is likewise denied for the same can not be imposed on the Government. WHEREFORE, petition is granted. Respondent Co��issioner of Internal Revenue is ordered to refund to petitioner the total au� of P1,883,963.48 representing erroneously collected contractor's and withholding taMes. .. No pronounce�ent as to cost. SO ORDERED. Quezon City, Metro Manila, July 24, 1'3'31. ' - - c. ROAQUIN Judge 25~

DECISION - CTA CASE NOS. 4163 & 4293 - 13 - WE CONCUR: ~~ Pt"'e s id i nq JL\dg e -e~~'Q- Q~ ERNESTO D. ACOSTA ~hsociate Jt..1dge ' CE RT I F I CAT I 0 N I hereby certify that this decision was reached after dl\e consl\ltation among the members of the Col\rt of Tax Appeals in accordance with Section 13, Article VIII of the Constitlltion. ~ P1r i.id ihU AJUPI~:�I�~lI i elf tak . a .:tl CoUr-'t I� I