CTA Case No. 3112 (Decision)

RI . UBL I C OF T AE PR IL Jr Pf MRB COURT OF TAX AI'PF. f.J. S QU EZO N C IT Y MITSUB19Hl METAL CORP s C. T. A. CASE NO. 3112 AND ATLAS CONSO~IDATED MINING ANO DEVELOPMENT CORPORATIONJ Peti tione r, -- v~1rs u s ��� COMM ISSI ONER OF INTERNAL REVENUE ! Res pond en\:. '�! - -- -� DE C 0N T his cas&? in v ol v e<:i\ I' t .iti n n ~r s c l ,'=' i m �f o r� ta:{ c red it o n the wi thho l di n g t a x on the i nterest payme n t made by M.i t sub .i s h i Meta l Cor poration a nd At l as Comso 1 i da ted M.in i n g And De ve l o pmen t Corpo ra t ion t o t h e r e s pon dent Commissione r of tnte r n al Revenu e cov e r�.in q t he mon t h s a nd yea n ; from .Ju ly 1978 up t o J ul y 198 u in the to ta l amou n t o f P 512, 4 43.1. 4 C'S e e par :L c::� t' l:��' , a n,j 7 o f Pe t i t i o n fo r ... 1 Consider i ng CTA re c .; E.'c:h A , p . 16 .� CTA r ec.) . that no d ec i s ion was r e ndered by res po n dent on petitioner ' s c l aim for tax credit, t:he l atter interpos ed its a ppeal to this c o u r t on ''.� Ju ly 3, 198 0. � ... .

.- 4 �� DECISION CTA CASE NO. 3112 - 2- The recor-p of this c a s e shows that after the issues were joined with the fili ng o f respondent's a nswer to th~ pet i t.ion for� n:! 't.i ew, petitioner presented documentary e vidence wh ic h have been mark and admit ted by the cou r t. o n t h e hearing of this c ase on Augus t 12, 1 98 1 . f See ff inutes of the s ession of the Cb~rt hel d on Feb ru ary 10, 1981, p � .1 .5~ CTA rec.). Likewise~ on the hearing o f this case on (.'ug ust 12 ~ 1987 petition e r� submit ted this case on t he basis of its evidence and reco r ds as we 11 as t he records of the case in CTA Case No. 2801~ a n d the said case was considered by this court ~ ubmitted for decision. (See Hinutes of the session o f the court held on ilugust 12 _. 1'.~87. p.3S.. CTA r e c .). However, scrut .i ny o f th e t-eco nJ sh o ws that r� esponden t did not pr�ns e r1t e v id�>1 <Ct? in support of his stand in the c:ase ~ bu t in st r'"!\tl mer ely relied o n the outcome of the a p pea led ca~ m to the Supreme Court entitled Co��issioner of lnt pr nal Revenue vs . ffi tsubi shi Hetal Corporation a n d ~t las Consolidated Hi ning and Develop�ent Corporati on and the Court of Tax Appeals, G.R. Nos. L -.5 490"' and L-80041, i nvolving the same parti e s and simi lar set of fact6 a nd issues. CSee Re s olution f,.,. this cou rt datf!d .., ..., 1989, p.44, CTA r�e c .) .i.4.t

DECISION CTA CASE NO. 3 112 - �3 - The �fo 11 owinCJ .=~ J 1 eqa t i.o�1�- o-f fRet of pet itioner 's in their � petit.io r' ~ cw rev .i ew may t herefore be c onsidered as imp 1 i ed 1y admit ted by respond ent are as follows: "2. That in 1970~ AtJ~s~ thro 1gh the efforts of Mitsubishi~ sec ured lo a ns from the Export-Import Bank of Japan and a conscrtiu~ of prlvate bank s in Japan; 3. That th~~ E::: pm- t- Import Bank of Japan is a f inane .i.ng insti ht i on own .. d ~ con tro 11 ed and f i f1R n ce d by thl? Government o �f Japan, lfJ h ile the l oans made t o Atlas by t he private banks who a~.re members of the consor tium were financed by the government of Japan eit her directly or.. through the Expo rt-Import Bank of J a p an ; 4. That under the terms of c:on-� tract of loan, Atlas was t o pay interest on the loan s at th e rates determined~ said in~erest to be forwarded by Mitsubishi tq the Export-Import Bank and the members of the consortium; 5 . That Mitsubishi according ly received the determined interest from Atlas and remi tted the en t ire amoun t to the E:�: por-t -I mport: Bank of ~le~pe. n and to the other mem berD of thm ~onsortium~ without retaining any portion thereo f as its i.ncome; 6. That Atlas paid th~ BIR, out of its own funds, the wi thhol ding te~ x due on these int~rest pay ment , as follo ws: CB RTR I 34582650 dated 7I bl78 P10B,158.93 CB RT~ I 36329812 dated 10/ 3/78 98,120.22 CB Confirt No. A0152165 dated 11 3/7!f 87,414.85 RTR I A0531617 dat@d 1/ 3/79 CB Confirt No . A253340~ dated 4/ b/1'1 70,700.16 ~: ' ' RTR A191266~ dat ed 4/ 6/79 CB Confira No. A2B43079 dated 7/ 10/79 56,680.10 RTR t A2315 164 dated 7 /1~/79 CB Confira No. A012 4732 rli\ted I01 2r�q 42,803.54 RTR I 2b41 9~�3 dated 10/ 2/l?

DECISION - CTA CASE NO. 3 112 -4- CB Confi ra No. A3337BOH dated 1/ 3/ (' 29,632.1 3 A2B62070 dated 1/ 3. 8') 16,750.23 RTR I 1\4911567 dated 4/ 10/ 0 2,1 82. 98 A1057�70 rl ated 4/10/80 CB Con hrm No. M99?J 52 dat ed 6/18/80 A463 JCI24 dated 6/ 18/80 RTR J CB Confir11 No . F'51 2, H3.14 � RTR 7. That M'.tsubishi ~ ~ signed its right t o the c 1aim to At lac; and joins Atlas herein as the legal ta xpayer under the Tax Code; 8. That on July 1~ 1980, peti - tioner filed a claim 'fot- h u�: credit and requested that the sum of P512 P 443.14 be applied against e:{ is ting and future ta:~ liabilities of Atlas; 9. That res pondent has not yet acted on the claim. Re spon dent in his A nH>~er � t o th e petition for review raised ' the follow ing SPECIAL AND AFFIRMATIVE DEFENSES as follows: "5. It is incLimbe nt u pon petitioner to show that it i s exempt from the payment of withholding tax based on Section 29 (~)(8)(A) of the 1977 Tax Code which gran t s tax exemption to income received from fin anc i ng institut ions owned, controlled or enjoying refinancing from foreign government; 6. Taxes are presume d to have been collected in accorda nce with law ; 7. The alleged payment of P512,443,14 as wi th hol ding tax was co 11 ec:: ted in ac:r.:ordanc:e � d th 1 aw a nd theref ore cannot be gt- a n ted as ta:< credit I �

DECISION CTA CASE NO. 3112 - 5- 8 . In an C"\r: t� ion f a� t n fund or t.:n: cr� ed1t~ t he burden of pr-c nf �es t upon the taxpaye r to show thAt the t~ x es paid were erroneously or illegally co llected and failure to susta in c:;aid btu'�rle n i E:; f .:, ta l to the action for r ef und or t a x credit ; ? . lt .i S i tlC IJfTibi"H) !_ peti-- tioners to est. ;"h l ic;h�'!d t'�"\' h<'\ ve co mplie d \l�li th tl v: f'l' cwis i.r11 -:;. oi' SE>ctio 1s 292 and 2<75 of th~ In ten � a I F< even ue Code of 1977; 10 . As a c:laim for tax credit is eq u ivalent to exemption~ i t is a c a rdinal rule of taxation~ firmly em bedded and adhered to in our jurisprudence~ that ta:-: exemptions at-e not favored a nd an? never presumed~ t.h .:-' t the y are construed strictis s imi }uri s ~ qainst tha individ ual and . 1 ibera ll y in favor� of the ta>: au that- i ty; that ta :: e:-:empt ion cannot be made by inference or imnlicAt i on but must be beyond r�ea son able doll t. a nd in c:ase of doubt~� the same s h a ll be r-esolved against the exemption. A c 1 aim fat- e xemption to prosper must be pre mi sed on the clearest grant of organic or statutory law. (Govt . of' P.I. vs. Honte de Piedad, 35 Phil. 466; Hous� vs. Po sadas, 5 3 Phil. 338; Philippine Telephon e and Telegraph Co. v. Collector o'( Internal Revenue .� 58 Phil. 639; Hanila Jockey Club vs . Collector of Internal Revenue . 9S Phi 1. 670 .: Philippine Guaranty vs. Co��issioner of Internal Revenue , G.R. No~ L-22074. Sept. 6, 1965 1 15 SCRA 1; Abad vs. Court of Tax Appeals; G.R. No. L-20834 an d 20903, Oct. t�.:J, 1968, 1 8 SCRA 374 .: COJudss ioner of Internal Revenue vs. A.D. Gu~rrero, etc., G.R. No, L-20812, Sept. 22, 1967, 21 SCR A 180) Wherefore, it is respectful II y petition for prayed � that the instan t c osts agains t review� b e dismis sed~ wi th petitioner." The only issue posed on this appeal is whether or not interest income de~ived from the loans

DECISION CTA CASE NO . 3112 - 6- extende d to At las Consolidated Mtn ing & Deve lopment Corporation ar-e e::empt withholding ta:< pur-suant to Section 29(b) (7) (A. of the National Inte rna l Revenue Code. This issue in no long r cne of fi rs t im- pression. In the analogous case of Coaaission e r of Internal Revenue v .. Hitsubishi Hetal Corpo ration , Atlas Consolidated Hining and Developaent Corpo- ration and Court of Ta x Appeal s~ G.R. No. 5 4908 and G. R, No. 80041 dated ,1a rt uary 2 2~ 1990~ th e Su pr-eme Court said and we quot ~ = The loan and c, las c ontr-act between Mits ub ishi and Atl a 5 d oes not contain a ny direct or inf r t e nt.ial reference to E:-:imbank wh atso ev E' t . Th e a g r~ eement is str ic tly betwefm 1'! 1 ts 11hi ~::;hj as creditat- .in the con tr�ac t f1 f I o an -"'llt f ,')t: 1 AS as the se 11 er~ of the cnpp� t r.nn r-e:-n tr a tl~s. Fr�om the categor� i c al 1 -\llt.}I .IC\q f> u -, ed in the document~ on e p1 f? f , 1:r?. tion �Jas in consi -�� deration of the pther. The s pec i fic terms and the t-ec.iprocal rta t ure of their o b 1igations mak e it imp 1a usi bl e, if not vacuous, to give c:redit to the cavalier assertion that Mitsubi shi was a mere agent in said tra nsaction. Surely, E ld mb <H1k ha d no thing to do with the sale of the copper c oncentrates since all th at M.i. tsubishi s tated in its loan appplicati on with t he former was that the amoun t being procured would be u sed as a loan tQ and i r' consideration for- importing coppe r concentrates from Atlas � .':...::::..1 Such !!n in noc:: uoL\5 statement of purpose could f,ot h ave:.! been intended for, nor could ,t.t legal ly consti tute, a contract of agency, If that had been the purpose, as respo n dent cour t believes~

DECISION .:� CTA CASE NO . 3112 - 7- said ~orporations would ha ve specifically so stated, espec ia 11 y cons ide ring their experience and e~pertise i n financia l transaj: ti'ons not to speak of the amount involved and its purchas1ng value i n 1970. A thorough analysis nf the factual ~nd leg ~ ambience of th r.~r c ases impels us to g .ive 1.111eiqht t.o .11.-:- fol l oiAJing .;.u �gumen ts c1f peti �t� j ni H?t�: '1The nature of t.he above contract shcwq tha t the same is not just�. �:\ sd. rnp lfl t:ontt- act of loan. It i.s qo t a mere c:redi �l:or-debt.rw n=' l '" t 1 o n s hip. It is mc:>rP. 11f a r""ri procal obligat io n ! ')F' I1�Jr->Rn f'l ll f'IS and 1'1ITSUBI P Ht t�JI I~"' r~" 1-h�� 'I <4tte t.. shall provide the fun d s in the instal lation of a new c'.ancerJ- trator at the former ' s Toledo mines .i.n Cebu ~ wh.i 1 e ATl-AS in consideration of which � . shall sell to MITSUBIHSHI ~ for a tet- m of 15 years, the entire copper concentrate that will be pro- duct-?d l:>y t.tm i n s talled c oncen-�- tl'� ai: or. ''Suffi r.:t� .i.t to s;ay ~ the selling of l:h F' co p e1 c: oncen--- trate to Ml TSI.I BISHI t�oi th in the specified tP.nn 1'1 �; ttY consi --� de~ation of th e grant ing of the amount of $20 millio n ~o ATLAS. MITSUBISHI, in order to fulfill i,ts part of the con tr ct~ had t b o b tai n f u nds. Hen c e~ i t had to ,secure a loan or loan s from o ther sources. And � fr om what sources, it is imma ter ial a s f ar a s ATLAS is concerned. I n this c a se~ MITSUBISH I obtained the $20 million from the EX'lMBANt<: of Japan anc:! the con- s6ttium of Japa~ese banks financed through the ~XIMBANK Japtii\n.

DECISION .' � .. CTA CASE NO. 311 2 - 8- "Wtlen MlTSU8ISHI t here fore secured such loan, it was in i t s �own incl ~;~pf.:�nde n t. r: .3tJ-"\C .i ty as a private entit.y <'~nrl qn t c"\S a conduit o1' the con -.;r. �~ iurn of Japanese b .:\1 1h; nr t tw' r X HIBANI::: of Japan. ~�Jil.i l r.0 tht=.' l ,, ':l f1S were secwred by MITSUBI SHI pri- marily as a loan t o and in consideration for i mporting coppe~ concentrates f ro m ATLAS~ the fact remains tha t it was a loan bY EXIMBANK of Japan to MITSUBlS HI and not to ATL AS. " Tt1us~ the trans;ac tion bebleP n MITSimimH a n d EXIMBANK of J a pan was a dis t inct an d separate con iTr.:\C t fr�om that entered int o hv MITSUBISH I an d ATL.AS. Sur�t=.' l y, i n the l atte r� contract~ i t is n ot EXIMBANK that was int en ded to be bene-- f ited. I t is MI TEiUBISHI which stood to pn:~f .i. t. Besides, the Loar and Sales Contract cannot b a ' any clear� e r. The only signatories to the same were MITSUBISHI. <=j nd ATLAS. Nowhere in the contract can it be i n f erred that MITSUBISHI acted f Cl r a nd in behalf t)f EXI MBANK of Japan nor of any entity, private or pub li c:, for tha t matte r. "CrJrol] .;:u y to thi<;; , i t may well be st a t d tha t.� n this Jurisdi ction, well -sett led in tt"le rt.1le t hat when a contr�act of l oan is completed. t he money ceases to b� t he property o f t h e for mer owner ~nd becomes the so le p r o perty o f the ob} i g or ( To lentino and Hanio v~~ Gonzal~� ~y , so Phil. SSBJ .

.. . .. . DECISION CTA CASE NO. 3112 - 9- "In the case at tar , when MITBUBISHI obt ained th~ loan of $20 million from EXIMBANK of Japan~ said a mount ceased to be the p~op er ty of the bank and became the proper ty of MITSUBISHI. "The cone lus ion is indu- bi ta blei MITSUBISHI , an d NOT EXIMBANI<:, is the sole creditor of ATLAS, the former bei ng the owner o �f ttH:> $20 mi.l l ion upon comple t ion of its l oAn contract with EXIMBANK ~f Japan � "The int Pr-<;?s t income of th e loan paid by 1-\TI..AS to '! MITSUBHISHI is the refore entirely di ffe1 Pnt f rom t he in- terest i.nt:: ntne p.:>id by MITSUBI SH I to EXII'1P.N~ I< of Japan. Wh;d t�ns the .,tthjE-'c t of the 1 5/. w:i.i"l�tl,pld.i.nq t?:' is not the inter�es t income paid by MlTSUBISHI to EXIMBANK but the interest income earned by MITSUBISHI from the loan to ATLAS. xs-: :<" ~-~.1 To repeat, t he con t ract between E:-:imban~: , and Ml+ SLtbishi. is entirely different. I t J.s complete in itself, d oes npt arpeM to be suppletory or collaterAl to a !HJt ller con trac t and i.s , therefore~ not trJ hP. di storted by other co n s ider-at i on s �'). i.htn_gg . The app 1 ic a tion for the loan w~s a ppro ved on May 20, 1970, or more than a month after the co ntrac~ between Mitsubhis h i and Atlas was entered into on Apri l 17 , 1970. It is true that under the contract of loan with E~imbank l Mitsu b i shi agreed to used the aiJiount as the loan to and in consideration for- importing copper concentrates from Atlas, but all that .. ' this proves is the justification for the loan � a~ repr-es~nted by Mitsubishi, a standard banking practice for evaluating the prospects of ~ue payme nt. There is nothing wrong wj.~h i t suc h stipulation 90

.... DECISION CTA CASE NO. 3112 - 10 - as the parties in ~ c:ont.r-;.,, are free to agree on suc h 1 awful ter-ms ,-\ ld condi tion s as they see fi t. L.in1i tl.nq the disburse- ment of t he amount borrowPd t o a certain person or t,o a ce,~tain P' tr�p ose is not unusua l , espec i.?~ 1 1 v in t hl" cas e of Eximbank which, nsirle from pr~ tecti ng its �finan cial e~:pos�.we>. must ""'""" to i t th at th e Si:\me art=! in 1 inr> ~<d U q1r prov i s ions and objectives of its chat t<?r Respondents postulate that Mi tsubi~hi had to be a condui t because Exi mbank 's charter prevents it from making loans e xcept to Japanese indi- viduals � and c orpora tion. We are not impressed. Not onl y is t here a failure to establi s h su ch 5u bmi ssion by a deqw:~.te evidence bu t it posits the unfair and une xplai n ed imput E\ tion that , fo r rea son subject on 1 y of s1. 1r mise, said f inane i ng inr,;titution wou ld d! Iibera ely circwnb e nt .its own charter tn accommodate an a 1 ien borrower throuqh a manipulated subter- fuge, bLI w th i t el <::> a pr lnc i pa 1 an d th e rea l obligee. The allegati on tha the interest paid by Atlas was remitted in full by Mi tsubishi to Eximbank, . ass uming the truth thereof~ is too te riLt ous and con- jectural to support the proposition that M~ tsubish.i is a mere conduit. Furthermore, the r�emi t tan ce o f the in te- rest payments may also be logically viewed � as an .3r r�e-mqe ment in paying Mitsubishi's obligation to Eximbank. Whatever C~.rrangement was agre ed upon by Eximban k and Mitsu bish i a~ to the manner or procedur~ for the pAyme nt of the latter's obligation is the ir own concern. It should also ~e noted t hat E:.:imbank' loan to Mitsubishi impos~ inte rest at the ~ate of 75% per annum, while Mitsubishi's contract wit h. Atias merely states that the interest on the amount of the loan ;;hall be the a ctua l cost beginning from and including other dates of releases against loan ."~/ 9l

DE C I S I O N CTA CASE NO . 3 112 - 1.1 - It is too s e tt led a ru le in this jurisdiction~ as to disp e n s e with the need for citations, that l a ws granting exemption from tax are construed stricti s simi Juris agaisn t t t1e ta >:payer and liberally in favor o f the taxing power. Ta:1ation is t he rule and e:{emption is the e:�:ception . The burden of proof rest upon the pa rty c laiming exemption tp prove that i t is i n f ac t covered by the exemption s o c laimed, which onus pet~tioners ha v e f ai led to discha rge. Significally, private res- po ndent are not eve n among the e n ti t ies ~...,hich~ . under Section 2 9(b ) ( 7 )(A) of the ta:�: code, are en t i t l e d to .. >: e mption and whi h s hould i nd ~ �;p P. nsa b 1 y be the party in interest in th j s cas e . Definitely ~ the t a :<ab' lity of a party cannot be h 1.::md 1 y q 1o s sed over on the basi$ of a s upp osed "br�o a d ~ pr�agm a tic: analysi!S" alon e wi t hou t subs tantial supportive evi dPn r: r , l e st n r:>e d e d fund s . Nor can we cl asP ttds di <:;,cuss i.DI1 witho ut t <::\ k i. n g c ogn i z an e a 1)f p t i l:icme r� � s ~"a r n i ng~ of pe r v a s i v p rP le va n ce at t hi s ti m e ~ th a t while i n t tnat i o n a l co mi ty i s invoked in thi s case on the nebulous repres~~tation th a t the fu nd s invo l v e d i n the loans are those of a foreig n government~ scrupul o us car e must be taken to avoid o pe n ing the floo dgat es t o the violatio~ of our tax laws. Otherwise, the mere expedient of having a Philippine corporat:ion ente r into a con tract f o r 1cans or other domes tic s e curities wi th private foreign e n t ities, which in turn wi 11 negotiate in dependen t ! y wi t h their governments, could be avC\.i ed of to take advant.ge of ' the t a x exempt ion law under discussion. WHEREFORE, petitioner � s c l aim for Tax Credit on the interest income paid b y it in t he total

DECISION - CTA CASE NO . 3 112 - 12 - a mount of P512, 443.14 i s hereby DENIED. With cost against pet ~tioner. SO ORDERED. Quezon City, Metro Manila~ May 1 7~ 1 91 ---� ROAQUIN Judge WE CONCUR1 ~~~;Rag EJuYdEgS 4,..�� x;; ~ Q...k ERNESTO D. ACOSTA Associat e Judqa CERTI F ICATION I hereby c er tify that t his decis ion was reached after due con s ultation a mo ng the members of the Court of Tax Appeals i n accordance with Section 1 3 , Article VIII of the Con stitution. Court of I' �