TAXATION 1_Smith v Commissioner

8/9/2019 TAXATION 1_Smith v Commissioner

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[C.T.A. CASE NO. 6268. September 12, 2002.]

DONALD L. SMITH, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,respondent.

D E C I S I O N

This Petition for Review involves a claim for refund in the amount of One MillionFive Hundred Thirty Three Thousand Six Hundred and Sixty Pesos & 70/100(P1,533,660.70) allegedly representing the income tax erroneously paid by hereinpetitioner for taxable year 1998. cTESIa

The antecedent facts of the case are as follows:

Petitioner is a citizen of the United States, of legal age, single, and is an employeeof Coastal Subic Bay Terminal, Inc., with address at 42A Grayling Street, WestKalayaan, Subic Bay Freeport Zone, Philippines. He was employed as Controller of

Coastal Subic Bay Terminal Inc. in 1998 (pars. 1 and 3, Joint Stipulation of Facts).

Coastal Subic Bay Terminal Inc. is a business entity located within the SubicSpecial Economic Zone, as created by Republic Act 7227, and was issued by theSubic Bay Metropolitan Authority a Certificate of Registration and Tax ExemptionNo. 93-0019 on December 4, 1997, valid until December 4, 1998 (par. 5 JointStipulation of Facts).

On April 15, 1999, petitioner, with tax identification number 170-302-240, filed hisannual income tax return and paid P1,533,660.70 in compensation income taxesfor the income he derived from his employment with Coastal Subic Bay Terminal,

Inc. (Annexes A, B and C, Petition for Review).

Claiming that the payment of tax on his compensation income was erroneous,petitioner filed a written claim for refund with the Bureau of Internal Revenue(BIR) on April 5, 2001 (par. 7, Joint Stipulation of Facts). As there was noimmediate action on his claim for refund and the two-year prescriptive period wasabout to lapse, petitioner elevated his case to this court by way of Petition forReview on April 6, 2001.

On May 10, 2001, petitioner filed a Manifestation and Motion to Correct Petitionfor Review. As alleged, said errors were due to some typographical errors

committed in the finalization of the draft-petition. The motion was granted in opencourt on May 25, 2001 and confirmed in a resolution dated May 31, 2001.

On August 14, 2001, herein respondent filed his Answer, raising the followingSpecial and Affirmative Defenses:

1. Petitioner's alleged claim for refund is still subject to administrativeroutinary investigation/examination by respondent's bureau.


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2. Section 12(c) of RA 7227, otherwise known as the Bases Conversion andDevelopment Act of 1992", relied upon by petitioner in claiming the refundprovides:

Section 12. Subic Special Economic Zones.

xxx xxx xxx

(c) The provision of existing laws, rules and regulations to the contrarynotwithstanding, no taxes, local and national, shall be imposed within the SubicSpecial Economic Zone. In lieu of paying taxes, three percent (3%) of the grossincome earned by all businesses and enterprises within the Subic SpecialEconomic Zone shall be remitted to the National Government, one percent (1%)each to the local government units affected by the declaration of the zone inproportion to their population area, and other factors. In addition, there is herebyestablished a development fund of one percent (1%) of the gross income earnedby all businesses and enterprises within the Subic Special Economic Zone to be

utilized for the development of municipalities outside the City of Olongapo andthe Municipality of Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemptionprivileges in the Subic Special Economic Zone, the same shall be resolved in favorof the latter. (Emphasis Supplied)

Under the foregoing provisions, only business establishments operating within theSubic Special Economic Zone are exempt from national and local taxes. Petitioneris not covered by the exemption granted under Section 12 (c) of Republic Act7227, as implemented by Section 4 of Revenue Regulations No. 1-95.

3. Petitioner's claim for refund lacks any basis in law.

4. In an action for refund/credit, the burden of proof is upon the taxpayer toestablish its right to refund and failure to sustain the burden is fatal to the actionfor refund.

Upon approval of their Joint Stipulation of Facts and Issues, the parties agreed todispense with the trial and submit this case for decision, considering that theissues involved are purely legal.

The issues to be resolved by this court in the case at bar are as follows:

1. Whether or not aliens working within the Subic Special Economic Zone aresubject to Philippine income taxes on income earned from such employment;

2. Whether or not petitioner is entitled to a refund or tax credit for incometaxes paid on compensation earned from working within the Subic SpecialEconomic Zone;


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3. Whether or not Section 12 (c) of Republic Act No. 7227 applies to petitioner.

With respect to the first issue, petitioner posits the view that the entire territoryknown as Subic Special Economic Zone (SSEZ, for brevity) is a tax-free territoryand as such, all income derived within the zone, including that of an alienindividual, is exempt from income tax and other taxes. Consequently, according to

petitioner, SSEZ is beyond the coverage of RA 8424, otherwise known as theNational Internal Revenue Code and the Tariff and Customs Code, as well as otherPhilippine tax laws.

Said contention deserves scant consideration.

The law in point is RA 7227, particularly Section 12 (c), to quote:

Section 12. Subic Special Economic Zones.

(c) The provision of existing laws, rules and regulations to the contrary

notwithstanding, no taxes, local and national, shall be imposed within the SubicSpecial Economic Zone. In lieu of paying taxes, three percent (3%) of the grossincome earned by all businesses and enterprises within the Subic SpecialEconomic Zone shall be remitted to the National Government, one percent (1%)each to the local government units affected by the declaration of the zone inproportion to their population area, and other factors. In addition, there is herebyestablished a development fund of one percent (1%) of the gross income earnedby all businesses and enterprises within the Subic Special Economic Zone to beutilized for the development of the municipalities outside the City of Olongapoand the Municipality of Subic, and other municipalities contiguous to the baseareas.

In case of conflict between national and local laws with respect to tax exemptionprivileges in the Subic Special Economic Zone, the same shall be resolved in favorof the latter (Emphasis ours).

In interpreting the aforequoted section of RA 7227, fundamental rules ofconstruction shall accordingly be applied. The phrase "no taxes, local and nationalshall be imposed within the SSEZ" shall not be treated in isolation with the othersubsequent phrases as it might convey a meaning different from that of itscontext taken as a whole. It is important that every section, provision or clause ofthe statute be expounded by reference to each other in order to arrive at the

effect contemplated by the legislature (page 61, Agpalo, Statutory Construction,1995 ed.). Thus, the phrase "no taxes, local and national, shall be imposed withinthe SSEZ" must be read together with the following sentence "In lieu of payingtaxes, 3% of the gross income earned by all businesses and enterprises within theSSEZ shall be remitted to the National Government, one percent (1%) each to thelocal government units affected by the declaration of the zone in proportion totheir population area, and other factors. In addition, there is hereby established adevelopment fund of one percent (1%) of the gross income earned by allbusinesses and enterprises within the Subic Special Economic Zone to be utilized


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for the development of the municipalities outside the City of Olongapo and theMunicipality of Subic, and other municipalities contiguous to the base areas." Thisphrase belies petitioner's assertion that SSEZ is indeed a tax-free territory. Theterm "in lieu of paying taxes" as used in the law does not constitute an absoluteexemption from taxation. While spared from national and local taxes, businessesand enterprises within the SSEZ are subjected to the said tax base on gross

income. No matter what legal jargon is used, the said taxes are in fact taxesimposed on businesses or enterprises operating within the SSEZ. Thus, it isincorrect to say that SSEZ is actually a tax-free territory.

Individual aliens employed within the Subic Special Economic Zone (SSEZ) are notexempt from the awesome power of Philippine taxation especially so that theysourced out their earnings from within the Philippines. The secured area of SSEZ,which is virtually delineated in metes and bounds by Proclamation No. 532, issuedby the then President Fidel Ramos on February 1, 1995, is in reality part of theterritorial jurisdiction of the Philippines. To buttress the point that SSEZ is indeedwithin the Philippine jurisdiction, Section 12 (h) of RA 7227, actually placed the

fenced-off area of SSEZ under the responsibility of the Philippine NationalGovernment, thus,

"The defense of the zone and the security of its perimeters shall be theresponsibility of the National Government in coordination with the Subic BayMetropolitan Authority. The Subic Bay Metropolitan Authority shall provide andestablish its own internal security and fire-fighting forces."

Such being the case, all subjects over which the Philippines can exercise dominionare necessarily objects of taxation. As such, all subjects of taxation within itsjurisdiction are required to pay tax in exchange of the protection that the state

gives (Commissioner of Internal Revenue vs. Algue, Inc., et al., L-28896, February17, 1988). Thus, the SSEZ, being within the territorial boundaries of thePhilippines, the aliens residing therein, who enjoy the benefits and protection fromthe said state are not exempt from contributing their share in the running of thegovernment. They have the bounden duty to surrender part of their hard-earnedincome to the taxing authorities. SAHaTc

Contrary to petitioner's assertion, the National Internal Revenue Code operateswith equal force and effect to all subjects within the territorial boundary of thePhilippines. Being a general law, it covers all persons, properties and privileges,which are found within its jurisdictional limit. With the enactment of RA 7227,

there came an exception to the general rule. Being a special law, it prevails overthe general law but only in so far as a certain group of persons or things isconcerned. Since the law, in granting tax incentives, only made mention ofbusinesses and enterprises within the SSEZ, it follows then that said RA 7227operates only on the said group. As no mention was made to individual taxpayersbeing tax-exempt, it follows that they still fall within the ambit of the general lawpursuant to the maxim excepto firmat regulam in casibus non exceptis, a thingnot being excepted must be regarded as coming within the purview of the generalrule.


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Parenthetically, there is not much of a substantial difference between individualcitizen and an individual resident alien working in the Philippines as far as incometaxation is concerned. In fact, under the National Internal Revenue Code (NIRC) of1997, both classes of individual taxpayers are similarly taxed under Section 24(A).The distinction lies only on the source of income to be taxed: While a residentcitizen is taxed on all income from within and without the Philippines, the resident

alien is taxed only on income from within the Philippines.Proceeding now to the issue of whether herein petitioner is entitled to a refund ofincome taxes paid on compensation earned from working within the SSEZ, weanswer in the negative. As previously discussed, resident aliens within the SSEZare still subject to the NIRC as far as their income from within the Philippines isconcerned. Accordingly, no refund of the said tax can be granted to petitioner asthe said tax due the petitioner in the amount of P1,533,660.70 was correctlyremitted to the BIR.

Anent the last issue of whether Section 12(c) of RA 7227 applies to petitioner,

again, we rule in the negative. A close reading of Section 12 (c) would reveal thatthe exemption from taxes, local or national, is actually intended to benefit onlythose registered businesses and establishments operating within the territory andnot to individual taxpayers working within its parameters. The grant of saidincentive is premised on the fact that the influx of new investments in oureconomy could very well meet the country's avowed policy of acceleratingeconomic growth and development.

As held by the Supreme Court in the case of Tiu vs. Court of Appeals, 301 SCRA278, January 20, 1999, thus:

"From the above provisions of the law, it can easily be deduced that the realconcern of RA 7227 is to convert the lands formerly occupied by the US militarybases into economic or industrial areas. In furtherance of such objective, Congressdeemed it necessary to extend economic incentives to attract and encourageinvestors, both local and foreign. Among such enticements are: (1) a separatecustoms territory within the zone, (2) tax-and duty free importations, (3)restructured income tax rates on business enterprises within the zone, (4) noforeign exchange control, (5) liberalized regulations on banking and finance, and(6) the grant of resident status to certain investors and of working visas to certainforeign executives and workers" (emphasis supplied).

It is clear from the foregoing that the purpose of the law is to attract andencourage investors who could spur economic growth and resultantly couldgenerate employment opportunities for the Filipinos. Nothing has been said aboutthe employees and personnel working thereat to be likewise tax-exempt on theircompensation income as no objective of national magnitude is actually realized ifthe law intends to exempt them from tax. Except for the privilege of granting aworking visa for said alien workers, the law is silent with regards to their taxability.To likewise exempt them from payment of taxes would be stretching the coverageof the law a little bit too far. This court cannot indulge in expansive construction


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and write into the law an exemption not therein set forth.

If the law intended to exempt individuals employed within the SSEZ from taxes, itcould have expressly stated it in clear and unequivocal language. The exemptionfrom the common burden cannot be permitted to exist upon vague implication norcan it be made out of inference. Settled is the rule that he who claims an

exemption from his share of the common burden in taxation must justify his claimby showing that the legislature intended to exempt him by words too plain to bemistaken (Surigao Consolidated Mining Co., Inc. vs. Collector of Internal Revenue,et al., L-14878, December 26, 1963). Since RA 7227 does not specifically mentionthe granting of tax exemptions to individuals working within the SSEZ, then no taxrefund should be accorded to herein petitioner.

The oft-repeated rule that "a refund partakes of the nature of a tax exemption andso it must be construed in strictissimi juris against the grantee and liberally infavor of the taxing power" deserves reiteration in this case.

WHEREFORE, in view of the foregoing, the instant Petition for Review is herebyDENIED for lack of merit. TEAaDC

SO ORDERED.

(SGD.) ERNESTO D. ACOSTA

Presiding Judge

I CONCUR:

(SGD.) JUANITO C. CASTAEDA, JR.

Associate Judge


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[C.T.A. CASE NO. 6139. December 17, 2003.]

MITSUBISHI CORPORATION MANILA BRANCH, petitioner, vs. COMMISSIONER OFINTERNAL REVENUE, respondent.

D E C I S I O N

This case involves a claim for refund of erroneously paid income tax and branchprofit remittance tax for the fiscal year ended March 31, 1998 amounting toP44,288,712 and P8,324,100, respectively, arising from petitioner's OverseasEconomic Cooperation Fund funded Batangas Coal-Fired Thermal Power PlantProject. cEHSTC

Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation dulyorganized and existing under the laws of Japan and duly licensed to engage inbusiness in the Philippines, with office address at the 14th Floor, L.V. Locsin,Building, 6752 Ayala Avenue, Makati City, Metro Manila (par. 1, Joint Stipulation of

Facts and Issues).

Through an Exchange of Notes between the Government of Japan and theGovernment of the Philippines dated June 11, 1987 (Exhibit "J"), it was agreed thata loan amounting to Forty Billion Four Hundred Million Japanese Yen(Y40,400,000,000) will be extended to the Republic of the Philippines by the thenOverseas Economic Cooperation Fund (hereinafter, "OECF"), (now the Japan Bankfor International Cooperation or "JIBC" for the implementation of the Calaca IICoal-Fired Thermal Power Plant Project (hereinafter, Calaca II Project).

In paragraph 5(2) of the said Exchange of Notes, it was stated that:

"The Government of the Republic of the Philippines, will, itself or through itsinstrumentalities, assume all fiscal levies or taxes imposed in the Republic of thePhilippines on Japanese firms and nationals operating as suppliers, contractors orconsultants on and /or in connection with any income that may accrue from thesupply of products of Japan and services of Japanese nationals to be providedunder the Loan" (Exhibit "J").

Subsequently, the OECF and the Government of the Republic of the Philippinesentered into a Loan Agreement (Loan Agreement No. PH-P76) dated September25, 1987 for Forty Billion Four Hundred Million Japanese Yen (Y40,400,000,000) for

the implementation of the Calaca II Project (Exhibit "O").

On June 21, 1991, the National Power Corporation (hereinafter, "NPC") andMitsubishi Corporation, petitioner's head office in Japan, entered into a contractfor the engineering, supply, construction, installation, testing and commissioningof one (1) x 300 MW Batangas Coal-Fired Thermal Power Project II at Calaca,Batangas (Calaca II Coal-Fired Thermal Power Project) (hereinafter, "Contract")(Exhibit "I").


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Article VI of the Contract provided that "The Foreign Currency Portion of theContract Price for Phase I is funded by OECF Loan No. PH-P76. Any ForeignCurrency Portion of the Contract which is not covered by OECF Loan No. PH-P76shall constitute as Phase II of the Contract. Corporation (NPC) shall secureadditional financing from OECF for Phase II within one (1) year after the date ofContract effectivity (Exhibit "I"). IAcTaC

Thus, a second loan agreement (Loan Agreement No. PH-P141) dated December20, 1994 for the amount of Five Billion Five Hundred Thirteen Million Japanese Yen(Y5,513,000,000.00) was entered into between the OECF and the Government ofthe Republic of the Philippines for the additional funding of the Calaca II Project(Exhibit "P").

The Calaca II Project was completed by the petitioner on December 2, 1995 butwas only accepted by NPC on January 31, 1998 through a Certificate ofCompletion and Final Acceptance dated February 4, 1998 (Exhibit "D").

On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year endedMarch 31, 1998 with the Bureau of Internal Revenue (par. 3, Joint Stipulation ofFacts and Issues; Exhibits "B", "B-1" and "B-2"). In the return, petitioner (being theManila Branch of Mitsubishi Corporation) reported an income tax due ofP90,481,711.00 computed in accordance with the provisions of RevenueMemorandum Order ("RAMO") No. 1-95, as follows:

Solicitation and Trading Activities

Worldwide Operating Income P6,421,609,029.00

Sales to the Philippines15,342,816,283.00

Worldwide Sales 3,281,557,773,404.00 .004675467

Taxable Income from

Solicitation Activities 30,024,023.00

Attribution Rate 75%

22,518,017.00


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Taxable Income April-December 1997 16,888,513.00

Tax Rate 35% 5,910,980.00

Taxable Income January-March 1998 5,629,504.00

Tax Rate 34% 1,914,031.00

Tax Due from solicitation and

trading activities P7,825,011.00

Construction and Other Activities


Tax Rate 35%

Tax due from construction and other activities P82,656,700.00

Total Tax Due P90,481,711.00

==============

(Exhibits "B-3", "B-6" and "B-7")

In computing the P90,481,711.00 income tax due for fiscal year ended March 31,1998, petitioner included as part of its taxable income, all revenues earned andcost incurred for its Calaca II Project, in accordance with the completed contractmethod of reporting income (Exhibit "B").

The net income from the Calaca II Project amounted to P151,997,705, computedbelow:

Revenue P1,416,829,241


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Less: Project Cost 1,111,706,964

Gross Profit305,122,277

Less: Operating Expenses 74,162,777

Income from Operations 230,959,500

Add: Other Income 3,482,413

Income Before Income Tax 234,441,913

Provision for Income Tax 82,444,208

Net IncomeP151,997,705

============

(Exhibit "B-16")

Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return ofIncome Taxes Withheld (Exhibit "C") and remitted the amount of P8,324,100representing its branch profit remittance tax (BPRT) for branch profits remitted tothe Head Office (in Japan) out of its income for the fiscal year ended March 31,1998. The tax rate used was 10% in accordance with the Philippines-Japan Tax Treaty. HCSDca

On September 7, 1998, the respondent issued Bureau of Internal Revenue RulingNo. DA-407-98 (Exhibit K) where it held that "Mitsubishi has no liability for incometax and other taxes and fiscal levies, including VAT, . . . on the 100% of its foreigncurrency portion of the Calaca II Project since the said taxes were assumed by thePhilippine Government." (par. 5, Stipulation of Facts, Joint Stipulation of Facts andIssues).

Of the P1,416,829,241.00 (Exhibit "B-16") total revenue from the Calaca II Project,P640,907,792 or 45.24% represents that portion which was not OECF-fundedconsidering that this amount represents the Philippine Peso component of theproject, while P775,921,449 or 54.76% represents the OECF funded portion(Exhibit N).


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Since petitioner paid P82,444,208.00 income tax for its income from the entireCalaca II Project (inclusive of the OECF-funded and non-OECF funded portions) andP8,324,100.00 BPRT for the remittance of its income (inclusive of the income onthe OECF-funded portion of the Calaca II Project), petitioner now seeks a taxrefund/credit of the P44,288,712 erroneously paid income tax and theP8,324,100.00 erroneously paid BPRT computed hereunder as follows:

Erroneously Paid Income Tax on Calaca II Project

Explanation

Income Taxes Paid P82,444,208 for income attributable to the

========== Calaca II Project

Sales P640,907,792 non-OECF funded portion

Less: Project Cost502,936,230 P1,111,706,964 (Total Project Cost)

x 45.24% (non-OECF funded portion)


Less: Operating Expenses 33,551,240 P74,162,777(total operatingexpenses)


Income from Operation 104,420,322 pertaining to the non-OECF funded

portion


Income before tax 107,902,735

Add: 1,112,967

Taxable Income 109,015,702 pertaining to the non-OECF funded

portion


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Income tax due 38,155,496 pertaining to the non-OECF funded

========== portion

Income taxes paid for

the entire project 82,444,208

Income tax due 38,155,496

Erroneously paid

Income taxes P44,288,712 pertaining to the OECF funded

========== portion and, therefor, should not

have been paid by Mitsubishi

(Exhibit "A")

Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits fromOECF Funded Portion of Calaca II Project

Net Income from Calaca II Project 151,997,705

Divided by: Total Revenue 1,416,829,241

Ratio of Net Income to Total Revenue 10.728%

==========

OECF Funded portion of Calaca II Project 775,921,449

x Ratio of Net Income to Total Revenue 10.728%

Net income from OECF-funded Portion 83,240,998

Multiply by BPRT Rate 10%


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Erroneously paid BPRT P8,324,100*

===========

*pertaining to the income from the OECF funded portion and, therefore, shouldnot have been paid by Mitsubishi

(Exhibit "A")

On June 30, 2000, petitioner filed an administrative claim for refund and/or taxcredit with respondent in the amount of P52,612,812.00, representing itserroneously paid income taxes in the amount of P44,288,712 and erroneouslypaid branch profit remittance tax in the amount of P8,324,100.00 correspondingto the OECF-funded portion of its Calaca II Project as computed above (par. 6,Stipulation of Facts, Joints Stipulation of Facts and Issues; Exhibits "A" and "A-1").

On July 13, 2000, petitioner, in order to suspend the running of the two-year

period within which to file a judicial claim for refund, filed the instant petition forreview pursuant to Section 229 of the Tax Code.

Respondent, on September 12, 2000, filed his answer raising the following Specialand Affirmative Defenses, to wit:

"7. Petitioner's alleged claim for refund is subject to administrative routinaryinvestigation/examination by respondent's bureau.

8. Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-servingrepresentations and not on actual investigation by respondent, petitioner must

prove with evidence its applicability to the instant case.

9. Taxes are presumed to have been collected in accordance with law.

10. In action for refund/credit, the burden of proof is on the taxpayer toestablish its right to refund and its failure to sustain the burden is fatal to theclaim for refund/credit.

11. Petitioner must show that it has complied with the provisions of Sections204(c) and 229 of the Tax Code."

On April 6, 2001, petitioner, by leave of court, moved for the adoption of theprocedure under CTA Circular No. 1-95, as amended by CTA Circular No. 10-97which was granted by this court on April 23, 2001. Mr. Ruben R. Rubio, a partnerof Sycip Gorres Velayo & Co. was commissioned to examine and verify thevoluminous documents supporting petitioner's claim. Thereafter, on August 28,2001, Mr. Ruben R. Rubio submitted his report (Exhibit "S") relative to hisverification of petitioner's claim for refund. The report reveals an erroneously paidincome tax and erroneously paid branch profit remittance tax amounting toP44,288,712 and P8,324,100, respectively. This court noted that there is no


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discrepancy between the amount cited in the report and the amount beingclaimed by petitioner. cEAIHa

In support of its claim for refund petitioner, presented documentary andtestimonial evidence. On the contrary, respondent did not present any testimonialor documentary evidence to dispute the claim of petitioner.

On May 23, 2003, petitioner filed its memorandum. On the other hand,respondent, despite the extension given by this court for him to file hismemorandum, failed to file the same. And so, this court, in its resolution datedJuly 15, 2003, submitted this case for decision.

The issues to be resolved by this court as stipulated by the parties are as follows:

1. Whether petitioner has erroneously paid income and branch profitremittance taxes for the fiscal year ended March 31, 1998, which is a proper claimfor refund pursuant to Sections 204 and 229 of the Tax Code; and

2. Whether the erroneously paid income and branch profit remittance taxes forthe fiscal year ended March 31, 1998 are substantiated by documentary evidence.

We are now going to discuss the first issue.

Records reveal that petitioner anchored its claim for refund on BIR Ruling No. DA-407-98, dated September 7, 1998 (Exhibit K) interpreting Item 5, paragraph 2 ofthe Exchange of Notes, which we herein quote for easy reference, to wit:

DA-407-98

9-7-98

Sycip Gorres Velayo & Co.

6760 Ayala Avenue

Makati City

Attn.: Atty. C. P. Noel

Tax Division

Gentlemen:

This refers to your letter dated May 15, 1998 requesting on behalf of your client,Mitsubishi Corporation-Manila Branch, for a ruling regarding the tax consequencesof its OECF-funded NAIA II and Calaca II Projects.


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It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a privatecorporation duly organized and existing under and by virtue of the laws of Japan;that Mitsubishi was duly authorized by the Securities and Exchange Commissionto operate a branch in the Philippines; that Mitsubishi is a member of the MTOBConsortium, the consortium which was granted the NAIA II Project is 75% foreign-funded by the government of Japan through the OECF and 25% as counterpart

fund of the Philippine Government; the funding of this project was made pursuantto an Exchange of Notes (Notes-NAIA) between the Government of Japan and thePhilippines; that under Notes NAIA, a loan in Japanese Yen up to the amount ofY47,036,000,000.00 was extended to the Philippine Government to fund, amongother projects stated therein, the Ninoy Aquino International Airport Terminal 2 orthe NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; thatitem 7, paragraph 2 of Notes-NAIA states:

"7. . . .

(2) The Government of the Republic of the Philippines will, itself or through its

executing agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and/or services of Japanesenationals to be provided under the Loan.

It is likewise represented that on June 21, 1991, Mitsubishi entered into a contractwith the National Power Corporation (NPC) for the supply of equipment andservices, engineering, construction, testing and commissioning of equipment inconnection with the Calaca II Project; that funding of the project is made through agrant from the Japanese Government through the OECF and pursuant to an

Exchange of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to Y40,400,000,000.00 was extended expressly to implementthe Calaca II Project; that Item 5, paragraph 2 Notes-Calaca provides;

"5. . . .

(2) The Government of the Republic of the Philippines will, itself or through itsexecuting agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and services of Japanese

nationals to be provided under the Loan." (Emphasis supplied.)

It is further represented that the above contributions of the Japanese Governmentthrough the OECF represents 75% of the NAIA II Projects and 100% of the foreigncurrency portion of the Calaca II project both of which will benefit not Japan butthe Philippines; and that under Notes-NAIA and Notes-Calaca, any income, valueadded tax or the other fiscal levies that may arise therefrom should not be madethe obligation of Japanese firms engaged in the Projects.


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In reply, please be informed that the aforequoted provisions of Notes-NAIA andNotes-Calaca are not grants of direct tax exemption privilege to the Japanesefirms, Mitsubishi in this case, and Japanese nationals operating as suppliers,contractors or consultants involved in either of the two projects because the saidprovisions state that it is the Government of the Republic of the Philippines that isobligated to pay whatever fiscal levies or taxes they may be liable to. Thus there

is no tax exemption to speak of because the said taxes shall be assumed by thePhilippine Government; hence the said provision is not violative of theConstitutional prohibition against grants of tax exemption without the concurrenceof the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec.28(4), Art. VI, 1987 Philippine Constitution).

In view thereof, and considering that the estimated contribution of theGovernment of Japan is Y18,120,000,000.00 in the NAIA II Project andY40,400,000,000.00 in the Calaca II Project and that the beneficiary is thePhilippine Government, this office is of the opinion and hereby holds thatMitsubishi has no liability for income tax and other taxes and fiscal levies,

including VAT, on the 75% of the NAIA II Project and on the 100% of the foreigncurrency portion of the Calaca II Project since the said taxes were assumed by thePhilippine Government.

This ruling is being issued based on the foregoing representation. If uponinvestigation, it will be discovered that the facts are different, then this ruling shallbe considered null and void.

Very truly yours,

SIXTO S ESQUIVAS IV

Deputy Commissioner

(Legal and Enforcement Group)

Based on the above-stated BIR Ruling DA 407-98 and the Exchange of Notes,petitioner now claims that its payment of the subject taxes was erroneouspursuant to Section 229 of the Tax Code, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit orproceeding shall be maintained in any court for the recovery of any national

internal revenue tax hereafter alleged to have been erroneously or illegallyassessed or collected, or of any penalty claimed to have been collected withoutauthority, or of any sum alleged to have been excessively or in any mannerwrongfully collected, until a claim for refund or credit has been duly filed with theCommissioner; but such suit or proceeding may be maintained, whether or notsuch tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)years from the date of payment of the tax or penalty regardless on any


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supervening cause that may arise after payment: Provided, however, That theCommissioner may, even without a written claim therefor, refund or credit anytax, where on the face of the return upon which payment was made, suchpayment appears clearly to have been erroneously paid. (Emphasis supplied.)

We agree with petitioner. IaSCTE

Notably, there was an erroneous payment of the subject taxes by petitioner forthe reason that said taxes are to be assumed by the Government of thePhilippines through its executing agency, the NPC, in connection with Item 5(2) ofthe Exchange of notes. As defined in Black's Law Dictionary, 6th Edition, the word"assume" means "to take on, become bound, or put oneself in place of another asto an obligation or liability". As can be gleaned from the definition, theGovernment of the Philippines, through NPC, binds itself to shoulder the taxobligations and liabilities of petitioner. This finds support under the provision ofArticle VII (B) (1) of the Contract (Exhibit "I") executed between petitioner andNPC, to wit:

Article VII (B) (1)

"B. FOR ONSHORE PORTION

1.) CORPORATION (NPC) shall, subject to the provisions under the ContractDocuments on Taxes, pay any and all forms of taxes which are directly imposableunder the Contract including VAT, that may be imposed by the PhilippineGovernment, or any of its agencies and political subdivisions." (Exhibit "I-1")

In addition, the testimony of petitioner's witness on the matter on which between

the parties shall shoulder the subject taxes further strengthened petitioner'sclaim, thus:

xxx xxx xxx

Atty. Manalo:

Now, based on the amendment to the contract between National PowerCorporation and Mitsubishi Corporation, who will pay the taxes for the onshoreportion of the Contract?

Witness:

Under Article VII (B) of the original contract, the National Power Corporationshall pay the taxes for the onshore portion of the contract.

Atty. Manalo:

I would like to request again for the submarking of Article VIII (B) of theoriginal contract as Exhibit "I-1".


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xxx xxx xxx

Therefore, the income tax and BPRT payments made by petitioner to respondentwhen such payments should have been made by the NPC, undoubtedly, putpetitioner's case in the operation of Section 229 of the Tax Code as one involvingerroneous payment.

A careful reading of the provisions of the Exchange of Notes will show that it is theintention of the two governments not to use the proceeds of the loan in thepayment of all fiscal levies or taxes imposed by the Philippines. In view thereof,we believe that to deny petitioner's claim for refund would violate the covenantthat the funded amount should not be subject to any taxes. This statement findssupport under item 8(a) of the Exchange of Notes, to wit:

"8. The Government of the Republic of the Philippines will take necessarymeasures to ensure that:

(a) The Loan be used properly and exclusively for the Project.

This is not the first time that this court has upheld the validity of the Exchange ofNotes as a basis for the refund of erroneously collected taxes. In the case of P & NCorporation (Manila Branch Office) vs. Commissioner of Internal Revenue, CTACase Nos. 4163 and 4293 (July 24, 1991), which involved a claim for refund oferroneously collected contractors' and withholding taxes, this court in granting thepetition on the ground that the subject provision of the Exchange of Notespartakes the nature of a tax exemption, stated that: DaTHAc

"It must be remembered that "tax exemption is founded on public policy . . . are

granted on the ground that they will benefit the public generally, or as a reward orcompensation for services rendered in the performance of some function deemedsocially desirable . . . are favored on the theory that the concession is due to quidpro quo for the performance of services essentially public by which the State isrelieved pro tanto from performing (84 C.J.S. No. 215, pp. 413414). Thus it isimportant to note that the exchange of notes in this case was entered into inpursuance of a loan agreement with Japan. Under the Constitution, in force at thattime, the President may contract and guarantee foreign and domestic loans onbehalf of the Republic of the Philippines subject to such limitations as may beprovided by law (Art. II, Section 12, 1973 Constitution, as amended). Therefore,having validly entered into a loan agreement through the exchange of notes, the

terms therein necessarily govern the execution of the loan agreement. Thecontract, involved in this case which was entered into pursuant to the loan merelyembodies the exemption provision in said exchange of notes."

Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta andCo., Inc. and BF Corporation, Operating as MTOB Consortium, CTA Case No. 5757,January 15, 2002, and in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A.M. Oreta and Co., Inc. and BF Corporation, Operating as MTOB Consortium, CTACase No. 6037, November 11, 2002, this court, again pursuant to the Exchange of


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Notes, granted the claim of petitioners for the refund of unutilized creditablewithholding value-added tax (VAT) in recognition of the validity of the Exchange ofNotes. This court has noted that in these decisions, the subject claim for refundwas based on the Notes-NAIA mentioned in BIR Ruling DA 407-98 in which hereinpetitioner was one of the claimants. Thus, in consideration of the above-statedpronouncements of this court affirming the validity of the Exchange of Notes as a

valid ground for refund of erroneously paid taxes, this court finds no valid reasonto disturb the wisdom of said rulings.

Likewise, this court is aware of Revenue Memorandum Circular (RMC) No. 42-99,dated June 2, 1999, amending Revenue Memorandum Circular No. 32-99, whichhas for its subject the standard clauses (referring to Item 5 paragraphs 1 and 2 ofsaid Exchange of Notes) pertaining to the tax treatment of participating Japanesecontractors and nationals under the exchange of notes between the JapaneseGovernment and the Republic of the Philippines, providing for the properprocedure for petitioner in case where it already paid the taxes subject of thiscase to the BIR. Pertinent portions of which read as follows:

The foregoing provisions of the Exchange of Notes mean that the Japanesecontractors or nationals engaged in OECF-funded projects in the Philippines shallnot be required to shoulder all fiscal levies or taxes associated with the project.Instead, the taxes shall be shouldered and borne by the executing governmentagencies. Hence, for the comprehensive treatment of the tax implications arisingtherefrom, the following rulings are hereby promulgated:

A) . . .

B) INCOME TAX

1. Japanese firms or nationals operating as suppliers, contractors orconsultants on and/or in connection with any income that may accrue from thesupply of products and/or services to be provided under the Project Loan, shall filethe prescribed income tax returns. Since the executing government agencies aremandated to assume the payment thereof under the Exchange of Notes, the saidJapanese firms or nationals need not pay the taxes due thereunder.

2. The concerned Revenue District Officer shall, in turn, collect the said incometaxes from the concerned executing government agencies.

3. In cases where income taxes were previously paid directly by the Japanesecontractors or nationals, the corresponding cash refund shall be recovered fromthe government executing agencies upon the presentation of proof of paymentthereof by the Japanese contractors or nationals. (Emphasis supplied).

C) . . .

Indubitably, under the RMC as regards income taxes, petitioner is only required tofile its ITR but need not pay the taxes due thereunder. The Commissioner of the


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BIR has mandated the District Officer to collect the income taxes from thegovernment executing agency. But in cases where income taxes were previouslypaid directly by petitioner to the BIR, as what petitioner did in this case, the cashrefund shall be recovered from the NPC. However, the RMD dated June 2, 1999only took effect after its publication in the National Administrative Register, July-September 1999 issue while the ITR of petitioner was filed on July 15, 1998 or

almost a year before the issuance of the RMC. Therefore, we hold that said refundmust be claimed directly by petitioner from the respondent for it would be unfairon the part of the petitioner that said RMC be given retroactive effect.

Anent the second issue, this court finds that petitioner has properly presentedsufficient evidence to substantiate its claim for erroneously paid income andbranch profit remittance taxes for the fiscal year ended March 31, 1998.

WHEREFORE, in the light of the foregoing, petitioner's claim for refund isGRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED toREFUND to petitioner the amount of P44,288,712.00 and P8,324,100.00

representing erroneously paid income tax and branch profit remittance tax,respectively. CEcaTH

No pronouncement as to cost.

SO ORDERED.


Presiding Judge

I CONCUR:

(SGD.) LOVELL R. BAUTISTA

Associate Judge

Separate Opinions

DISSENTING OPINION

With due respect to my colleagues, I beg to disagree with the majority's

conclusion that petitioner is exempt from income tax and branch profit remittancetax pursuant to the Exchange of Notes between the Government of Japan and theGovernment of the Philippines (Exhibit "J") and BIR Ruling DA-407-98 datedSeptember 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa

1. There are constitutional grounds to prohibit the grant of tax exemptionunder such Exchange of Notes.

2. Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grant


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(2) The Government of the Republic of the Philippines will, itself or through itsexecuting agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and/or services of Japanesenationals to be provided under the Loan.

It is likewise represented that on June 21, 1991, Mitsubishi entered into a contractwith the National Power Corporation (NPC) for the supply of equipment andservices, engineering, construction, testing and commissioning of equipment inconnection with the Calaca II Project; that funding of the project is made through agrant from the Japanese Government through the OECF and pursuant to anExchange of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to Y40,400,000,000.00 was extended expressly to implementthe Calaca II Project; that Item 5, paragraph 2 Notes-Calaca provides;

"5. . . .

(2) The Government of the Republic of the Philippines will, itself or through itsexecuting agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and services of Japanesenationals to be provided under the Loan." (Emphasis supplied.)

In reply, please be informed that the aforequoted provisions of Notes-NAIA andNotes-Calaca are not grants of direct tax exemption privilege to the Japanesefirms, . . . because the said provisions state that it is the Government of the

Republic of the Philippines that is obligated to pay whatever fiscal levies or taxesthey may be liable to. Thus there is no tax exemption to speak of because the saidtaxes shall be assumed by the Philippine Government; hence the said provision isnot violative of the Constitutional prohibition against grants of tax exemptionwithout the concurrence of the majority of the members of Congress (BIR RulingNo. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). aHECST

In view thereof, and considering that the estimated contribution of theGovernment of Japan is Y18,120,000,000.00 in the NAIA II Project andY40,400,000,000.00 in the Calaca II Project and that the beneficiary is thePhilippine Government, this office is of the opinion and hereby holds that

Mitsubishi has no liability for income tax and other taxes and fiscal levies,including VAT, on the 75% of the NAIA II Project and on the 100% of the foreigncurrency portion of the Calaca II Project since the said taxes were assumed by thePhilippine Government.

The aforequoted ruling clearly states that the Exchange of Notes grants no taxexemption and merely provides that the Philippine Government assumes all taxliabilities. Hence, there is no violation of "the Constitutional prohibition againstgrants of tax exemption without the concurrence of the majority of the members


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of Congress (BIR Ruling No. 071-97 citing Sec. 28(4) Art. VI, 1987 PhilippineConstitution)."

It must be noted that the Exchange of Notes is merely an agreement between thetwo governments (Philippines and Japan) involved. The Exchange of Notes is not asource of tax exemption as correctly pointed out by respondent in its ruling by

stating that "there is no tax exemption to speak of because the said taxes shall beassumed by the Philippine Government." Undoubtedly, a tax assumption is notequivalent to tax exemption. The former arises from contract while the latter isgranted by law through the legislative branch of the government. As a rule, "theclaim of tax exemption must expressly be granted in a statute stated in alanguage too clear to be mistaken'' (Commissioner of Internal Revenue vs. Courtof Appeals, 298 SCRA 83).

The Exchange of Notes is just a preparatory agreement or a mere understandingbetween the two governments in which the government of Japan will grant a loanin favor of the Philippine government to be used in the latter's economic

development program. This is evident from the opening statements of theExchange of Notes wherein it provided that:

"Excellency,

I have the honour to confirm the following understanding recently reachedbetween the representatives of the Government of Japan and of the Governmentof the Republic of the Philippines concerning a Japanese loan to be extended witha view to promoting economic development efforts of the Republic of thePhilippines: . . . " (p. 1, Exhibit "J")

Clearly, the Exchange of Notes is not a "self-executing" agreement. This was thereason why the two loan agreements, Loan Agreement No. PH-P76 (Exhibit "O")dated September 25, 1987 and Loan Agreement No. PH-P141 (Exhibit "P") datedDecember 20, 1994, were executed providing the Philippine government enoughfunds to implement the Calaca II Project. Accordingly, in order to realize thisproject, the NPC, the executing agency of the Philippine government entered intoa contract with herein petitioner and in said Contract the provision of Article VIII(B) (1) (Exhibit "I") was included in order to carry-out the undertaking assumed bythe Philippine government (through the NPC), to wit: HAICTD

Article VIII (B) (1)


1.) CORPORATION (NPC) shall, subject to the provisions under the ContractDocuments on Taxes, pay any and all forms of taxes which are directly imposableunder the Contract including VAT, that may be imposed by the PhilippineGovernment, or any of its agencies and political subdivisions."

(Exhibit "I-1")


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This provision not only realized the intent of the two governments under Item 5,paragraph 2 of the Exchange of Notes but it also recognized the covenant of thetwo governments not to use the proceeds of the loan in the payment of all fiscallevies or taxes imposed by the Philippines. This statement finds support underItem 8(a) of the Exchange of Notes, to wit:


(a) The Loan be used properly and exclusively for the Project, . . ."

However, despite the provision in the Contract that NPC shall assume the taxliabilities of petitioner, the latter still made payments of the subject taxes torespondent. And now, petitioner, believing that it has made erroneous paymentsof the subject taxes, is before us invoking the provision of Section 229 in relationto Section 204 of the Tax Code. cIECTH

The petition is without merit.

Petitioner has no basis in law. The provision of Section 229 is not applicable topetitioner, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit orproceeding, shall be maintained in any court for the recovery of any nationalinternal revenue tax hereafter alleged to have been erroneously or illegallyassessed or collected, or of any penalty claimed to have been collected withoutauthority, or of any sum alleged to have been excessively or in any mannerwrongfully collected, until a claim for refund or credit has been duty filed with the

Commissioner; but such suit or proceeding may be maintained, whether or notsuch tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)years from the date of payment of the tax or penalty regardless on anysupervening cause that may arise after payment: Provided, however, That theCommissioner may, even without a written claim therefor, refund or credit anytax, where on the face of the return upon which payment was made, suchpayment appears clearly to have been erroneously paid. (Emphasis supplied)

The above-cited section speaks of taxes erroneously or illegally assessed or

collected, or of any penalty claimed to have been collected without authority, orof any sum alleged to have been excessively or in any manner wrongfullycollected. Undeniably, it is not proper for us to allow a claim for refund in favor ofpetitioner who, by law, is legally mandated to pay the taxes due from it. Theallegation of petitioner that the subject taxes it paid comes within the purview ofan erroneous payment merely because said taxes, by virtue of a contract, are tobe assumed by NPC is unavailing.

It is a basic principle in civil law that with certain exceptions not obtaining in this


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case, a contract can only bind the parties who had entered into it or theirsuccessors who assumed their personalities or their juridical positions, and that,as a consequence, such contract can neither favor nor prejudice a third person(Ouano vs. Court of Appeals, G.R. No. 95900, July 23, 1992). Article 1311 of theCivil Code of the Philippines provides that "Contracts take effect only between theparties, their assigns and heirs, except in case where the rights and obligations

arising from the contract are not transmissible by their nature, or by stipulation orby provision of law." This is the principle of relativity of contracts. CDHcaS

In the case at bar, it is undisputed that the contract was entered into only by andbetween the parties (NPC and herein petitioner) and the herein respondent wasneither a party thereto nor was he aware of the provision thereof. Thus,respondent should not be made to observe the term of the contract between theparties, otherwise, the principle of relativity of contracts, long enshrined in oursubstantive laws, will be violated.

The "assumption of taxes" clause in the Contract between the petitioner and NPC

is not enough to put petitioner's case within the operation of Section 229 of theTax Code. The payments of petitioner to respondent of the income taxes and theBPRT were made legally by it and the Contract is not enough ground to grantpetitioner's claim for refund. A contract is, as always, subordinate to the law.

However, petitioner remedy, if any, is to seek a cash refund from NPC for theequivalent amount of the income taxes and branch profit remittance taxes it paidto the BIR. This remedy is recognized by the respondent himself when he issuedRevenue Memorandum Circular (RMC) No. 32-99, as amended by RevenueMemorandum Circular 42-99 dated June 2, 1999, which provides that "In caseswhere income taxes were previously paid directly by the Japanese contractors or

nationals, the corresponding cash refund shall be recovered from the governmentexecuting agencies upon the presentation of proof of payment thereof by theJapanese contractors or nationals".

International comity may not be invoked to evade our tax laws. Thus, theSupreme Court held:

"It is too settled a rule in this jurisdiction, as to dispense with the need forcitations, that laws granting exemption from tax are construed strictissimi jurisagainst the taxpayer and liberally in favor of the taxing power. Taxation is the ruleand exemption is the exception. The burden of proof rests upon the party claiming

exemption to prove that it is in fact covered by the exemption so claimed, whichonus petitioners have failed to discharge. Significantly, private respondents arenot even among the entities which, under Section 29(b)(7)(A) of the tax code, areentitled to exemption and which should indispensably be the party in interest inthis case. AaDSTH

Definitely, the taxability of a party cannot be blandly glossed over on the basis ofa supposed "broad, pragmatic analysis" alone without substantial supportiveevidence, lest governmental operations suffer due to diminution of much needed


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funds. Nor can we close this discussion without taking cognizance of petitioner'swarning, of pervasive relevance at this time, that while international comity isinvoked in this case on the nebulous representation that the funds involved in theloans are those of a foreign government, scrupulous care must be taken to avoidopening the floodgates to the violation of our tax laws. Otherwise, the mereexpedient of having a Philippine corporation enter into a contract for loans or

other domestic securities with private foreign entities, which in turn will negotiateindependently with their governments, could be availed of to take advantage ofthe tax exemption law under discussion." Commissioner of Internal Revenue vs.Mitsubishi Metal Corporation, G.R. No. 54908, January 22, 1990, 181 SCRA 82.

Tax exemptions must be strictly construed such that the exemption will not beheld to be conferred unless the terms under which it is granted clearly anddistinctly show that such was the intention of the parties (Philippine AcetyleneCo., Inc. v. Commissioner of Internal Revenue, G.R. No. L-19707, Aug. 17, 1967;Manila Electric Company vs. Vera, etc., G.R. No. L-29987, Oct. 22,1975; SurigaoConsolidated Mining Co., Inc. v. Collector of Internal Revenue, et al., G.R. No. L-

14878, December 26, 1963, all cited in Aban, Law of Basic Taxation of thePhilippines, p. 119). Tax exemptions are not presumed (Lealda Electric Co., Inc. v.Collector of Internal Revenue, G.R. No. L-16428, April 30, 1963). Tax refunds are inthe nature of tax exemptions. As such, they are regarded as in derogation ofsovereign authority and to be construed strictissimi juris against the personclaiming the exemption (Commissioner of Internal Revenue v. S.C. Johnson andSon, Inc., 309 SCRA 87 [1999]).

In the light of the foregoing, we cannot conclude that the Exchange of Notesgrants tax exemption to petitioner. Hence, petitioner's claim for refund should bedenied for lack of merit. ScTCIE

(SGD.) JUANITO C. CASTAEDA, JR.

Associate Judge[C.T.A. CASE NO. 6139. December 17, 2003.]

MITSUBISHI CORPORATION MANILA BRANCH, petitioner, vs. COMMISSIONER OFINTERNAL REVENUE, respondent.

D E C I S I O N

This case involves a claim for refund of erroneously paid income tax and branch

profit remittance tax for the fiscal year ended March 31, 1998 amounting toP44,288,712 and P8,324,100, respectively, arising from petitioner's OverseasEconomic Cooperation Fund funded Batangas Coal-Fired Thermal Power PlantProject. cEHSTC

Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation dulyorganized and existing under the laws of Japan and duly licensed to engage inbusiness in the Philippines, with office address at the 14th Floor, L.V. Locsin,Building, 6752 Ayala Avenue, Makati City, Metro Manila (par. 1, Joint Stipulation of


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28/46

On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year endedMarch 31, 1998 with the Bureau of Internal Revenue (par. 3, Joint Stipulation ofFacts and Issues; Exhibits "B", "B-1" and "B-2"). In the return, petitioner (being theManila Branch of Mitsubishi Corporation) reported an income tax due ofP90,481,711.00 computed in accordance with the provisions of RevenueMemorandum Order ("RAMO") No. 1-95, as follows:

Solicitation and Trading Activities

Worldwide Operating Income P6,421,609,029.00

Sales to the Philippines15,342,816,283.00

Worldwide Sales 3,281,557,773,404.00 .004675467

Taxable Income from

Solicitation Activities 30,024,023.00

Attribution Rate 75%

22,518,017.00


Tax Rate 35% 5,910,980.00

Taxable Income January-March 1998 5,629,504.00

Tax Rate 34% 1,914,031.00

Tax Due from solicitation and


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trading activities P7,825,011.00

Construction and Other Activities


Tax Rate 35%

Tax due from construction and other activities P82,656,700.00

Total Tax Due P90,481,711.00

==============

(Exhibits "B-3", "B-6" and "B-7")

In computing the P90,481,711.00 income tax due for fiscal year ended March 31,1998, petitioner included as part of its taxable income, all revenues earned andcost incurred for its Calaca II Project, in accordance with the completed contractmethod of reporting income (Exhibit "B").

The net income from the Calaca II Project amounted to P151,997,705, computed

below:

Revenue P1,416,829,241

Less: Project Cost 1,111,706,964


Less: Operating Expenses 74,162,777

Income from Operations 230,959,500



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Income Before Income Tax 234,441,913

Provision for Income Tax 82,444,208

Net IncomeP151,997,705

============

(Exhibit "B-16")

Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return ofIncome Taxes Withheld (Exhibit "C") and remitted the amount of P8,324,100representing its branch profit remittance tax (BPRT) for branch profits remitted tothe Head Office (in Japan) out of its income for the fiscal year ended March 31,1998. The tax rate used was 10% in accordance with the Philippines-Japan Tax

Treaty. HCSDca

On September 7, 1998, the respondent issued Bureau of Internal Revenue RulingNo. DA-407-98 (Exhibit K) where it held that "Mitsubishi has no liability for incometax and other taxes and fiscal levies, including VAT, . . . on the 100% of its foreigncurrency portion of the Calaca II Project since the said taxes were assumed by thePhilippine Government." (par. 5, Stipulation of Facts, Joint Stipulation of Facts andIssues).

Of the P1,416,829,241.00 (Exhibit "B-16") total revenue from the Calaca II Project,P640,907,792 or 45.24% represents that portion which was not OECF-funded

considering that this amount represents the Philippine Peso component of theproject, while P775,921,449 or 54.76% represents the OECF funded portion(Exhibit N).

Since petitioner paid P82,444,208.00 income tax for its income from the entireCalaca II Project (inclusive of the OECF-funded and non-OECF funded portions) andP8,324,100.00 BPRT for the remittance of its income (inclusive of the income onthe OECF-funded portion of the Calaca II Project), petitioner now seeks a taxrefund/credit of the P44,288,712 erroneously paid income tax and theP8,324,100.00 erroneously paid BPRT computed hereunder as follows:

Erroneously Paid Income Tax on Calaca II Project

Explanation

Income Taxes Paid P82,444,208 for income attributable to the

========== Calaca II Project


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Sales P640,907,792 non-OECF funded portion

Less: Project Cost502,936,230 P1,111,706,964 (Total Project Cost)



Less: Operating Expenses 33,551,240 P74,162,777(total operatingexpenses)


Income from Operation 104,420,322 pertaining to the non-OECF funded

portion


Income before tax 107,902,735

Add: 1,112,967

Taxable Income 109,015,702 pertaining to the non-OECF funded

portion

Income tax due 38,155,496 pertaining to the non-OECF funded

========== portion

Income taxes paid for

the entire project 82,444,208

Income tax due 38,155,496

Erroneously paid

Income taxes P44,288,712 pertaining to the OECF funded


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========== portion and, therefor, should not

have been paid by Mitsubishi

(Exhibit "A")

Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits fromOECF Funded Portion of Calaca II Project

Net Income from Calaca II Project 151,997,705

Divided by: Total Revenue 1,416,829,241

Ratio of Net Income to Total Revenue 10.728%

==========

OECF Funded portion of Calaca II Project 775,921,449

x Ratio of Net Income to Total Revenue 10.728%

Net income from OECF-funded Portion 83,240,998

Multiply by BPRT Rate 10%

Erroneously paid BPRT P8,324,100*

===========

*pertaining to the income from the OECF funded portion and, therefore, shouldnot have been paid by Mitsubishi

(Exhibit "A")

On June 30, 2000, petitioner filed an administrative claim for refund and/or taxcredit with respondent in the amount of P52,612,812.00, representing itserroneously paid income taxes in the amount of P44,288,712 and erroneouslypaid branch profit remittance tax in the amount of P8,324,100.00 correspondingto the OECF-funded portion of its Calaca II Project as computed above (par. 6,Stipulation of Facts, Joints Stipulation of Facts and Issues; Exhibits "A" and "A-1").


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On July 13, 2000, petitioner, in order to suspend the running of the two-yearperiod within which to file a judicial claim for refund, filed the instant petition forreview pursuant to Section 229 of the Tax Code.

Respondent, on September 12, 2000, filed his answer raising the following Specialand Affirmative Defenses, to wit:

"7. Petitioner's alleged claim for refund is subject to administrative routinaryinvestigation/examination by respondent's bureau.

8. Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-servingrepresentations and not on actual investigation by respondent, petitioner mustprove with evidence its applicability to the instant case.

9. Taxes are presumed to have been collected in accordance with law.

10. In action for refund/credit, the burden of proof is on the taxpayer to

establish its right to refund and its failure to sustain the burden is fatal to theclaim for refund/credit.

11. Petitioner must show that it has complied with the provisions of Sections204(c) and 229 of the Tax Code."

On April 6, 2001, petitioner, by leave of court, moved for the adoption of theprocedure under CTA Circular No. 1-95, as amended by CTA Circular No. 10-97which was granted by this court on April 23, 2001. Mr. Ruben R. Rubio, a partnerof Sycip Gorres Velayo & Co. was commissioned to examine and verify thevoluminous documents supporting petitioner's claim. Thereafter, on August 28,

2001, Mr. Ruben R. Rubio submitted his report (Exhibit "S") relative to hisverification of petitioner's claim for refund. The report reveals an erroneously paidincome tax and erroneously paid branch profit remittance tax amounting toP44,288,712 and P8,324,100, respectively. This court noted that there is nodiscrepancy between the amount cited in the report and the amount beingclaimed by petitioner. cEAIHa

In support of its claim for refund petitioner, presented documentary andtestimonial evidence. On the contrary, respondent did not present any testimonialor documentary evidence to dispute the claim of petitioner.

On May 23, 2003, petitioner filed its memorandum. On the other hand,respondent, despite the extension given by this court for him to file hismemorandum, failed to file the same. And so, this court, in its resolution datedJuly 15, 2003, submitted this case for decision.

The issues to be resolved by this court as stipulated by the parties are as follows:

1. Whether petitioner has erroneously paid income and branch profitremittance taxes for the fiscal year ended March 31, 1998, which is a proper claim


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for refund pursuant to Sections 204 and 229 of the Tax Code; and

2. Whether the erroneously paid income and branch profit remittance taxes forthe fiscal year ended March 31, 1998 are substantiated by documentary evidence.

We are now going to discuss the first issue.

Records reveal that petitioner anchored its claim for refund on BIR Ruling No. DA-407-98, dated September 7, 1998 (Exhibit K) interpreting Item 5, paragraph 2 ofthe Exchange of Notes, which we herein quote for easy reference, to wit:

DA-407-98

9-7-98

Sycip Gorres Velayo & Co.

6760 Ayala Avenue

Makati City

Attn.: Atty. C. P. Noel

Tax Division

Gentlemen:

This refers to your letter dated May 15, 1998 requesting on behalf of your client,

Mitsubishi Corporation-Manila Branch, for a ruling regarding the tax consequencesof its OECF-funded NAIA II and Calaca II Projects.

It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a privatecorporation duly organized and existing under and by virtue of the laws of Japan;that Mitsubishi was duly authorized by the Securities and Exchange Commissionto operate a branch in the Philippines; that Mitsubishi is a member of the MTOBConsortium, the consortium which was granted the NAIA II Project is 75% foreign-funded by the government of Japan through the OECF and 25% as counterpartfund of the Philippine Government; the funding of this project was made pursuantto an Exchange of Notes (Notes-NAIA) between the Government of Japan and the

Philippines; that under Notes NAIA, a loan in Japanese Yen up to the amount ofY47,036,000,000.00 was extended to the Philippine Government to fund, amongother projects stated therein, the Ninoy Aquino International Airport Terminal 2 orthe NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; thatitem 7, paragraph 2 of Notes-NAIA states:

"7. . . .

(2) The Government of the Republic of the Philippines will, itself or through its


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executing agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and/or services of Japanesenationals to be provided under the Loan.

It is likewise represented that on June 21, 1991, Mitsubishi entered into a contractwith the National Power Corporation (NPC) for the supply of equipment andservices, engineering, construction, testing and commissioning of equipment inconnection with the Calaca II Project; that funding of the project is made through agrant from the Japanese Government through the OECF and pursuant to anExchange of Notes dated June 11, 1987 (Notes-Calaca); that under the Notes-Calaca, a loan up to Y40,400,000,000.00 was extended expressly to implementthe Calaca II Project; that Item 5, paragraph 2 Notes-Calaca provides;

"5. . . .

(2) The Government of the Republic of the Philippines will, itself or through itsexecuting agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines on Japanese firms and nationals operating assuppliers, contractors or consultants on and/or in connection with any income thatmay accrue from the supply of products of Japan and services of Japanesenationals to be provided under the Loan." (Emphasis supplied.)

It is further represented that the above contributions of the Japanese Governmentthrough the OECF represents 75% of the NAIA II Projects and 100% of the foreigncurrency portion of the Calaca II project both of which will benefit not Japan butthe Philippines; and that under Notes-NAIA and Notes-Calaca, any income, value

added tax or the other fiscal levies that may arise therefrom should not be madethe obligation of Japanese firms engaged in the Projects.

In reply, please be informed that the aforequoted provisions of Notes-NAIA andNotes-Calaca are not grants of direct tax exemption privilege to the Japanesefirms, Mitsubishi in this case, and Japanese nationals operating as suppliers,contractors or consultants involved in either of the two projects because the saidprovisions state that it is the Government of the Republic of the Philippines that isobligated to pay whatever fiscal levies or taxes they may be liable to. Thus thereis no tax exemption to speak of because the said taxes shall be assumed by thePhilippine Government; hence the said provision is not violative of the

Constitutional prohibition against grants of tax exemption without the concurrenceof the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec.28(4), Art. VI, 1987 Philippine Constitution).

In view thereof, and considering that the estimated contribution of theGovernment of Japan is Y18,120,000,000.00 in the NAIA II Project andY40,400,000,000.00 in the Calaca II Project and that the beneficiary is thePhilippine Government, this office is of the opinion and hereby holds thatMitsubishi has no liability for income tax and other taxes and fiscal levies,


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including VAT, on the 75% of the NAIA II Project and on the 100% of the foreigncurrency portion of the Calaca II Project since the said taxes were assumed by thePhilippine Government.

This ruling is being issued based on the foregoing representation. If uponinvestigation, it will be discovered that the facts are different, then this ruling shall

be considered null and void.Very truly yours,

SIXTO S ESQUIVAS IV

Deputy Commissioner

(Legal and Enforcement Group)

Based on the above-stated BIR Ruling DA 407-98 and the Exchange of Notes,

petitioner now claims that its payment of the subject taxes was erroneouspursuant to Section 229 of the Tax Code, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit orproceeding shall be maintained in any court for the recovery of any nationalinternal revenue tax hereafter alleged to have been erroneously or illegallyassessed or collected, or of any penalty claimed to have been collected withoutauthority, or of any sum alleged to have been excessively or in any mannerwrongfully collected, until a claim for refund or credit has been duly filed with theCommissioner; but such suit or proceeding may be maintained, whether or notsuch tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2)years from the date of payment of the tax or penalty regardless on anysupervening cause that may arise after payment: Provided, however, That theCommissioner may, even without a written claim therefor, refund or credit anytax, where on the face of the return upon which payment was made, suchpayment appears clearly to have been erroneously paid. (Emphasis supplied.)

We agree with petitioner. IaSCTE

Notably, there was an erroneous payment of the subject taxes by petitioner for

the reason that said taxes are to be assumed by the Government of thePhilippines through its executing agency, the NPC, in connection with Item 5(2) ofthe Exchange of notes. As defined in Black's Law Dictionary, 6th Edition, the word"assume" means "to take on, become bound, or put oneself in place of another asto an obligation or liability". As can be gleaned from the definition, theGovernment of the Philippines, through NPC, binds itself to shoulder the taxobligations and liabilities of petitioner. This finds support under the provision ofArticle VII (B) (1) of the Contract (Exhibit "I") executed between petitioner andNPC, to wit:


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Article VII (B) (1)


1.) CORPORATION (NPC) shall, subject to the provisions under the ContractDocuments on Taxes, pay any and all forms of taxes which are directly imposable

under the Contract including VAT, that may be imposed by the PhilippineGovernment, or any of its agencies and political subdivisions." (Exhibit "I-1")

In addition, the testimony of petitioner's witness on the matter on which betweenthe parties shall shoulder the subject taxes further strengthened petitioner'sclaim, thus:

xxx xxx xxx

Atty. Manalo:

Now, based on the amendment to the contract between National PowerCorporation and Mitsubishi Corporation, who will pay the taxes for the onshoreportion of the Contract?

Witness:

Under Article VII (B) of the original contract, the National Power Corporationshall pay the taxes for the onshore portion of the contract.

Atty. Manalo:

I would like to request again for the submarking of Article VIII (B) of theoriginal contract as Exhibit "I-1".

xxx xxx xxx

Therefore, the income tax and BPRT payments made by petitioner to respondentwhen such payments should have been made by the NPC, undoubtedly, putpetitioner's case in the operation of Section 229 of the Tax Code as one involvingerroneous payment.

A careful reading of the provisions of the Exchange of Notes will show that it is the

intention of the two governments not to use the proceeds of the loan in thepayment of all fiscal levies or taxes imposed by the Philippines. In view thereof,we believe that to deny petitioner's claim for refund would violate the covenantthat the funded amount should not be subject to any taxes. This statement findssupport under item 8(a) of the Exchange of Notes, to wit:



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(a) The Loan be used properly and exclusively for the Project.

This is not the first time that this court has upheld the validity of the Exchange ofNotes as a basis for the refund of erroneously collected taxes. In the case of P & NCorporation (Manila Branch Office) vs. Commissioner of Internal Revenue, CTACase Nos. 4163 and 4293 (July 24, 1991), which involved a claim for refund of

erroneously collected contractors' and withholding taxes, this court in granting thepetition on the ground that the subject provision of the Exchange of Notespartakes the nature of a tax exemption, stated that: DaTHAc

"It must be remembered that "tax exemption is founded on public policy . . . aregranted on the ground that they will benefit the public generally, or as a reward orcompensation for services rendered in the performance of some function deemedsocially desirable . . . are favored on the theory that the concession is due to quidpro quo for the performance of services essentially public by which the State isrelieved pro tanto from performing (84 C.J.S. No. 215, pp. 413414). Thus it isimportant to note that the exchange of notes in this case was entered into in

pursuance of a loan agreement with Japan. Under the Constitution, in force at thattime, the President may contract and guarantee foreign and domestic loans onbehalf of the Republic of the Philippines subject to such limitations as may beprovided by law (Art. II, Section 12, 1973 Constitution, as amended). Therefore,having validly entered into a loan agreement through the exchange of notes, theterms therein necessarily govern the execution of the loan agreement. Thecontract, involved in this case which was entered into pursuant to the loan merelyembodies the exemption provision in said exchange of notes."

Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta andCo., Inc. and BF Corporation, Operating as MTOB Consortium, CTA Case No. 5757,

January 15, 2002, and in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A.M. Oreta and Co., Inc. and BF Corporation, Operating as MTOB Consortium, CTACase No. 6037, November 11, 2002, this court, again pursuant to the Exchange ofNotes, granted the claim of petitioners for the refund of unutilized creditablewithholding value-added tax (VAT) in recognition of the validity of the Exchange ofNotes. This court has noted that in these decisions, the subject claim for refundwas based on the Notes-NAIA mentioned in BIR Ruling DA 407-98 in which hereinpetitioner was one of the claimants. Thus, in consideration of the above-statedpronouncements of this court affirming the validity of the Exchange of Notes as avalid ground for refund of erroneously paid taxes, this court finds no valid reasonto disturb the wisdom of said rulings.

Likewise, this court is aware of Revenue Memorandum Circular (RMC) No. 42-99,dated June 2, 1999, amending Revenue Memorandum Circular No. 32-99, whichhas for its subject the standard clauses (referring to Item 5 paragraphs 1 and 2 ofsaid Exchange of Notes) pertaining to the tax treatment of participating Japanesecontractors and nationals under the exchange of notes between the JapaneseGovernment and the Republic of the Philippines, providing for the properprocedure for petitioner in case where it already paid the taxes subject of thiscase to the BIR. Pertinent portions of which read as follows:


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The foregoing provisions of the Exchange of Notes mean that the Japanesecontractors or nationals engaged in OECF-funded projects in the Philippines shallnot be required to shoulder all fiscal levies or taxes associated with the project.Instead, the taxes shall be shouldered and borne by the executing governmentagencies. Hence, for the comprehensive treatment of the tax implications arisingtherefrom, the following rulings are hereby promulgated:

A) . . .

B) INCOME TAX

1. Japanese firms or nationals operating as suppliers, contractors orconsultants on and/or in connection with any income that may accrue from thesupply of products and/or services to be provided under the Project Loan, shall filethe prescribed income tax returns. Since the executing government agencies aremandated to assume the payment thereof under the Exchange of Notes, the saidJapanese firms or nationals need not pay the taxes due thereunder.

2. The concerned Revenue District Officer shall, in turn, collect the said incometaxes from the concerned executing government agencies.

3. In cases where income taxes were previously paid directly by the Japanesecontractors or nationals, the corresponding cash refund shall be recovered fromthe government executing agencies upon the presentation of proof of paymentthereof by the Japanese contractors or nationals. (Emphasis supplied).

C) . . .

Indubitably, under the RMC as regards income taxes, petitioner is only required tofile its ITR but need not pay the taxes due thereunder. The Commissioner of theBIR has mandated the District Officer to collect the income taxes from thegovernment executing agency. But in cases where income taxes were previouslypaid directly by petitioner to the BIR, as what petitioner did in this case, the cashrefund shall be recovered from the NPC. However, the RMD dated June 2, 1999only took effect after its publication in the National Administrative Register, July-September 1999 issue while the ITR of petitioner was filed on July 15, 1998 oralmost a year before the issuance of the RMC. Therefore, we hold that said refundmust be claimed directly by petitioner from the respondent for it would be unfairon the part of the petitioner that said RMC be given retroactive effect.

Anent the second issue, this court finds that petitioner has properly presentedsufficient evidence to substantiate its claim for erroneously paid income andbranch profit remittance taxes for the fiscal year ended March 31, 1998.

WHEREFORE, in the light of the foregoing, petitioner's claim for refund isGRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED toREFUND to petitioner the amount of P44,288,712.00 and P8,324,100.00representing erroneously paid income tax and branch profit remittance tax,


40/46

respectively. CEcaTH

No pronouncement as to cost.

SO ORDERED.


Presiding Judge

I CONCUR:

(SGD.) LOVELL R. BAUTISTA

Associate Judge

Separate Opinions

DISSENTING OPINION

With due respect to my colleagues, I beg to disagree with the majority'sconclusion that petitioner is exempt from income tax and branch profit remittancetax pursuant to the Exchange of Notes between the Government of Japan and theGovernment of the Philippines (Exhibit "J") and BIR Ruling DA-407-98 datedSeptember 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa

1. There are constitutional grounds to prohibit the grant of tax exemptionunder such Exchange of Notes.

2. Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grantincome tax exemption.

3. The Exchange of Notes only provides for the assumption of tax liabilities bythe Philippine Government. It does not provide for tax exemption.

4. BIR Ruling DA-407-98 dated September 7, 1998 does not entitle petitionerto a refund of income taxes paid by it.

Section 28(4), Article VI (Legislative Department) of the 1987 Constitution of thePhilippines expressly provides: "No law granting any tax exemption shall bepassed without the concurrence of a majority of all the Members of the Congress."The requirement of an absolutely majority of all the Members of Congress in thegrant of tax exemption clearly manifests the intent of the framers of ourConstitution that tax exemptions are not to be frivolously granted.

On the other hand, Section 21, Article VII (Executive Department) of theConstitution states: "No treaty or international agreement shall be valid andeffective unless concurred in by at least two-thirds of all the Members of the


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Senate."

Related thereto is Section 32(B)(5) of the 1997 Tax Code, which provides:

Sec. 32. Gross Income.

xxx xxx xxx

(B) Exclusions from Gross Income. The following items shall not be includedin gross income and shall be exempt from fixation under this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. Income of any kind, to the extent requiredby any treaty obligation binding upon the Government of the Philippines.

In this regard, there is no showing that the Exchange of Notes involved here was

approved by at least two-thirds of the entire Senate membership. Consequently,such Exchange of Notes cannot validly grant tax exemption and in fact, it did not.

As stated in the Majority Decision, records reveal that petitioner anchored itsclaim for refund on BIR Ruling No. DA-407-98 dated September 7, 1998 (Exhibit"K"), issued by Deputy Commissioner Sixto S. Esquivias IV, interpreting Item 5,paragraph 2 of the aforementioned Exchange of Notes, which we herein quote forin pertinent part: HScAEC

. . . that item 7, paragraph 2 of Notes-NAIA states:

"7. . . .

(2) The Government of the Republic of the Philippines will, itself or through itsexecuting agencies or instrumentalities, assume all fiscal levies or taxes imposedin the Republic of the Philippines o

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