CTA Case No. 3011 (Decision)

uUU�1lJJUC Ol' THE PU!t.TPPI~ES ../COURT OF TAX APPEALS cw~10N c; rv WESTERN MINOLCO CORPORATION,/ Petitioner, - versus - C . T . A. CASE NO. 3011 EFREN I. PLANA COMMISSIONER OF INTERNAL REVENUE , Respondent. X- - - - - - - - - - - - - X DE C I S I 0 N Disputed by petitioner Western Minolco Corporation in this appeal is the Government's right to the sum of Pl,317 , 801.03 represent- ing payment of the 35% transaction tax which it paid from June 27, 19 77 to October 21 , 1977, pursuant to Presidential Decree No. 1154 , formerly embodied in Section 210(b) of the National Internal Reven ue Code, but now prescribed under Section 24(cc) of the same Code, pursuant to Presidential Decree No . 1739. Petitioner, a domestic corporation with principal offic~ at 231 Sa lc ed o St., ... 27S

DECISION - CTA CASE NO. 3011 - 2- Legaspi Village 1 Makati, Metro ~lani la, is engaged in mining industry, particularly copper concentrates for export mined from its mineral lands in Atok and Kibungan, Benguet . Upon application for tax exemption filed with the Bureau of Mines, Certificate of Qualifi- cation for Tax Exemption No.� 34 was issued in its favor in October, 1972, by the then Secre- tary of Ag riculture and Natural Resources. It appears that petitioner applied to the Securities and Exchange Commission for authority to borrow money and issue commer- cial papers (promi sory notes } , and which ap- plication was granted under Certific ate of Renewal No . R- 1056 dated December 24 , 1976. Pursuant to this authority, petitioner bor- rowed funds from several financing institu- tions by issuing promisory notes during the period from June, 1977 to October, 1977 and paid the 35% transaction tax due thereon in the amount of P1,317,801.03 imposed under the then Section 210(b) of the National Internal Revenue Code of 1977. Believing that it is not liable to pay the 35% transaction tax pursuant to its ~orli-

DECISION - CTA CASE NO . 3011 - 3- ficate of Qualification for Tax Exemption No . 34 issued by the then Secretary of Agriculture and Natural Resources by virtue of Section 79-A of Commonwealth Act No . 137, otherwise known as "Th e t1ining Act ", and Presidential Decree No . 463, otherwise known as 11 The Mine -- ral ,Resources Developmen�t Decree of 1974 11 1 as implemented by Consolidated Mines Administrative Order of the Secretary (now !v1inister) of Natu- ral Resources dated May 17, 1974, part i cularly Section 83 thereof, petitioner in his letter dated February 16, 1978 requested the refund of the said tax amounting to ?1 , 317,801 . 03. Respondent, however, denied petitioner's re- ques t in his letter dated February 19, 1979. Hence the pre sent recours�e . In his denial dated February 19 , 1 979 of petitioner 1 s request for refund, respon- dent contends : (1) That the 35% transaction tax is actually a tax on the interest earnings of the lender who is actunl- ly the taxpnyer on whose incoTne the tax is imposed; ., ' 28 0

DECISION -- CTA CASE NO. 3011 - 4- (2) That since the financing institu- tions which loaned money to peti- tioner are the lenders, petition- er merely acted as witholding agent; (3) That petitioner cannot claim exempt- tion under Section 52 (tax on mining claims) and Sectiori 53 (tax on i mpo rt- ations) both of Presidential Decree No . 463 because the 35% transaction tax is neither a tax on mining claims nor a tax on importations . Advert ing to the terms of the certificate of qualificat.ion for tax exemption of petition- er , as well as the provisions of the law unde r which it was granted, it is quite apparent, despite the seemingly conflicting arguments advanced by the parties as to the extent and scope of petitioner ;s tax exemption, that there is no real dispute between them that p etitioner is liable for income tax and exempt only fro m taxes i mposed upon and payable by it in the conduct of its mining business and in the im- portation of machinery 8 equipment, spare parts 1 supplies and materials absolutely necessary in 28 1

DECISION - CTA CASE NO. 3011 - 5- land indicated therein. Certificate of Quali- fication for Tax Exemption No. 34 employs the words"x x x x from payment of all taxes, ex- cept income tax, payable by him in the con- duct of his business and in the importation of machinery, spare parts and/or equipment listed in the stamped " ANNEX� I" which were considered to be indispensable in the opera- tions and will be used by said operator/les- see exclusively in the mineral land mentioned above." Section 79-A of Republic Act No . 3823 , amending Corrunonwe al th Act No. 137, otherwise kno\-Jn as "The lvJining Act , " specifies "x x x complete tax exemptions, except income tax, from the time of its actual bona fide orders for equipment for commercial production." And Sec~ion 53 of Presidential Decree No. 463 3 otherwise known as " The Mineral Re sources Development Decree of 1974", provides: "Ma- chineries, equipment, tools for p roduction , plants to convert mineral ores into saleable form, spare parts, supplies, materials, ac- cessories, explosives , chemicals Gnd transport- ation and communicatio.n facilities jmported by and for use of new mines and old mines

DECISION - CTA CASE NO . 3011 - 6- whi ch resume operation , x x x x are exempt from t he p ayment o f customs duties and all taxes exce pt income tax x x x ". Accordingly , if the transaction tax of Pl, 3l 7 , 80l.03 paid by petitioner under the t hen Section 210(b) of the National Internal Revenue Code was not act ually imposed upon and payable by it in the conduct of its mining busi - ness and in t.he importation of machinery , spare parts and/or equlpment listed in the stamped "ANNEX I" of its certificate of qualification for ta x exemption 'dhich Here indispensable in the operations and used exclusively by peti- tioner in its mineral land , then said tax of Pl, 31 7,801.03 is not c overed within the pur- view of its certificate of qualification for tax exemption and petitioner is not entitled to the refund thereof . The same result fol- lows jf the said 35% transaction tax is an income tax payable by petitioner. Is the 35% transaction tax of ~1 1 317,801.03 paid by petitioner under the then Section 210 (b) of the N<Jtional Internal RevePue Code dC income tax payable by .it? If not, .is it a i.<1?' 2S J

DECISION CTA CASE NO . 3011 - 7- actually imposed upon and demanded from peti tion- er who it is intended should pay it in the con- duct of its mining business and in �the import- ation of machinery, spare parts and/or equip- ment listed therein and essential in the opera- tions of its mineral land, in accordance with its certificate of qualification for tax exempt- ion? Section 210(b) of the National Internal Revenue Code read at the time as follows: "Sec. 210 . Percentaqe tax on cer- tain transactions . - II (d) X X X X " (b ) Comme rcial paper transactions.- There shall be levied , assessed , col- lected and paid on every commercial pa- per issued in t~e primary market as pr in- cipal instrument , a transaction tax equi- valent to thirty-five per cent (35 %) based on the gross amount o f interest thereto as defined hereunder, which shall be paid by the borrower/issuer ; Provided, however 1 That in the case of a long-term comrne rcial paper whose maturity exceeds one year, the borrower shall pay the tax based on the c.mount of interest corres- ponding to one yea r, and thereafter shall pay the tax upon accrual or actual pay- ment (whichever is earlier ) of the untaxed portion of the interest which corresponds to a period not exceeding one year . " The transaction �tax imposed in this section shall be a final tax to be paid by the borrowe r and shall be allowed as ~l deductible item for purposes of conput, :, ; the borrower ' s taxable income. "For purposes of this tax - (l) 'Commercial p aper 1 shall be de- 2 8 :l

DECISION - CTA CASE NO . 3011 - 8- fined as an instrlli~ent evidencing indebt- edness of any person or entity , inclu- ding banks and non-banks performing quasi-banking functions, which is issued, endorsed , sold, transferred or in any manner conveyed to another person or entity , either with or without recourse and irrespective of maturity. Principal- ly , co~~ercial papers are promisory notes and/or similar instruments issued in the primary market and shall not in- clude repurchase agreements, certificates of participations, and &uch other debt instruments issued in the secondary mar- ke�t. II ( 2) The term 'interest� shall mean the difference between what the principal borrower received a nd the amount it paid upon maturity of the commercial paper which shall, in no case, be lower than the interest rate pre- vailing at the ti me of the issuance or renewal of the con1rnercial paper. In- te:r:est shall be deemed synonymous wj_th discount and shall include all fees, commissions, premiums and other pay- ments which form integral parts of the charges imposed as a consequence of the use of money. "In all cases, where no interest rate is stated or if the rate stated is lower than the prevailing interest rate at the time of the issuance or renewal of com- mercial paper 1 the Commissioner of In- ternal Revenue, upon consultation with the Monetary Board of the Central Bank of the Philippines, shall adjust the in- terest r ate in accordance herewith, and assess the tax on the basis thereof. "The tax he rein imposed shall be remitted by the borrower to the Com- missioner of Internal Revenue or his collection agent in the municipality where such borrower has its principal place of busines~ within five (5) working days from the issuance of the 2 S5

DECISION CTA CASE NO . 3011 - 9- commercial paper. In the case of long ter m commercial paper, the tax upon the untaxed portion of the interest which corresponds to a period not exceeding one year shall be paid upon accrual of payment , whi chever is earlier . " A similar issue was settled by this Court in the case of Marinduque Mining and Indus- trial Corporation vs. Efren I. Plana, Com- mi ss ioner of Intern a l Revenue, CTA Case No . 30 1 9 , March 27 , 1981, where we ruled that the 35% transaction tax imposed under Section 210(b) of the National Internal Revenue Code, supra , is a tax on interest earnings of the lenders or .T-'lacers who are actuaJ:..1Y_the t ax- payer s on whose income is imposed. In that case , the Marinduque Mining and Industria l CorporatJon 1 a d omestic corporation , is engaged in mining operations which has such principal products as nid;:e l , copper , gold and silver concentrates and cement . In an Operating Contract with the Philippine Govern- ment pursuant to the provisions of Republic Act No . 1828, as amended by Republic Act Nos. 2077 and 416 7, othenvi se known as the "Nickel Law", it has undertake n the exploration , develop-- ment, exploitation and operation of Parcel II 2S G

DECISION- CTA CASE NO. 3011 -10 - of the Surigao Mineral Reservation in the pro vince o f Surigao del Norte , together with the right to extract, process, utilize and dis- pose of the minerals , mineral and metal pro- ducts, by-products, residues and other products that may be extracted or produced or may re- sult from such operations; furnishing at its own cost and expense all materials, labor, equipment, plants and other installations and processes that may be required for carrying on the operations authorized or necessary or incident thereto , and all operations , pro- cesses, work or acts shall be carried out at its own cost and expense. Among the consi- derations, it is entitl ed to the additional privilege provided in Article VI(S) of the Operating Contract taken from the provi- sions of Section 6(1) of Republic Act No . 1828, which, insofar as pertinent , reads: "That the operator shall 1 from the effective date of the contract of operation up to and including the fifth year after commencement of actual pro- duction, be exempt f ro:n all tu.xe s , d u- ties, fees u.nd charges , both national and local, directly payable by it for any work or act.iv.ity, equipment 1 machi- nery, materials, instruments, supplies, acce sso rj_es, structures, buildi ngs, lands , improvements and/or other pro- 28 7

DECISION - CTA CASB NO . 3011 - 12 - pe r iod from July 15, 1977 to January 27 , 1978, imposed under Section 210(b) of the National Internal Revenue Code of 1977, supra . In denying the claim for refund , this Co urt , t hrough Judge Alex Z. Reyes , made ob- servations, among others , as follows : "Accordingly, we need not and do not think it necessary to discuss further the nature of the transaction tax more than to say that the incipient scheme in the issuance of Letter of Instructions No . 340 on November 24 , 1975 (O.G . Dec . 15 , 1975), i.e . , to achieve operational sim- plicity and effective administration in capturing the interest-income "windfall" from money market operations as a new source of revenue, has lost none of its animating principle in parturition of amehdatory Presidential Decree No. 1154, now Section 210(b) of the Tax Code . The tax thus imposed is actually a tax on interest earnings of the lenders or pla- cers who are actually the taxpayers i n whose income is imposed . Thus, "the bo r rowe r withholds the tax of 35% from the interest he would have to pay the lender so that he (borrower) can pay the 35% of the interest to the Government . " (President Marcos, Times Journal, June 17 , 1977 cited in Respondent ' s Memorandum, p. 6) . Petitioner's contention that LOI No . 340 was not carried into law and there- fore not a law is a profligacy of infer- ence and Non SegQ_i tor. We are unlikely impressed. It falls flatly in conflict with law . Instructions of the President are part of the law of the land (Art . XVII, Sec. 3 (2), Philippine ConsU.tution) and their non-observance shall not be excused by disuse (Art . 7, Civil Code of the Philippines).. Suffice it to state that the broad concensus of fiscal and monetary au-thorities is that "even if nominally, the borrower is made to pay the tax , actually, the tax is on the j

DECISION - CTA CASE NO. 3011 - 13 - interest earning of the immediate and all prior lenders/placers of the money". These are no mere splendiferous fus- tians but respectable opinions which make us hesitate to correct. We therefore uphold the correct- ness of the consttuction given the sta- tutory grant as well as the soundness of the ruling with respect to the nature and purpose of the transaction tax imposed tmder Section 210(b), supra, by respondent Commissiorter of Internal Revenue". We find no cogent and valid reason to deviate, much less depart, from the conclusion reached in Marinduque Mining & Industrial Corporation , as expressed in the above-quoted opinion of the Court there 1 and the same should resolve the identical probl em now brought before us in this proceeding. As clear- ly and unequivocally stated therein, the 35% transaction tax formerly embodied in Section 210(b) of the National Internal Revenue Code is an income tax on interest earnings of the lenders or placers who are actually the ta~- payers. It is axiomatic therefore that the said tax cannot be a tax imposed upon and payable by petitioner (borrower) . Consequently, peti - tioner is not �the taxpayer entitled to the refund thereof in case the t ax is erroneously 290

DECISION - CTA CASE NO . 3011 - 11 - perties directly connected with or needed and to be used exclusively in the operation , other than those provided in this Ac t and except those fees and charges that are imposed for work or ser- vices actually rendered to the operator: XXX XXX XXX . II Likewise , Section 53 of Presidential Decree No . 463 , entitled "The Mineral Resources Develop- ment Decree of 1974" was invdked, to wit: "Tax Exemptions . - Machineries, equipment, tools for produc�tion, plants to convert mineral ores into saleable form, spare parts , supplies, materials, accessories, explosives , chemicals and transportation and communication faci}.i- ties imported by and for the use of new mines and old mines 1:1hich resume opera- tion, when certified as such by the Secretary upon recommendation of the Director, are exempt from the payment of customs duties and all taxes except in- come tax for a period starting from the exploration and ending five years from the first date of actual corr~ercial production of saleable mineral products: Provided, That such articles are not locally available in reasonable quan- tity , quality and price and are neces- sary or incidental in the proper opera- tion of the mines . " On the basis of the foregoing provisions, the taxpayer therein sought to enforce its claim for the refund of an amount represent- ing payments of the 35% transaction tax based on the gross amount of interest on borrow- ing from financial institutions during the ~ 2S S

DECISION - CTA CAS~ NO. 3011 - 14 - or illegally collected. And if petitioner is not the taxpayer who actually made payment of t he 35% transaction tax in question , it logi- cally follows that said tax is not a tax pay- able by petitioner "in the conduct of its busi- ness and in the importation of machinery , spare parts and/or equipment listed in the stamped "ANNEX I" which were considered to be indis- pensable in the operations and will be used by said operator/lessee (petitione r) exclu- sively in its mineral land", in accordance with the terms and conditions of its certifi- cate of�qualification for tax exemption . Petitioner Western Minolco Corporation having failed to justify its exemption from the 35% transaction tax by words too clear to be misread (Acting Commissioner of Customs vs . Mani l a Electric Company and Court of Tax Appeals , L-23632, June 30 , 1977, 77 SCRA 469), the decision of respondent Commissioner of Internal Revenue dated February 19, 1979 denying petitioner's claim for refund of the amount of ~1 , 317 , 801 . 03 representlng the 35 % transaction tax must have to be affirmed � .29 1

DECISION- eTA CASE NO. 3011 - 15 - It is hardly necessary to add that the law "does not look with favor on tax exemptions and that he who would seek to be thus privi- leged must justify it by words too plain to be mistaken and too categorical to be misinter- preted." (Reagan vs. Commissioner of Inter- nal Revenue, L-26379, Decembe�r 27, 1969, 30 SCRA 968; Commissioner of Internal Revenue vs. P. J. Kiener Company, LTD. , International Cons- truction Corporation, et.al . , L-24754, July 18, 1975, 65 SCRA 142.) WHEREFORE, finding no merit in the peti- tion for review, the same is hereby dis- missed at petitioner�s costs. SO ORDERED. Quezon City, May 21, 1982. ~PV Al'-1ANTE ;ILLER Presiding Judge WE CONCUR: C. ROJ\QUIN ssociate Judge ~~