Mitsubishi Metal Corporation and Atlas Consolidated Mining & Development Corporation, et al. vs. Commissioner Cf Internal Revenue, et al.

DECISION -

CTl\

Cl'~ SE NO 28 01

-· 2 - credit of Pl,J71,595 . 0l representing alleged e rr one~us pwyment ~ o ... 15% ~ .. ~ j_ thhold ing tax on inter:e:st. on loans payable to the Export-Import Ban.k of Japan in 1974 ~ ~"' r·• Qli-....t.

1975 , subject matte r of th is appeal , being processed by the Appellate Division of the Bureau of In terna l Revenue.

(Minutes of the session of the Court held on April 6, 1977, p. 16 , CTA Rec 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 ase (BIR Records ) disclose that on September 9 , 1976 the Agriculture & Natur a l Resources Division o f said Bur e a u had alrea dy investig a t e d and verif ied the claim of petitioners, and rec ommended to respondent, through the Appellate Division , that i t be approved .

(Exhs . "0" & "0-·1" 1 pp. 55-57 r BIR Records.) And on November 16, 1976, the Appellate Division of t he Bu r eau o f Internal Revenue, with the concur rence of the Revenue Service Chief (Legal } , recommended to the Commissioner of Internal Revenue 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 credi 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..) on 0 ._,

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 scheduled for hearing by this Court on September 30 , 1977, and during the tr ial t hereof , petitioners presented their evidence, oral and documentary. After petitioners h""ve market and offered their exhibits 1 which were all admitted by the C0urt. , counsel for respondent su.bmitted his cas e on the basis of the Bureau of Internal Revenue r ecords (BIR Records) and the pleadings, without offering proof as to the truth of his own allegations found in his answer.

(Minutes of the session of the Cour t held on Septembe r 3d , 1977, p . 21 , CTA Records.) Under t he well-sett led rule that one who prays for judgment on the pleadings without offering proof as to the truth of his own allegations, must be understood 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 admitted (Bauermann vs. Casa s, 10 Phil. 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 Metal 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

1CO

DECISION -

CTA CASE NO 2801

- 4 - Securities and Exchange Comm ssion to engage in business in the Ph lippines. Atlas Consol i dated Minin'] & Deve ·'.op- ment Corp., hereinafter referred t o a o

11. -'--1 - · ~ :::':\ ..4 n c 1- ~ " 0 Y" 'rio - - - t _. r ... n ..._,. · ,.... '- · L-l.l. a;;, , la c •.•• ObC . .;,i..lC c-- .-J:.'O.:.d lv." C.n.lut: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 all 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 consor tium of private banks i n Japan; 3.

That the Expor t-Import Dank of Japan is ·a financing i nstitution owned, controlled an~ financed by the Gover 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 financed by the Government of Japan either directly 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.

II

July 25 f

II

II

II

II

1325364 1 0 l 320,451.73 200 ,000 .00 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 1

II

II

II

II

2223394 244,362.53

II

I!

II

II

4289814 256, 032.14 Ii -:'77-:./,8 28-:14 Total for l97t1 a.'1d 1975

7. That Hi tsubishi 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 claim 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 respondent b..as not yet acted en 'd1e clairn.

At ~~y rate, the records of the Bureau of Internal Revenue , on the basis of which respondent, asid'- fr om the pleadings, submitted this case for 4 • • aec1s1on, disclose that:

{Exh .

"0-2", pp . 143-14 6 , BIR Records) 1 .

Mitsubishi Metal Corporat" on i s a Japanese Cor poration duly licensed to engage in business in the Phi l ippines with offic e address at 15 t h Floor , Citibank Center, Makat 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.

L

"G "

5 '' r:'4 ~x~.

,pp.

~-~ , 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 May 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 foLLows:

(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' (The. Fourth additional fund fo r development of Toledo Mines) "Expected 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

Presidential Decree No. 131 effective January 1, 1973 and remitted to the government as follows:

_« pera 15% Withhold- Official Receipts of 158 1974 = Interest Paid Fly Tax Paid Withholding Tax Paid Ist qtr. P2,136,344.87 B 320,451.73 CBP O.R. 1325096- 4/25/74 Qnd gtr. 2,011,544.00 ( 200,000.00 CBP O.R. 1325364- 7/25/74 ( 101,731.60 CBP O,R. 1488i01- 7/25/74 3rd qtr. 1,940,612.13 291,091.82 CBP O.R. 958779-10/25/74 Ath qtr. _1,869,944.80 280,491.72 CBP O.R. 958973- 1/24/75 Total #27,958,445.80 B 1,193,766.87 \ 1975 Ist qtr. B1,849,552.28 B 277,432.84 CBP O.R. 2223123- 4/25/75 2nd gtr. 1,629,083.56 244,362.53 CBP O.R. 2223394~ 7/25/75 of 1,706 ,885.15 (239,437.16 ICM No. 111-75 applied (16,595.61 ROR No. F 4289314 - 7/25/75 Total 85,185,520.99 B 777,828.14

RESUME

Interest Paid 15% Withholding

Tax Paid

Total for 1974 B 7,958,445.80 B 1,193,766.87 Total for 1975 5,185,520.99 777,828.14 TOTAL FOR 1974-1975 £13 ,143,966.79 B 1,971,595.01

5. Actual remittance to the government of the aforesaid payment was certified as correct by the Chief, Withholding Tax Division of the Bureau of Internal Revenue. (Exh. "F", pp. 128-129, BIR Records.) |

6. In filing their claim for tax credit the claimants (petitioners herein) alleged that inasmuch as the cooperative loans were secured from the Export-Import Bank of Japan, a financing institution owned by the Japanese government, ·'

DECISION -

C'r.~ CASE NO 2801 - 8 - and the consortium of Japanese banks enjoying refinancing f r om the Japane se government, 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 follows: Sec. 29 - Gross income • x x x

(b) Exclusions from gross income • • The follow- ing · i terns shall not be included in the gross income and s hall be exempt from t axation under this Title.

(7 ) Miscellaneous Items: (A) Income received r:--~oni thP 1 . .,.

"n~J""'-' +-me•" ""c 1' !1 t· 'n--P·l-l .. ,-,-:; ~P 1' ''"'"" :1.' n '- ...

• ·~ - .;',;.;:..~ ...... ';:;.!._J.__L. ~_,;,..~_..,..:.._ ~:...- .

: _'·- '·;:.;::;..~ 2~.~---· 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;:__~ rtO"'.,~rnn'en'- ( 2) .r: 1. ""'at1C' ; na J. <t-1 c--o"'"'"' .:... 11.1.. -~ (l';-is ~.:;:..;!.._·_•_..:.:: f .

. .L. '!..;;'~~.!:.:.:~~.....::~:....!:::~':.... ~~~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 Director Kenjo Kadowak i of the Overseas Investment Loan 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 project 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 Corporation 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 inasmuch as under the term s of the c ontract, Atlas Consol ida t ed wi ll shoulder the tax o n interest payable o n said loans. (Exh . "I,1" , p . 116 , BIR Records .)

Under the fo r egoing facts , is the interest income der ived f r om t h e loans extended 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) Exclusions f r om gross inc ome . - The follo~ ing items s hall not be incl ude d in gross income and shall be exempt from taxation under this Title:

" ( 7) ~liscellaneous I t e rns. - (A) Income received from their invest- !.nents in 't11e'"' Ph_Ql].2pine_~ in _l~~ , stocks, bonds, or other domestic securities 1 or from interest on their deposits in banks in t he Philippines by (1) fore ign governments,

(2) financin£L .inst:ltutions 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 specif i c.

It merely call s for application a s thus worded.

Adverting to the terms 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) bv a f inancing insti tution o wned or controlled by a . - foreign g overnment o r (2) .bY a financing instituti 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 thhold ing t ax .

Respondent doe s not quarre l with petitioners that the Export- Import Bank o f Japan is a financing ins titution owned a nd c ont~o ll ed by the Japanese Government; and that the consortium of private banks are financing institutions and the loans ~xtended by them to Atlas Consolidated Min ing & Development Corporation originated from the Export-Import Ban k of Japan.

In o ther words , the con- sortium of private 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 Atla s Consolidated Mining & Development ~ o rpor~tion. The collision occurs, however, at the participation of Mits ubishi Metal Corpor ation in the loan tr ansactions . Respondent contends , citing 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 Consolidated Mining & Development Corporat i on (Exh. "G", pp. 34-54; BIR Recc.r ds ) '· \·Jhich r eads :

"AND WHEREAS , t he parties ha ve entered pr ovisionally into a long term Loan and Sales c ontract dated November 7 , 1969, 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 Meta l 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 Internal 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 creditor is the Expor t - ImpoJ: t Bank of Japan .

Al l the papers and documents perta i ning to ~he loan of ¥4 ,320 ,0 00 , 000.00 through Mitsubishi Metal Corporation conclusively s how that the identity of the money loaned by the Expor t-Import Bank of Japan wa s to Atlas Consolidated Mining & Deve l opment Corporation.

And wi th r espec t to the loans t hrough the consortium of private Japanese banks in the sum of ¥2,880,000,000 .0 0 to Atlas Consolidated Mining & Develop- rnen t Cor poration, the r ecords reveal tha t they or ig inated from t.he Export-Import Bank of Japan as evidenced by the sworn certification executed by Ya sunori Sakai, manager, Nan ila Office of ·Hi ts 1bishi f:1etal Corporation. (E~d1 . "J 11 , pp . 7-9 , BIR Records.)

In other wor ds , the act~al and ultimate 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 Consolidated Hining & Deve l opment Corpo- ration .

Parenthetically, it may be stated t hat t he total l oan of ¥7 ,20 0 1 000,000.00 (¥4 ,3 20 ,000,000.00 plus ¥2,B8o,ooo,ooo. oo) .is equal to u.s. $20fooo,ooo.oo .

This

$20 million loan is t he amount r eferred t o in all the documents sec ured from the E}~port - Import. Bank of Japan and f r om the Tokyo head office of Mitsubishi Metal Corpo- r a tion,together with the documents of certifications executed by Yasunori Saka i (Exh. "J", §.UJ?.fB) •. Since the interest income involved he r ein is the fruit of a loan (or loans) .attr ibuted t o the Export-· lmport Bank of J apan f rom which i t grew, and not to the Mi t subi s hi Metal Corporation or the consortium of banks, and income is t axable to the person who earned it despite antici- pator y ar rangements, such inter est 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 institu t i on owned or controlled by the Japanese Govern~en t exempt from income tax under Section 29 (b) (7 ) of the former National Inte rna l Revenue Code . Accordingly, the claim of petitioners Mitsubishi Metal

Corporation and Atlas Consolidated Mining & Development

•i ( l l

DEC ISION -

CTA CASE NO 2801

- 14 ·- Corporation fo r tax credit o f Pl,971 , 595,01 repr esenting erroneous payment of 15% withholding tax on interes t payments on the loans payable to the Ex:port-Import Bank of Japan in 1974 and 1975 is meritor i ous.

WHEREFORE , re spondent Commissioner of In t er nal Revenue is hereby ordered to grant a tax c redit in favor of petitioner Atlas nonsolidated Mining & Development Corporation t he amount of Pl 1 971, 595.0l.

Without pro- nouncement as to costs .

SO OR.DEEED.

Quezon Ci t y , Metro Manila, Apr il 10 , 198 0.

I CONCUR :

i.A'" CO~S TANTE n. ROAQUIN /..

.

/ASSOClate Judge

t t J l