CTA Case No. 3380

DECISION -

in gross income and shall be exempt from taxation under this Title.

4 x x x "(8) Miscellaneous items. - (a) In- come received from their investments in the Fhilippines in lmans «x x x by (1) foreign governments: (2 . financing institutions owned controlled, _ er eresenegansecenueerseasanceaterseenrseemsteconinasasesanetaveeassnrwne nseewepittne emmmmtaerycane arts sntgostensonsnerssvacscsanatosomasasscnntnenssnesncsoesaen nemrsanserant stenantngstconmmnent tn enjoying refinancing from thems and (3 international or regional financing institutions established by governments.

" wll mn 4 bs CUnderscoring supplied] The fac..s are not disputed, the parties having agreed to submit this a for decision based oan the pleadings and the records after petitioner has presented its evidence. | Fetitioner Asian Transmission Corporation is a domestic corporation organized and existing under Fhilippine laws with principal office at Silangan Canlubang Industrial Park, Canlubang, Laguna. Tt entered into a loan agreement with the Mitsubishi Motors Corporation (Mitsubishi, for short), a corporation duly organized and existing under the laws of Japan, an two occasions, viz (a) the amount of Japanese Yen QGne Hundred. Twenty~Seven Million Five Hundred Thousand (¥127,509,000) executed oan April 15, 1975 and (b) the amount of Japanese Yen 443 - 3

Three Hundred

Mi ll ion (¥300~000~000) executed on Auqust .1. 0, 1977.

LikewisE?~ petitioner- into loan aqreement s with the Ni ssho-- Iwai Co., Ltd. (Nissho- Iwa.i.~ 1'or· brevity)~ a l so a corporation duly organized and e:·:istiSlq under the laws o.f

Japan~ in

the amount s of J~pa n ese Yen

One

Hundred

Twenty

Seven Million Five Hundred Thousand

(¥1 27~500 ~0 00) and J ap;anf.·?se

Yen

Hundred

Million

(¥ 300~000,000 ) em Apr-il 15, 1c-;75 an d

August

.1.0, 1977, respectively .

For the 3rd a nd 4th quarters of 1979 and 1st~ 2nd~ 3rd and 4th quarter ~ of 1980, petitioner paid interes t on the l oans extended by Mi tsubishi paying withho l ding t axes thereon amountin~ to P258,462.31~ the details of which are a s follow s~ 1979

3RD

4TH

TOTAL

2270965 2374861

CONFIRHAUDN

.Ji~E I ~l..l!.Q .. !

2574588 2846460

DATE OF

..r.B.r~.;_ru 10.21.79 01.18.80

WITHHOLDING

....... J.BLP-.BJ.L p 41,010.49 ·--40 J .. ~.liLJ..~

DECISION -

CTA CASE NO. 3380 ca - 4 — 1980 1ST TAX DEBIT MEMO 04.21.80 P 39,380.74 2ND 3033940 0337227 07.21.80 40,017.34 3RD 3034924 “5325055 10.20.80 49,503.71 TH 3761249 6218914 01.20.81 __ 48,002.27 TOTAL P176,884.06 BRAND TOTAL P258,462.31 Similarly, for the ‘3rd and 4th quarters of 1979 and the ist, 2nd, ‘Grd and 4th quarters of 1980, petitioner paid withholding taxes on interest payments on the loans extended by Nissho-Iwai amounting to F258,773.07, details of which are as follaws:

CONFIRMATION DATE OF WITHHOLDING

QUARTER RECEIPT NO. RECEIPT NO. = PAYMENT = TAN PAID_ 1979 3RD 2270966 2574579 10.21.79 =P 41,010.49 4TH 2374863 2846457 01.18.80 40,679.36 TOTAL P 81,689.85 1980 1ST TAX DEBIT HEMO 04.21.80 P 39,360.74 2ND 3033938 0337228 07.21.80 40,122.90 3RD 3034926 5325057 10.20.80 49,503.71 ATH 3761248 6218915 01.20.81 _ 48,095.87 TOTAL 177,083.22 GRAND TOTAL P258,773.07 Thereafter, in a letter dated September 22, 1981, petitioner Asian Transmission, through its auditors, filed with respondent’s Bureau ai claim for refund af the aforementioned amounts af P2588 462.51 and PASS ,772,07 4 or a tatal af PSI7,255.28, alleging that the loans were extended to petitioner by the Export-Import Bank of Japan (Eximbank , for shart) through Mitsubishi and Nissho-Iwai, and therefore exempt from Philippine withholding tax con aincame pursuant to the then Section 29(b)(8), supra, of the National Internal Revenue Cade , Ex Imbert heing A financial institution awned amd cantrolled by the government of Japan.

On Qetoher 15, 1981, petitioner filed its petition for review with this Court in accordance with Section ake aed ot the applicable National Internal Flevenue (Code, toa which respondent filed his answer denying the claim for refund.

Are petitioner’ s interest payments on its loans from Mitsubishi and Nigssho-Twai exempt from withholding taxes?

Tt will Greatly simplify matters if the pravisions af law involved, and factual situations related thereto, that are heyond dispute, ber reduced ta basic legal propositions, to wits •

- 6 - ( .1. )

Under-

Section

29 o ·f the

T a :-:

Code~

:i.nt:.E!r E~~; t income is inc J.ud E~d in income.

Hence, i nterest income is subject to income tax. ( 2) Interest~ ~ received by Mitsubishi.

and Niss ho- Iwai paid by Asian Transmi ssion on the loans e:-: tended by Mits ubi shi and

Nissho-Iwai

would subject to li'Jithhold:inq ta:-:

be.inq without doubt interest income on the part of Mitsubishi and Nissho-Iwai. (~!.)

However·, if thE? inter-ests paid b y Asian Tr-ansm ission li'Jere rece.i.ve·(j. by E:-:imbe:1nk of Japan on J. oc:m s E~:-:t:.endecl by E:-:imbank n·f ~J app n, a financing institution owned by the Japanese··Bovernment, such inte res t s are exempt from withholding tpx pursuant to the thf?n !3ect.i.cm :.29(b) (f.f) o f the Ta:-: Code, which pr~ ovid(·? S that income r · eceive:~ d ·fn.Jm investments in

the Philippines in

lo ~ns by f i nan cing ins t:.i.t.ut:ion s owned, contxolled, or enjoying refinancing from foreign go1grn ments are not inc luded in gross income and sha ll be exempt from income ta xation . ( 4) Mi tsubi s hi a n d Niss ho- I wai ar-e:?

nm-'Jher-e embraced or covered by the for e going provisions of Sec t.i.cm 29 (b) ( 8) of the Revenue Code as they an?. admit tf-.?cll y f oreign ..

DECISION

CTA CASE NO. 3 380 - 7 - 'f inane: inrJ institutions ' owned~ ci:lntr-olled, or e njoying r-e financing fr-om for-eign gover-nment nor- inter-national or- r-egiona l financing institutions es t a bli s h e d by a for-eign gover-nme nt.

for·eign cor-por-ations or-gan-ized and e :·: istinq under- the l a ws of Japan.

The ques tion ther e fore is whether the inter-est payment s of pf:?ti tione1~ Asian Tr-ansmi ssion on the lo.:m s contr ;;:,c t.ed vd.th t·Htsubishi and Ni ss-. ho- Iwai are income received fr-om the in v estments in the Philippine s in loan s by Eximbank of Japan.

A

r eading of the loan agreements entered into em

April

15, 1975 and Augu s t 10, 1977 and the amendmr.=.m t s E~:-:ec u ted em

September·

5 , .1.977 by and bf2tween 1'1i t subi s hi c:md · pet.i tioner·· As ian Tr·· a n s mi ss ion, and by and betwef:~ n Ni ss ho·-· I \14ai and petitioner

Asian

Tran s mi ss ion wi ll rei:l.d i 1 y s how tha t the contracts c:

l~ eated a c r-ed i tor·-·-debtor· re l ation s hip only between Mitsubi s hi a nd

Asian

and Ni !ssho-- Iwai i:\nd

Asian

mi ssim'\.

(pp.

16 -2 9~ BIR r-ecor-ds;

pp.

:::;5- 49, BIR l'·ecords; pp.

50-63~ BIR

,~ ec:orcls.)

1'1i tsubishi and Ni ss-. ho-- Iwai ob l iga-tEtd themse lves to provide ·funds to

Asian

Tr-ansmission.

To comply · and

“fulfill their part af the loan agreements, Mitsubishi and Nissho-Iwai had to produce the funds. From whatever source, Asian Transmission was mot cancerned. Nowhere and nowise in the loan agreements was there stated that Mitsubishi and Nissho-Iwai had to obtain loans from Eximbank of Japan. Neither can it be inferred or deduced from the loan agreements “that Miteubishi and. Nissho-Iwai acted for and in behalf of Eximbank of Japan, or Eximbank of Japan had to earners ar quarantee the leans extended by Mitsubishi and Nissho-Iwai to Asian Transmission. As a matter of fact, nothing there in the loan agreements is said that the funds or loans extended by Mitsubishi and Nissho-Iwai ta Asian Transmission came: from Eximbank of Japan. Eximbank of Japan was not in any manner privy to these contracts of loan.

Accordingly, it is self evident that the loans contracted by Asian Transmission with Mitsubishi and Nissho-Iwai are not ivestnente "dn » the Philippines in loans by Eximbank of Japan and the interest payments of Asian Transmission on the loans contracted with Mitsubishi and Nissho-Iwai are not incaone received from the investments in the 4g

DECISION

CTA CASE NO. 338 0 - 9 - e:·: pr .. ess 1 y c: le<:\r-·J.y pr-ovided i n the loan agreements of borrower Asian Transmissi on in favor of

i. t.s lenders Mit.su bis hi a nd Ni ss ho - Iw ai ~ a ll payments o·f principal a nd tu.:tf::~.r.::.~s .. t. s ha ll be m.::\cle to the JE.!JJdg.r.:_'2.

by t.eleqr.::\ph.ic trA.nsfelr to such han k

•7:\C:CCJunt in

T'ok y o~ ,Japan as will be designated by the ( pp.

23!1 :'..17-71,

BH\

NDthin q the re in the loa n aqreements s pea ks of i nteres t paya ble to Eximbank of Japan. The ter .. rns o f the loan ag reements prDvide the safest guide as to the nature of the contracts a nd the intention of no s.i.~1n i. ·f :i.c::anc(:?

in thE?

c: F.~ r-t .i. ·f i cat. i. on d <:1 t E·~ cl 1'1 <':'\ r .. c h l 5 ~ 1 9 8 ~.2 ( F ;.; h • A ) i s sued ..

Bank of Japan for the Phi l ippine~ stating that the l oans contracted by wi. th t•l.i t •:,,u bi E;hi Moto r s Corporation and Nissho-Iwai Co ., Ltd .~ were ·f inancE·~d a nd ~:JUf.:\r .. a n t. E·~e d by th£~ E:-: por-·t. .. - Impo r- t

Bank

of To begin \AJ.i. th ~ the cert:i. f ic,::\ tion ( E:-:h.

A)

:i.s on 1 y a :·:e r .. o :·: or-· pho to copy. It. does ..

not b F~a lr the seal o ·f thE;?

E:-:por-t--Import.

Bank

of J a pan or the office of its c hi e f ~~pr~ se nt ativ e in

DECISION —-

the FPrilippines., Secondly, as “aptly stated hy reanonrtert . the signature appear le above the cs typewrikten name Shunsuke Arak i as chief aerbative of the Expart-Impart Hank of Japan in the Philippines was never identified by a competent witness. Meat h er Mr, Shunsuke Araki, a respansible official of -t bh e@ said Bank who certified to the fact that the loans of petitioner with financed by Eximbank of Japan, or his authorized ar clarify the bank’s actual participation or involvement in the 1o an transactions. Then, the claim for or fund of alleged erroneous payments of withhealcding tax had already been filed with the

Qf Internal Rey

anuie oon Septenher 2A, Isat and the petition for review was filed with this Court oon Oeteber 15, 1981. Hence, Exhibit A could, at he be ono more than an afterthought which might proavide support for the claim for refund. But more importantly, the certification that the loans extended by Mitsubishi and Nissho-Iwai to ..

- 11 - the pa y mr~n t s pE'ti t.ioner· As .L::~n Transmission to Mitsubish.i and Nis s ho~Iwai on loans extended by them are .income received in v e s tments in

the Philippines in

loans by the Export - Impor t Bank of Japan. To suppor·t:

it s cites M.itsubishi Meta l Corporation a nd Atlas ~o n solidated of In ter·n r.~ 1 r;:evern.Jt:::>, CTA Case No.

2f30l, (.lpr· .i. l .U:3, 1980; and Mitsubishi.Metal Corporation, et al. vs . Commiss ion e r of

Internal

Revenue,

CTA

Ca~;e No .

3015~ Janua - y 15, 1981, which are pending appeal in tl1f'?

Supr·E'me

Cou r·t, but in both CH.Sf·2s, 1 ··1.i-l:.~-:; uhishi obtain e d the loan s as conduit of the Export-Import: Bank of Japan and a consortium of private Japanes e b a nk s fin a n ced b y the Gove rnme nt of Japan.

As correct l y pointed out by respondent, the s aid c a ses in v ol v e cont.r·act of ,:u-1d Mitsubishi Metal Corporation arranged, as agent, to loan for

Atlas

Consolidate d

Mining

& Development Corporation to finance the instal lation of a new concentrator in (.ltlas' Bigaa Area intended to e :-: P<"'nd the pr·oduc ti ve c: e.\p ;:~c:: .i t.y of its To 1 edo minE'!!S, <':lncl {.)t.l,::\s aq r··e r.·~d to ~~ E'.1 ll to t1.i t:sub.is-,hi the ..

4E2

DECISION —-

“entire copper . concentrates produced from said cancentrator for 15 years. In accordance with their cantract, Mitsubishi, as agent of Atlas, made arrangements and anplied for a loan with Eximbank of Japan and ai consortium of ‘Japanese hanks in order to accommodate Atlas which was subsequently approved by Eximbank and the consortium of Japanese Ranks. In eather words, the relationship between Atlas and Mitsubishi with respect to the loan applied for by Mitsubishi and approved by Eximbank of Japan and the caneaPEoUR of Japanese banks was that of agency, whith business , relations never existed in the present case. Then, unlike in the instant case, the interest payments by Atias toa Mitsubishi were all remitted to Eximbank and the consortium of Japanese banks without retaining any portion thereaf as its income.

The Court recognizes that inasmuch as the power of te ation is necessary to the existence of the government, any act limiting such power, or where the intent to tax is clear, and the taxpayer Claims that he. is not encompassed by the statute, such statute should bre strictly construed in favor of the government and against the taxpayer. In 453

‘ather words, exemptions fram taxation are toa be canstrued ay

AQAINEt the

taxpayer oar. liberally in favor of the taxing authority. (Jai-Alai Corporation vs. Collector, 104 Phil. SAGs Esso Standard Fastern vs. Commissioner of Customs, L-2if4i, Oct. BA, 19646, Bd SCRA ABRs Phil. Acetylene vs. Commissioner of Internal Revenue, LeLe7O7, Ouquet 7, 967, FO SCRA LOSS; Commissioner of Internal Revenue vs. Guerrero, L-BO942, Sent, 22, 1967, 21 SCRA 180.) The exception contained in the tax statutes must be strictly construed against the one: claiming the exemption hecauwse the law does not look with favor an tax exemptions and that he wha would seek to he thus privileged must justify it by words too plain to he mistaken and» tog cateyorical tom he mis- interpreted. (Commissioner of Internal Revenue vs. P.J. Kiener Company, Ltd., et al., L~-B47 54, July 2a, 1975, 65 SCRA 142.) An exemption fram the commen burden cannot be permitted ta exist upan vague implication or inference. (Manila Electric Co. vs. Vera, L.~25847, Oct. 22, 197%, G7 SCRA BAL.)

oe

DECISION

CTA CASE NO . 3380 - 14 - WHEREF0RE, fin d ing the petition for review without merit, the same is dismissed and the refund sought is hereby denied, at petitioner's costs.

Quezon City

~ Metro Manila~ July 27~ 1988. Presid .

WE CONCUR:

r--...

CONS TANTE C .

ROAQUIN

jssociate

Judge

-~

Associate Judge

CERTIFICATION

J herehy certify that this decisian yA SS reached after due consultation amorgq the members of the Caurt af Tax Appeals in accordance with Sectian LS, Article VIIT of the Canstitution.

Quarta;

AMANTE ILLER

Presiding Judge

Court of Tax Appeals