CTA Case No. 3112

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~ peti t.ion for· n:!'t.i ew, petitioner presented documentary e vidence whic h have been mark and admit ted by the cou r t. on t he hearing of this c ase on Augus t 12, 1 98 1 .

f See ffinutes 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 (..'ugust 12 ~ 1987 petitione r· submit ted this case on t he basis of its evidence and recor ds as we 11 as t he records of the case in CTA Case No. 2801~ a nd 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 the t-eco nJ shows that r·esponden t did not pr·nse r1 t e v id£>1 <Ct? in support of his stand in the c:ase ~ bu t instr'"!\tl merely relied on the outcome of the a ppea 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-.5490"' 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 court datf!d . ., . .., .i.4.t 1989, p.44, CTA r·e c .)

DECISION CTA CASE NO. 3112 - ·3 - The ·fo 11 owinCJ .=~ J 1 eqa t i.o·1·- o-f fRet of petitioner 's in their· petit.ior' ~ cw rev .i ew may t herefore be c onsidered as imp 1 i ed 1 y admit ted by respondent are as follows: "2.

That in 1970~ AtJ~s~ thro 1gh the efforts of Mitsubishi~ secured loa ns from the Export-Import Bank of Japan and a conscrtiu~ of prlvate banks 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 f1Rnced by thl? Government o ·f Japan, lfJhile 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 either directly or .. through the Export-Import Bank of J a pan ; 4.

That under the terms of c:on-· tract of loan, Atlas was t o pay interest on the loans at the rates determined~ said in~erest to be forwarded by Mitsubish i tq the Export-Import Bank and the members of the consortium; 5 .

That Mitsubishi according ly received the determined interest from Atlas and remitted the en t ire amoun t to the E:·: por-t-I mport: Bank of ~le~pe. n and to the other memberD 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 payment , as follows: CB RTR I 34582650 dated 7 I 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~ dated 4/ 6/79 CB Confira No.

A2B43079 dated 7/10/79 56,680.10 RTR t A2315164 dated 7 /1~/79 CB Confira No.

A0124732 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/ (' 29,632.13 RTR I A2B62070 dated 1/ 3. 8') CB Con hrm No.

1\4911567 dated 4/10/ 0 16,750.23 RTR J A1057°70 rlated 4/10/80 CB Confir11 No . M99?J 52 dated 6/18/80 2,182.98

RTR •

A463JCI24 dated 6/18/80 F'512,H3.14 7.

That M'.tsubishi ~ ~ signed its right t o the c 1 aim 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:{ isting and future ta:~ liabilities of Atlas; 9.

That res pondent has not yet acted on the claim.

Respondent in his AnH>~er · t o the petition for review raised ' the follow ing SPECIAL AND AFFIRMATIVE DEFENSES as follows:

"5.

It is incLimbent 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 accord a nc e 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 therefore cannot be gt-an 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-cnf •es t upon the taxpaye r to show thAt the t~ x es paid were erroneously or illegally collected and failure to susta in c:;aid btu'·rlen i E:;

f.:,ta l to the action for r ef und or t a x credit ; ? .

tioners lt to .i S i tlC IJfTibi"H) !_ est.;"h l ic;h£'!d t'•"\' peti-- h<'\ve complied \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~ it is a c a rdinal rule of taxation~ firmly embedded and adhered to in our jurisprudence~ that ta:-: exemptions at-e not favored a nd an?

never presumed~ t.h .:-' t they are construed strictis s imi }uri s ~ qainst tha individual and .

1 ibera ll y in favor· of the ta>:

au that- i ty; that ta :: e:-:emption cannot be made by inferenc e or imnlicAt i on but must be beyond r·eason 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 mised on the clearest grant of organic or statutory law. (Govt . of' P.I. vs. Honte de Piedad, 35 Phil.

466;

Hous• vs.

Posadas, 53 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 SCRA 180) Wherefore, it is prayed · that the instan t review· be dismis sed~ wi th petitioner."

respectful II y petition for c osts agains t 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 Interna 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 Corporation , Atlas Consolidated Hining and Developaent Corpo- ration and Court of Tax Appeal s~ G.R. No. 54908 and G. R, No. 80041 dated ,1a rt uary 2 2~ 1990~ the Supr-eme Court said and we quot ~ = The loan and c, las c ontr-act between Mits ubishi and Atl a 5 d oes not contain a ny direct or inf r t e nt.ial reference to E:-:imbank whatsoev E' t .

The 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 1 igations mak e it imp 1 a usi bl e, if not vacuous, to give c:redit to the cavalier assertion that Mitsubishi was a mere agent in said tra nsaction. Surely, E ld mb<H1k had no thing to do with the sale of the copper c oncentrates since all that M.i. tsubishi s tated in its loan appplication 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 innoc:: uoL\5 statement of purpose could f,ot have:.! been intended for, nor could ,t.t legal ly consti tute, a contract of agency, If that had been the purpose, as respondent cour t believes~ DECISION .:• CTA CASE NO . 3112 - 7 - said ~orporations would have specifically so stated, espec ia 11 y cons idering 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·: ' 1 The 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 obligation ! ')F' I1·Jr->Rn f'l ll f'IS and 1'1ITSUBI PHt t• JI I~"' r~" 1-h·· 'I <4ttet ..

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:hF' cop e1 c: oncen--- trate to Ml TSI.IBISHI t•oi thin the specified tP.nn 1'1 £;

ttY consi --· de~ation of the granting of the amount of $20 million ~o ATLAS.

MITSUBISHI, in order to fulfill i,ts part of the con tr ct~ had t b o btai n f u nds. Hen c e~ it had to ,secure a loan or loans from o ther sources.

And · fr om what sources, it is immaterial 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. 3112 - 8 - "Wtlen MlTSU8ISHI t here fore secured such loan, it was in its ·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 1 h; 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 rom ATLAS~ the fact remains tha t it was a loan bY EXIMBANK of Japan to MITSUBlSHI and not to ATLAS. " Tt1us~ the trans;ac tion beblePn 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~ it is not EXIMBANK that was intended to be bene-- f ited.

I t is MI TEiUBISHI which stood to pn:~f .i. t.

Besides, the Loar an d Sales Contract cannot ba ' any clear·e r.

The only signatories to the same were MITSUBISHI. <=jnd 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 an y entity, private or pub li c:, for tha t matter.

"CrJrol] .;:u y to thi<;; , it may well be st a t d that.· n this Jurisdiction, 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 former owner ~nd becomes the sole p r o perty o f the ob} i g or ( To lentino a nd Hanio v~~ Gonzal~• ~y , so Phil. SSBJ .

.. .

.. .

DECISION CTA CASE NO. 3112 - 9 - "In the case at tar , when MITBUBISHI obtained th~ loan of $20 million from EXIMBANK of Japan~ said amount ceased to be the p~oper ty of the bank and became the proper ty of MITSUBISHI.

"The cone lus ion is indu- bi tablei MITSUBISHI , an d NOT EXIMBANI<:, is the sole creditor of ATLAS, the former being the owner o ·f ttH:> $20 m i.l l ion upon comple t ion of its l oAn contract with EXIMBANK ~f Japan · "The intPr-<;?s t income of '!

the 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

t o 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.

It 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. distorted by other con s ider-ati ons §'). i.htn_gg .

The app 1 ic a tion for the loan w~s a pproved 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 Mitsub 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 payment.

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·pose is not unusua l , espec i.?~ 1 1 v in t hl" case of Eximbank which, nsirle from pr~ tecti ng its ·financial e~:pos• .we>. must ""'""" to it that the 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 establis h such 5ubmission by a deqw:~.te evidence bu t it posits the unfair and une xplai ned imputE\ tion that , fo r reason subject on 1 y of s1.1 r mise, said f inane i ng inr,;titution wou ld d! Iibera ely circwnbe nt .its own charter tn accommodate an a 1 ien borrower throuqh a manipulated subter- fuge, bLI w th it el <::> a pr lnc i pa 1 and the rea l obligee.

The allegati on tha the interest paid by Atlas was remitted in full by Mi tsubishi to Eximbank, . assuming the truth thereof~ is too teriLtous and con- jectural to support the proposition that M~ tsubish.i is a mere conduit.

Furthermore, the r·emi t tance 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 agreed upon by Eximban k and Mitsubish i a ~ to the manner or procedur~ for the pAyment of the latter's obligation is their own concern. It should also ~e noted t hat E:.:imbank' loan to Mitsubishi impos~ interest 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 DECISION CTA CASE NO . 3112 - 1.1 - It is too s e tt led a ru le in this jurisdiction~ as to dispe n s e with the need for citations, that l a ws granting exemption from tax a r e 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 p a 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 hav 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 ~ •;pP.nsa b 1 y be the party in interest in th j s ca s e . Definitely ~ the t a :<ab' lity of a party cannot be h 1 .::md 1 y q 1 o s sed over on the basi$ of a s upposed "br·o a d ~ pr·agma tic:

analysi!S" alon e wi t hou t subs tantial supportive evi dPn r: r , l e st n r:>ed 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 ane a 1)f p ti l:icme r· · s ~"a r n ­ i ng~ of per v a s i v p rP le van ce at t hi s ti m e ~ tha t while i n t tnat i o n a l comi ty i s invoked in thi s case on the nebulous repres~~tation tha t the fu nds invo l v e d i n the loans are those of a foreig n government~ scrupul o us care must be taken to avoid o pe n ing the flo o dga t es t o the violatio~ of our tax laws. Otherwise, the mere expedient of having a Philippine corporat:ion enter into a con tract f o r 1 cans or other domes tic s e curities wi th private foreign e n t ities, which in turn wi 11 negotiate independen 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.

WE CONCUR1

~REYES ~~;ag Judg 4,. .•• x;; ~ Q...k ERNESTO D. ACOSTA Associat e Judqa

CERTI F ICATION

---

• ROAQUIN

Judge I hereby c ertify that t his deci s ion was reached after due cons ultation a mong the members of the Court of Tax Appeals i n accordance with Section 13 , Article VIII of the Constitution. Court of

I ' •