CTA Case No. 2801 (Decision)

REI'U'!.H. !C O F 1 t ;,: Pt!!!.TPP!-.;!>S CO .'RT OF TAX APPEALS OU~ZON CITY tvliTSUBISHI ME 'l'AIJ COf-\PORATION AND 1\TLJ:\.S CONSOLIDATE D ~�1HHNG & DEVELOPMEN T COR -Qr~.A~-�ION , Petitioners , - VGISUS - C . T.A. CASE NO. 2601 COMMISS IONEH OF TNTERNl'~ L REVENUEr . Respondent . X- - - - - - - - - - - - - - X DEC I S I 0 N In this suit for r ecovery of alleged erroneo1sly paid wi tbholding �tax at source, the q u.;;; s tio n prnsented is "'l'lhet her interest in come derived fx:orn lo.:::ms c:o xt.erded to p ti ti one r Atla s Consolida te d Min i ng & Development Corporation by the Mitsub i shi Metal Corporation obta i ned by th e la t e r from the Expo r t -Import Ban k of Japan, a fina ncing institution owned by the Japanese government, and the consortium of Ja1 anese banks enjoying refinan- cing f rom the J apanese government is exempt from with- holding t.o.x p ursuant to Section 2.9 (b) (7) o f t he National I1 t e rna l Revenue Code. When this case was called for he a ring on April 6 , 1977 , after the i s~ues were joined wi th the fi l ing of t he answer t o the petition f or review, counsel for respondent ma nifested in ope n court that the claim o f petitioners Mitsubishi Metal Co rpora tion and Atlas Consolidate d Mi ning & Development Cor poration for tax ()0 oJ ~)

". DECISION - CTl\ Cl'~ SE NO 28 0 1 -� 2 - credit of Pl,J71,595 . 0l representing alleg ed e rr one~us pwyment o .~.. 15% ~..~ j_ thhold in g tax on inter:e:st. on loans payable to the Export-Import Ba n.k of Japan in 1974 Q~li~-".'..r.�t�. 1975 , subject matte r of th is appeal , being processed by the Appellate Division of the Bureau of In tern a l Revenue. (Minutes of the session of the Court held on April 6, 1977, p. 16 , CTA Re c or d s.) The Court therefore orde r ed that the case be reset fo: hearing in the next c alenda r o f the Court. The r ecords o f the Bureau of Internal Revenue bearing o n t he c as e (BIR Re cord s ) disclose that on September 9 , 1976 the Agricultu re & Natura l Resources Division o f said Bur e a u had alre a dy investig a t e d and verif ied the claim of petitioner s, and rec ommended to respondent, through the Appellate Division , that i t be approved . (E xhs . "0" & "0-� 1" 1 pp. 55-57 r BIR Re cords.) An d on November 16, 1976, the Appellate Division of t he Bu r eau o f In ternal Revenue, with the concur rence of the Revenue Service Chief (Leg al } , recommended to the Commissioner of Internal Reve nue that the t ota l amo un t of Pl ,9 71 , 595 . 0l as erroneously paid withholding tax at source in 1973 and 1974, be cr edi t ed i n favor of Atlas Consolidated Mining & Development Corpor ation pursuant to the then Sec tion 309 of t he National Internal Revenue Code . (Exh. "0- 2", pp. 14 3- 146 , BIR Record s..) o0 n._,

DECISION - CTA CASE NO. 2801 ~- 3 �- Before respondent Commissioner of Inte rnal Revenue c ould act on the claim of pe t i tioners , ho'�lever; the case was s cheduled for hearing by this Cou rt on September 30 , 1977, and during the tr ial t hereof , petitioners presented their ev idence, oral and documentary. After peti tioners h""v e marke t and offered their exhibits 1 which were all admitt ed by the C0urt. , c ounsel for respondent su.bmi tted his cas e on the basis of the Bureau of Internal Revenue r ecords (BIR Record s) and the pleadings, without offering proof as to the truth of his own allegatio ns found in his answer. (Minutes of the session of the Cour t held o n Septembe r 3d , 1977, p . 21 , CTA Records.) Under t he well-set t led rule that one who prays for judgment on the pleadings without offering proof as to the truth of his own allegations, must be unde rstood to ha Je admitted the truth of all the material and relevant all egations of the opposing party , and to r est his motion for judgment on these allegations taken together with such of his own as are admit ted (Bauermann vs. Casa s, 10 Phi l. 386 i Evangelista vs. DelaRosa, et al., 76 Phil. 115) ~ the fol lowing allegations of f act of peti- tioners i n their pe t ition for review may the refore be considered beyond dispute: 1. THAT Mitsubishi Meta l Corp., herein- after referred to as Mitsubishi , is a f oreign cor poration existing under and by virtue of the laws of Japan, and registered with the 1 CO

DECISION - CTA CASE NO 2801 - 4- Securities a nd Exchange Comm ssion to engage in business in the Ph lippines. Atlas Con sol i dated Minin'] & Deve �'.op- ment Corp., hereinafter referred t o a o t _. -'--1 - � ::':\ L11-. l.l. a;;, , l a~ c�.�..�4 O bnC .c.;,1i- ..~lC" c-0- .Y-"J'r:io.'O-.-:.-d lvr... n" C...._,n. �.l,...u. '-t:�lng under and by virtue of the laws of the Philippines and ~ngaged in the business of mining. It has its offices in A. S~riano Bu i lding . Mits�1bishi and Atlas may both b:O! served with a ll legal writs and processes through coun se l~ 2 . That before J anuary 1974, Atlas, through the agency of Mitsubishi, secured l o,ns from the Export-Import Bank of Japan and a con sor ti um of private banks i n Japan; 3. That the Expor t-Import Dan k of Japan is � a financing i n stitution owned, controlled an~ financed by the Gov er nment of Japan, while t he loans made to Atlas by the priva~e bank s who a r e members of the consortium were fina nced by the Government of Japan either direc tly or through the Export-Import Bank of Japan; 4. That under the terms of the contract of l oan , Atlas was to pay inte res t on the loans at the rates determined, said interest to be forwarded by Mitsubishi to t he Export- Import Bank and the mem' ers of the consortium: 5 . Th- t Mitsubishi accordingly rece ived the determined interest from Atlas and remit ted the entire amount to the Export-Import Bank of Japan and t.o the oth:r members of the consottium 1 without retaining any portion thereof as its income; 6. That Atlas paid the Bureau of Internal Revenue , out of its own funds, the withholding tax due on these interest payments , as follows: 1974 Paid April 25, per CBP O.R. No. l325096 P. 320,451.73 II July 25 f II II II II 1325364 200 , 000 . 00 10 l

uECISION - C'Li\ CZ\SE NO 2801 - 5- Paid Oct . 25 , per CBP O.H. No. 1488101 Jji 101,731.60 II II 11 ll 958779 291,091.82 " Jan . 25/ 75" II ll " 0~8973 280,49~.:.1� p 1,193,,66 . 87 1975 Paid April 25!per CBP O. R.No . 2223123 P 277 / 32.84 II J"uly 25 II II II II 2223394 244 , 362.53 1 II I! II II 4289814 256, 032 .14 Ii -:'77-:./,828-:14 Total for l97t1 a.'1d 1975 7. That Hitsubishi assigned its right to the claim to Atlas and joins Atlas herein as the legal ta:-.::po.yer under the Ta.x Ccxle ; 8. T:.'1at on I1arch 5, 1976, petitioners filed a c laim for tax credit and reqt.1ested that. the sum of Pl, 971 , 595 . 01 be applied against existing and future tax liabilities of Atlas; 9. Ti:1at r espondent b..as not yet acted en 'd1e clairn. At ~~y rate, the records of the Bureau of Internal Revenue , on the basis of whic h respondent, a sid'- fr om the pleadings, su bmitted this case for a4 e c1� s1� on, disclose that: {Exh . "0-2", pp . 143 -14 6 , BIR Records) 1 . Mitsubishi Metal Corporat" on i s a Japanese Co r po ration duly licensed to engage in business in the Phi l ippines with offic e address at 15 t h Floor , Citibank Center, Maka t i, Rizal . Atlas Consolidated Mining & Deve - lopment Corporation is engaged in the development of copper and other mineral deposits in Toledo ci~y, Cebu . 2. On April 17, 1970 a contract was entered into wi t h Mitsubishi, whereby, the latter would loan $20 , 000, 00 0 . 00 to Atlas, to install a new concentrator

.. DECISION - C'l'A CASE NO 2801 - 6- in the Biga property for the purpose of expanding the productive capacity of the Toledo Mines, and for the latter to sell to Mitsubishi the entire produ~tion of copper concentrate s for a term of 15 years . Of the s aid loan $9,000 , 00 0 . 00 will be used fur the purchase of the concentrator machinery from Japan. ( P~.x~L . "G " ,pp. 5 ~ '' -~ r:' 4 , BIR l\.eccn-ds) 3 . Thereafter, Mitsubishi made arrangements and applied for a loan with the Export-Import B~nk of Japan to accommodate Atlas . On Ma y 26, 1970, its loan application was appr oved Ly the Export-Import Bank fur the amount of �4 , 320,000 . 00 unde r such terms and conditions among other foLL ows: (Exh . 11 11 pp. 7-9, BIR Records.) ,} , "Hitsubish i Hetal Corporation shall use the amount as a loan to and in consideration for importing copper~ concentrate from ~ Cor!�g 1 � �at~? r-1 i_~!}_g__�:__De v e lo_p~e n ~.J?_~t a tJ. on il1__!. h~ Philip2J:[.;22i' (T he. Fourth additional fund fo r development of Toledo Mines) " Expe cted Date of Release ---.--rv1ay 29 , 19 71 , "Due Date - - - ------- -~--------. --S eptember 30 t 1981 ::Rate of Interest - - ---.-.-----.-7% per annum Terms of Payment --~~~ ~ -~~---Mitsubishi corporation has to pay back the total amount of loan by September 30 , 1901 i n accordance with the loan contract with Atlas Consolidated x x x'' 4 . For the years 1974 and 1975 the total inte rest payments made by Atlas on such loans amounted to ~13,143,966.79 and the corresponding 15% tax i n the sum of Pl , 971,595.01 was withheld pursuant to Section 24(b) (1) and Section 53(b) (2) of the Tax Code, as amended by t 03

�' DECISION - CTA CASE NO 2801 �- 7 - Presidential De cr ee No. 13 1 e ffect i ve January 1 , 1973 and r emi tted to the government as follows: 1974 Interest Paid 15~ H:i.thhold- Official Receiots of 15% J:ng Jax ;paid - ~_:hg1hctd~1X Pa:l.9_ lst qtr. :P2 , 136 ,344.87 P 320 ,451.73 C"'BP O. R. 1325096- 4/25/74 2nd qtr . ( 200 ,000 . 00 CBP O.R. 1325364- 7/25/74 2~011,544.00 3rd qtr . 1.01,731.60 CBP O.R. 1488101- 7/25/74 4t h qtr. 1 0 940 ,612.13 29l,091.82 CBP O.R. 958779-10/25/74 1 , 869,944 .80 280 ,491.72 CBP O.R. 958973�- 1/24/75 ---.~-�---~ �-� Total �}7,958 ,445.80 ' 1975 1st qtr. l'll,8.9 ,552 . 28 2nd qtr . 1,629 t083 . 56 n H 1,706,885 .:!.5 'l'otal E!5,l85 ,5 2Q.. 9~ .;.;.f.l__7.;....;7.'.7;'-", 828.14 Tot.:.tl for 1974 P.ESt.JiVJE - - 15%Tva..h.x-t- bl.a- llio.dl. ,-'- i.- nq~- Total for 1975 - --...~-..a -I-n' - "t e- -r..;.e...:;s.-t. .P.a.i.d- 'l'OTAL FOR 1974-1975 p 1, 193 , 766 . 87 :p 7,9 58,4 ~15.80 777 ;8 28 .14 5,185, 520 .99 5. Actual remittance to the goverrunent of the aforesaid payment was c ertified as c orrect by the Chief 1 Withholding Tax Division of the Bureau of Inter na l Revenue . (Exh. "F' 11 1 p p . 1 28- 129 , BlR Records .) 6. In fili ng thei r claim for tax credit t he c l aimants (pe titioners herein) _alleged thQt inasmuch as the cooperative loans were se cured from the Export-Import Bank of Japan, a fin ancing ins ti t ution owned by t he Japanese government, t 0-1

�' DECISION - C'r.~ CASE NO 2801 - 8- and the consortium of Japanese banks enjoying refinancing f r om the Japane se gove rnmen t, the interest income is exempt from t he withb.oJ.ding tax, pursuant to Sect ion 29 (b) (7) of the Tax Code, which p:r:ovides as fo llows: Sec. 29 - Gross income � x x x (b) Exclusions fro m gross inc ome � � The foll ow- ing �i terns shall not be included in the gross income and s hall be exempt from t axati on under this Title. (7 ) Miscellaneous Items: (A) In come re ceived r-: -'-~on.i.. th� �P~ 1. .-,. .";n'~,;J.";":'.-.'~..+..-.m. ';e:;.!�._"J.__"L". ~c_,;,.1.~'_!.1.,..:t.�._n ' ~:.-...--P: _�'l-�l'-�.;,.:.-;,::-;.:.~;2 ~P~1'. ' '"~ '""-:-1' . n-� loans, stock, bonds or other dGmestic secu- rities, or fr�~1n i11t:eres �t on t.l1ei1: deposiJcs in banks in the Philippines by (l) . fo;:__~ ( na 2) . ~ rt. O":'.;,~:.r.;n!..n_�_'�e_n..':.-:: f . ..rL: 1. "'"!'a.t1.C;';; '~~.!J.:<.t-:1.c:-~-o~".'".'.".' .:.:.:..~1:1..1.....!-:~ :(:~l'';:-..i.s. . ~~~L!~ d e c or:J.::!2lJ*r.- c r _LL9.:tl!.?:.~l r e :t: in a~c in g_ ("'from them , and ( 3) i!1 ternat ionul or regional I inanc"ing institution established by go;.;'er:n- tnen ts . 7. A cert]fication \�la r3 issued by Directo r Kenjo Kadowak i of the Overseas Investment Lo an D~partment of the Export-Iml?ort Bank of Japan to t he ef f ect that E >-~por t and Import Bank of Japan extended a loan of $20 million to Mitsubishi Metal Corporation to finance the expansion pro ject of Atlas Consolidated Mining & Development Corp- oration , pursuant to the loan and sales contract dated April 17 , 1970 between Mitsubishi and Atlas Consol idated Mining & Development Corporation. (p. 118, BIR Records. ) 8 . The interest paid by Atlas Consolidated Mining & Development Corporation through Mitsubishi on the said loans were remitted in full by Mitsubishi Metal Corporation to the Export-Import Bank of Japan and other members of the consortium of private banks . (Exhs. "N"t "N-3" , pp.135- t 05

DECISION - CTA CASE NO 280 1 ~ 9- 136, BIR Records .) On August 27, 1976, Mitsubishi Metal Corpo ratio n executed a waiver and disclaimer of its interest in the pending claim for tax credit in favor of Atlas Consoli- dated Mining & Deve lopment Corporation ina smuch as u nder the term s of the c ontract, Atlas Co nso l ida t ed wi ll shoulder the tax o n interest p ayable o n said loans. (Exh . " I,1" , p . 116 , BIR Records .) Under the fo r egoing facts , is the interest income der iv ed f r om t h e loans ex tended to Atlas Consolidated Mining & Devel~pment Corporation exempt f rom withhold i ng - tax pursuant to Section 29(b ) (.7) (.A ) .of the National I nternal Revenue Code, which reads as follows : " SEC . 29. Gross Income . x x ~~ "( b) Exclu sions f r om gross in c ome . - The follo~ ing items s hall n ot b e inc l ud e d in gross income and shall be exempt from taxation under this Title: " ( 7) ~liscellaneous I t e rn s. - (A) In come recei ved from their in ve st- !.nents in 't11e'"' Ph_Ql].2pine_~ in _l~~ , stocks, bonds, or other domestic securities 1 or from interest on their depos its in banks in t he Philippines by (1) fo re ign governments, ( 2) financin�L .inst:ltu tions ovmed ~ cont1: o lle_9_ , or . enjoyJ:ng r efinanEJ.D5l from them, and (3) _in- te r national or reg i onal financ:ng institutions established by governments n. (empha.sis suppl i ed. ) The law is clear and spec if i c. It merely call s for app lic ation a s thus word e d. Adverting to the term s of the applicable provision, it is apparen t that income received from i nvestments in the Philippines in loans 10G

DECISION - C'I'A Cl\SE 'NO 2801 - 10 - (l) .b -v a f in an cing ins ti tution o wned or controlled by a foreign g o vernment o r (2) .bY a financing institut i on enj oying refinancing from a foreign government is not included in gross income and is exempt from income tax- ation . Consequently, t he interest income is exempt from the wi thho ld ing t ax . Respondent doe s not quarre l with petitioners that the Export- Import Bank o f Japan is a financing ins titu ti on owne d a nd c ont~o ll ed by the Japanese Government; and that the consortium of private banks are financing institu tions and the loans ~xtended by the m to Atlas Con solidated Min ing & Development Co rporation originated fro m the Export-Import Ban k of Japan. In o ther words , the con- sortium of p rivate J apanese ban ks enjoy t he use of funds o f the Export-Import B ~nk of Japan fo r their l oans to At la s Consolidated Mining & Development ~ o rpor~tion. The collision occurs, howeve r, at the participation of Mit s ubishi Metal Corpor ation in the loan tr ansactions . Respondent contends , ci ting par agraph 4 of the loa n and sales contract entered into on April 17, 1970 by and between Mitsubishi Metal Corporation (former l y Mitsubishi ~1et al Hining Co . , Ltd.) .and Atlas Conso li dated Mining & Developme nt Corporat i on (Exh. " G", pp. 34-54; BIR Recc. r ds ) '� \�Jhi c h r eads : "AND WHEREAS , t he parties h a ve entered pr o vis ionally into a long term Loan and Sales c ontract dated November 7 , 19 69, and Letter '1 07

... DECISION - CTA CASE NO 2801 - 11 - Agreement dated October 23, 1969, under which ATLAS shall borrow from MITSUBISHI the sum of TWENTY MILLION DOLLARS f$20,000,000) in United States Currency to inst~ll a new concientrator in the ATLAS Biga Area for the purpose of ex- panding the productive capacity of the Toledo Mine, and shall sell to MITSUBISHI the entire production of copper concentrates produced from the said concentrator for a term of FIFTEEN (15) yGarS. 11 (Par. 4, p. 53 1 BIR Records.) � ~hat Mitsubishi Metal Corporation is the creditor. And as creditor , it is not a (1) .financiLg institution O\vned, controlled, or enjoying refinancing f : om foreign govern- ments; (2. ) .international or regional financing institution established by go��.lernmen ts; much less (3) .a foreign govern- men~ as contemplated under Section 29(b ) (7) of the National Internal Revenue Code, whose income received from their investments in the Philippines should be e �eluded from gross incoms, and therefore, exempt from Philippine income tax . Accordingly, respondent argues that since Mitsubishi Metal Corporation does not fall within the scope of the provision of Section 29 (b) (7) .of the Old Revenue Code, it is liable to tax and therefore the interest payments made by Atlas Consolidated Mining & Development Corporation on the loans obtained from Mitsubishi Metal Corporation are subject t o withholding tax at source. It bears emphasis that petitioners do not base their claim for tax credit on the premise t hat the loans were made by Mitsubish i Metal Corporation or directly by the consortium of private Japanese banks; rathe~ they anchor JO S

... DECISION CTA CASE NO 2801 - 12 - t heir c l a i m on the fact th~t the l oans were actually and ultimately made by the Export-Import Bank of Japan. And in the light of the facts adduced during the trial which were never contr adicted by respondent ; the r ec Ids of the case , specially the r ecords of the Bureau of Inte rnal Revenue ; and the aLlegations in the petition for review, t1e truth of which has not been d i sputed bu t deemed admi t - t ed by respondent , as alre2dyiliscussed above , it seems clear beyond any doubt that the ultimate cred itor is the Expor t - ImpoJ: t Bank of Japan . Al l the papers and documents perta i n ing to ~he loan of �4 ,32 0 ,0 00 , 000.00 through Mitsubishi Meta l Corpor ation conclusively s how that the identity of the money loaned by the Expo r t-Import Bank of Japan wa s to Atlas Con solidate d Mining & Deve l opment Corporation. And wi th r espec t to the loan s t hrough the con sortium of private Japanese banks in the sum of �2,880,000,000 .0 0 to Atlas Consolidated Mining & Develop- rnen t Co r pora ti on, the r eco rds reveal tha t they or ig inated from t.he Export-Import Bank of Japan as evidenced by the sworn certification executed by Ya suno ri Sa kai, manager, Nan ila Office of �Hi ts 1bishi f:1etal Corporation. (E~d1 . "J 11 , pp . 7-9 , BIR Reco rds.) In other wor ds , the act~al and ul timate creditor is the Export-Import Bank of Japan , the borrower is Atlas Consolidated Mining & Deve lopment Corporation, the interest paid on the loans by the latter was received by the former, and Mitsubish i Metal Corpo-

�, DECISION - C'I'A CASE NO 2801 -- 13 - rat ion, as well as the consor tium of private banks, was merely the arranger o r condu it thr ough which t he l oans flowed from t he cred itor Export- Import Bank of Ja an to the debtor Atlas Consoli date d Hining & Deve l opment Corpo- ration . Pa renthetically, it may be stated t hat t he total l o an of �7 ,20 0 1 000,000.00 (�4 ,3 20 ,00 0,000.00 plus �2,B8o,ooo,ooo. oo) .is equa l to u.s. $20fooo,ooo.oo . This $20 million loan is t he amount r eferred t o in all the documents se c ured from the E}~port - Import. Bank of Japa n and f r om the To kyo head office of Mitsubishi Metal Corpo- r a tion,together with the documents of cert ifications e xecuted by Yasuno ri Sa ka i (Exh. "J", �.UJ?.fB) �. Since the interest income involved he r ein is the fruit of a loan (or loans) .attr ibute d t o the Export-� lmpo rt Bank of J a pan f rom which i t grew, and not to the Mi t sub i s hi Metal Corporation or th e consortium of banks, and income is t axab le to the person who earned it despi te anti ci - pator y ar rangemen ts, suc h inter e st income would clearly be taxable t o the Export�-Import Bank of Japan. However 1 as already shown above, the Expor t- Import Bank of Japan is a financing insti tu t i on owned or controlled by the Japanese Govern~en t e xemp t fro m income tax und er Section 29 (b ) (7 ) of the former National Inte rn a l Revenue Code . Accordingly, the claim of petitioners Mitsubishi Me tal Corpo ra tion and Atlas Con s olidated Mining & Development �i l( l

DEC ISION - CTA CASE NO 2801 - 14 �- Corporation fo r tax credit o f Pl,971 , 595,01 repr esen ting erroneous payment of 15% withholdin g tax on interes t payments on the loans payable to the Ex:port-Import Bank of Japan in 1974 and 1975 is meri tor i ous. WHEREFORE , re spon dent Commissioner of In t er na l Revenue is hereby ordered to grant a tax c redit in favor of petitioner Atlas non solidated Mining & Deve lopment Corporation t he amount of Pl 1 971, 59 5.0l. Without pro- nouncement as to costs . SO OR.DEEE D. Quezon Ci t y , Met ro Manila, Ap r il 10 , 198 0. I CONCUR : i.A'" C/OA/~.. SSTSAONCT.Ela n . ROAQUIN u d ge t te J t Jl