CTA Case No. 3380 (Decision)

REI=� UBL I C OF THE PH I LIPPI NES COURT OF TAX APPEALS QUEZON CITY ASIAN TRANSMISSION CORPORATION, Petitioner , C.T.A. CASE NO. 3380 THE ACTING COMMISSIONER OF INTERNAL REVENUE, Respondent . >~ ����� DEc I I DN Ir-o t h .�i <:;; <."-U.i t:. fc."Jr�� t "f.�~'fu nd of a l l eqe cl pr~nnenusly L.-.hhu p ."li cl l. d ir1q - .:. ~'1h :i.c h ln pertinent part~ '' ( b) r~:, _:: .<::: Jt.,\ <:L-t~�)_f:'S~ .....:Lr..�D..f!L. ..fJ.t:::.q!::>?: .. ju_!;: ~;Jf!'r-L.~.. ThP 'foJ.lo~�J:i.nq :.i.. t.f:.'rn,.:; ~; h i::\ 11 n(:!t hP .i..nc: ludf.?c.i

DEC I SION CTA CAS E NO. 3380 - 2- in q I'"' D~5f::; income <':lnd s lv:':l.ll e>:empt. f r� nm ta:-:atinn under thi s Title . II II ( 8) (a) In -- come received from their investments in the Phi J. .i.ppinf.-~5 in lr.~ ans >: ~-: :�: by ( .1.) f CJ r� E' i. q n q o v e ,...n men t s ; (2 ) tt.!.J.f:\_IJ.r:;.J .D..Q.. J.O..? .t..t..t.'-::tt..:t...R.O..?.........._._.QJ:~.ngg_,_______f;..Qf!...t.r._gJJ_g.r.J..,....... _... o.r.. e.r.:U.J2.Y.iD.Q_......L~f.,:i:..!:1. ..~.Q.!;...!.O..fl...........f..D?JIL......JJ:!..~.!.!!. ; an d ( 3 ) in tf.~r.. na tiona 1 Ol'" reg ion a 1 f inane .i.nq institutions est~bli. s hed by governments. II ,,.,, tt [Underscorinq supplied] The fac 1. S are not disputed, the parties having aql'- e<?.d to submit th.i.c::; Ci-:l. S!e fCJr- d ec ision bac::-,!�'~ d on the pleading s and the records after petitioner has pres ented i ts evidence . Petitioner Asian Tran s mi ss ion Corporation is a d om f.~ ~='� t. .i. c: c:: or.. po r-a t. ion D r.. g ,;~n .i. zed and e :-: i f:; t. .in q un d (-;? ,,.. Ph:i.l.i.ppinP l c:l. ~�l ~.> t.-1ith pr.. inc:ip,;~l ofi' icf.-~ at S .ilanqan Canlubanq Indu~;tr-ia l F'i:H"k, Canlub a nq, L a qu.na. It E-~ n �t:pr�E~d in to a l oan aqreemen t with the Mi t s ubi shi. t1 o t.n r� ro; Cor.. por.. a tion ( 11i tsub.i..shi. ~ a c oF�por.. ation duly orq c:\n:i.zed and f:~ :-::i.stint;:J undet�- the laws of J a pan~ bn� two occasions, vi z (a) the amount of ,Jc:\p<:mE~s e Yen One HundF�ed T!<'Jt�mty -� Seven t�Hl J. ion Fi.vr: Hundr� r~ d Thnus.3~1d (�127,500,000) ~:-:ecut:ed on ApF�.i. l .1. 5, .1. 975 and (b) thf? <":: mount: nf ,Japanese Yen

DECISION CTA CASE NO. 3380 -3 Three Hundred Mi ll ion (�300~000~000) executed on Auqust .1. 0, 1977. LikewisE?~ petitioner- into loan aqree ment 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 Hundr ed Thousand (�1 27~500 ~0 00) and J ap;anf.�?se Yen Hundred Million (� 300~000,000 ) em Apr-il 15, 1 c-;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 intere s 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~ CONFIRHAUDN DATE OF WITHH OLDING .Ji~E I~l..l!.Q. ! ..r.B.r~.;_ru ... .J.BLP-.BJ.L 1979 3RD 2270965 2574588 10.21.79 p 41, 010.49 2846460 01.18.80 �--40 J..~.liLJ..~ 4TH 2374861 TOTAL

DECISION CTA CASE NO. 3380 -4 1980 1ST TAX DEBIT MEMO 04.21.80 p 39,360.74 07.21.80 40,017.34 2ND 3033940 0337227 10.20.80 49,503.71 01.20. 81 3RD 3034924 5325055 -�-'�~&01..~.71. 4TH 3761249 6218914 TOTAL BRAND TOTAL Simi 1 ar J. y, few the 3 r� d and 4�t.h quarters of 1979 and the 1st, 2nd~ ~:::r�d and '+t.h quarters of 1980~ petitioner paid withholding taxes on interest payments on the loans extended by Niss ho- Iwai <~moun t..i.ng to P:.2!'.'iE3 ~ 7T3. 07 ~ details of 1'-Jh.i.c h ,:t.re as foll ow s ~ q~B~JIR R.~JJJPJ...NJ!!. CONFIRMATION DATE OF WITHHOLD INS 1979 ..K~.~-PfL.~.!L ..P.!\.Y~.~~J . . .. .I.e.LP.M.P_ 3RD 2270966 2574579 10.21.79 p 41,010.49 4TH 2374863 .. 2846457 01.18.80 __1.9. ~.E~.~~~ TOTAL P.....~.!.&~?..&~ 1980 1ST TAX DEB IT MEMO 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 4TH 3761248 6218915 01.20.81 _,_4_~Jl.?.~~.~l TOTAL � eJB&~.~n BRAND TOTAL ~-~~-~Jl.~~.~b Th e r� ea�fter, .in a letter da tl'?d September ,...,, ,t�.: .t::. ~ .1981, pF.?ti f.ioner Asi a n Tr�ans missi(;:Hl, through i t s

DECISION CTA CASE NO. 3380 - 5- ,~uditor s ~ �filed with r-espondent ' s Bur-�eau a claim for� the aforemention e d a mo unt s of and F'258, 7T3. 07, or total of P517~2 3 5.38, alleging that the lo a n s we re e x tended to pet:.it.icmer� by the E :-:por- t - Impor-�t. Bank of ,Japan ( E :-: imb r.:m k, for short) through Mjt:. s ubi s h.i and l\l.i s ~; ho - I wa .i. , and there �fore e :-: emp t:. from Phi 1 i ppi n e withholding ta x .on income pur s u a nt t o th e then Section 29(b) (8) ~ supra~ of th ~:? N .::~t.ional Internal F< t-~ vE~nue Codf~ , -E :�.:...i.mbank finan c ial institution o wn e d a nd c ontrolled by the government of ,Japan. On Oc t o her-� 1 5 , .1.98.1, p e tition e r f i l e d i t s peti ticm �for�� n :? v i etA/ wi t h thi s Cour- t .i n ac: cord a n c f? ~"i .i. th Se ction of th e a ppli r.::c:lbl f:~ 1'1 a t i em a 1 Inter-�n a l F~ f2V <:::> nue Codf? , to which !res p o nd e n t fil <'? d hi s a n s we r d e nying the claim for r e fund. Are p e titioner's inte res t p ayment s on its lo.:~ n s from l"l.it s ubi~:; hi and Ni ss ho -��� t!t-Ja.i e:-: empt from wi thholding taxes? It will greatly s implify if the provisions of law involved, and f a ctual s itua tion s relate d thereto , tha t beycmc:l di s pute, be reduc e d to ba s ic lega'l propo s ition s , to wi t: �

� DECISION CTA CASE NO. 3380 - 6- ( .1. ) Under- Section 29 o �f the Ta :-: Code~ :i.nt:.E!r E~~; t income i s inc J.ud E~d in inco me. 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 Mit s ubi shi and Nissho-Iwai would subject to li'Jithhold:inq ta:-: be.inq without doubt interest income on the part of Mitsubishi and Ni ss ho-Iwai. (~!.) Howev er�, if thE? inter-ests paid b y Asian Tr-a nsm ission li'Jere rece.i.ve�(j. by E:-:imb e:1 nk 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 investme nt s 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 lu ded in gross income and sha ll be exempt from income ta xation . ( 4) Mi tsubi s hi a n d Ni ss 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 Philippines 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 su bi 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 p etitioner A sia n Tran s mi ss ion w i l l 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 !ss ho -- Iwai i:\nd Asian mi ss im'\. (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 them se lve s to provide �funds to Asian Tr-ansmission. To comply � and

DECISION CTA CASE NO . 3380 - 8- . h l l f .i l 1 thE?.i.r- of 1'1:i t .s.ub.i. 5; h :.i. 1\l.i s5;he>-� I Wc:l :i. h<:ld t.C> pr-e>cluce the 'funds:;. F rorn v.Jha t<=>vet'" s;oun::e, As.i an Transrni. ssi.on was not concerned. Ne>where and nowise in the le>an agreements was there stated that Mitsub.i.shi and Ni ss ho -... I ~�Ja .i had to obtain 1 C:�c:lns~ �f r. om E :-: i rn hank o �f .Japan. Neither can it be interred or deduced from the loan agreements kh at M.it ~ ubishi and - Nissho-Iwa.i acted for <:md in tJehc.~lf of E:-:.irnbank of .Jap a n, or- F:-:irnbank o�f ,Japan had to f .i n anc:e ot�- (;lUc:lt�- .::,n t er.:-> the loans extended by M.itsubi s hi and Nissho-Iwai to Asian Transmission. As a rnr.'ltter� of fac:t, noth.i.nq there in the loan a greements is said that the funds or loans exten d ed by Mits ub.i s hi. and Ni ss ho-Iwai to A<:;.i..;,::~n Tt'-.:':ln~=;; rn.is-, s.i.o n earn~ .' fr-orn E :-: .i.rntj .:':lnk o �f ,J<:::~pan. a E:�: i mb c":\ 1'1 k Cl f apar1 \I'IC:IS not. in :\ny rnr.~nner� privy to these contracts of loan. According ly, it is se lf evide nt that the l oans con t r-a e tr::~d by Asia n Tt-ans"!TT iss .i. on 1-'J.i t. h 1�1 i. t sub ish i. ar-,c:f Ni ssho-.. I ~'>~ c:~i 0..9_t ____.._j ._!J..~_f?..s. tmf:?JJ. L?____.... :i. D...._...._.J;.h ~- interest payments of Asian Transmission on the loan s contr~ctecl with Mit s ubi shi and Ni ss ho - Iw ai 4(

DE C I S I O N CTA CASE NO. 338 0 - 9- e:�: pr.. ess 1y c: le <:\r-�J.y pr-ovided i n the loan agreements of borrower Asian Transmi ssi on in favor of i. t. s lend er s Mit. su bi s hi a nd Ni ss ho - Iw ai ~ a ll payments o�f principal a nd tu.:tf::~.r.::.~s.t. s h a ll be m.::\cle to the J E.!JJdg.r.:_'2. by t.eleqr.::\ph.ic trA.nsfelr to such h an k �7:\C:CCJ unt in T'ok y o~ ,Japan as will b e designated by the ( pp. 23!1 :'..17-7 1, BH\ NDthin q the re in the loa n aqreements s pea ks of i nter es t pa ya ble to Eximbank of Japan. The ter.. rn s o f the loan ag reements prDvide the sa fe st 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 1y a :�:e r. o :�: or-� pho to cop y. It. doe s . 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 CTA CASE NO . 3380 - 10 - the Philippines. Second l y, a s aptly stated b y r�E�)S por!d e nt, the signature a ppearing above the t.ypr::Mr i. t ten name Shunsuke Araki <'lS chief r �e pr�- e se nt: a t .iV E) o �f the E>(port.-Impor�� t B,~1nk of .Ja.p a n .in the F'hil.ipp.ines was never . identified by (:\ competent witness. NPither�� 1'1r- . !:3hunsuke (-~r� aki, a ,,..�?.'5pons.i b 1 e off .i.e ia 1 of -t he said B ank 1-'Jho ce r�- t..i f .i.ed to the fa ct that the loans of .~etitioner with M.i tsubi "; h i and 1\! isshn --lwai. ~-Jer��� e guar-an t<�?ed and financ:Pd by F)�(.i.mbank of J<::"lpan, or� h.i.s <:lut:hot-:i.zpd representative, was presented as witness to explain or�� cl.:,lr��:i. fy thE' bank's ac:: tu.:~ l par�� tic: .i pat i. on or .invo 1 Vt""1men t: in the 1 oan tr~ansac: t.ions. Then, the c:: e r�� t. i �f i c ,3 t i on .i. s d a t E~ cl 1'1 a r c:: h .1. 5 , 1 9 t3 ~.? , a �f t e r�� t he c 1 �~d. m f cw ,,- � Fund u f a 1 1 eg ed f.?.tr-ro rH?OU s pa yrnf?n t: s of wit.hhnlcl.inq t .a::-: h <:\d E<. lt-�e,,,,cly ht~en �f i l r::-�c:l 1--'Ji.th thE> l n t f - : : r- n a l l=<evenue on SF~pt.Pmbf.�~r ,., -:r 1981 .�::. ...:. !' and t.hl:' pE�t.ition for�� r-E�)View ~-Jas. �filPd 1-'Jith thi~;; Court on October 15, 1981. Hence, Exhibit A could, at b~::-� s t , bE> no mor~p than an a �ft:.er�t.hought. which rn.i.qht. providE' suppor-t �for the c: l airn for- refund. But mc>r�� e .i.mpor�tant. ly, the c:er-ti1' icat.i.on i:.hat the loan s extend e d by Mitsubish.i and Ni ssho-Iwai to pF)i":..i.t.i.onpr� (.)~".; ian Tr- .;,, n ~:; m:i. s;s:i.o n dCJE"?.S not. pr-ove th at

.. DECISION CTA CASE NO. 3380 - 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 . Commis s 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 ba 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 Mit subishi 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 t i ve c: e.\p ;:~c:: .i t.y of i t s 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 .. 4 E2

DECISION CTA CASE NO. 338 0 - 12 - f:?n t ..i ,,..f.�? copper concentrates p ,,.�od uc <ed ft���om concentrator for 15 years. ' In accordanc e with t.h<-:':lit��� cont r��ac:t, M-i t s u b i s h i .. as agent of Atlas, made -~ at��� r��,"'nqement~-:; c:\ncf c1ppliec:l for� a lo an h' i t h E~-:imbank of Japan a nd a consortium of Japanese banks in or�cler�� to acc:om rnod c"i te At 1 as-, which was su h sequen t 1 y a pproved b y Eximbank and the con sortium of Japanese Banks. In ot. hr:::-~r�� \.'Jor�ds, the r��e 1 ations:- h.ip bPtween Atlas a nd Mi t su b ishi with res pect to the loa n app l i e d fo r by Mit s ubi s hi and appro~ed by Exim b a nk of ,J C1.p a n and t .he conso r �tiu m of ,Jc"'\pi::~nese hanks Wi::\S that of agency, lt~hi c:h bu<c;ine~;; s. r�� r.-:~ l at.io n s never�� P:�: i<::, t.ecl i n the pr�e~;,ent case. Th E-m, unlike i n the �, .in<:�,t.ant c:as;r::.-�, t:.hP inter--est payments by Atlas; to t1 i t s uh .i. s h i ~'-'E~n':l <~ 11 n -?mi t b?.d to L-i imban k and t:hf? consortium of Japanese banks without retaining any portion thereof as its income. The Court recog ni zPs that .inasmuch as the po~�J�:>r o �f t.c: , atio n is n ece~;~:; ,., ry to t.h<:::> e:-: i s t e n ce of t h E~ gover� nrn~?.nt , c:\ny act. limiting such povJer, or where the intent to tax is c lear , and the taxpayer claims:- th ;:,,t he is not Pnc::ornpas;f_;ed by the sta tute , suc h sta tut e s hould b e strictly con s tru e d in f a vor o �f the qovE>r�� nm e nt:. .;,,nd ag.::\in c.:;t. thE? t.a:-:pa y er. In

DECISION CTA CASE NO . 3380 13 ,U.!.....---��--"'::;_tr..~i..!;:..i.. L?..L i...TJJ..f....-.����-��i-~J.r.:..i.. :?._ aqai n s t. the ta:-:payE' I". c-wd l. i ber� a J.l y .i.n �f ;=~vCJr� nf thP. t.a :d .ng a ut.hcwi ty. (Jai-Alai Corporation vs. Collector , lOb Phil. ::~A5; Esso Standard Eastern vs. Commissioner of Customs, L- 2 1841 ~ Oct. 28, 1 966, 25 SC f\(.) 488; Phil. Acetylene vs. Commissioner of Internal Revenue, L- 19707, Augu s t. 17, .1. ~767, 2 0 SCRA .1 056; Commissioner of Internal Revenue vs. Guerrero, L-20 942, Se pt. 22, 1967, 2 1. SCRA 180 . ) Th e exception conta i n ed i n the ta x stat ute s mu s t be st ri ct l y co n s tru e d agai n s t the one c l ai mi.nq th e exemption becau s e the law does not l ook with favCJr on tax exemption s a nd tha t he who wou ld seek to be thu s pr� .i v i.l eqE:'d must. jus t..i. fy i t by wnrds t~?.9.. p l a .in to h e rn.i. s t:.a k e n ar:Jd-' t.9D.. c::atc~<JCW.i.c:a l to hr.~ mi s- i. n b::::>r pr�e t e d. (Commissioner of Internal Revenue vs. P.J . Kiener Company, Ltd ., et al., l..-24 75 4, July 18 , 1975, b5 SCR A 142. ) An exemption from the co mmon burd e n can n ot be per�mitted to E~:-:ist upon vague impl. .ic:a t.ic:m or� .i.n �fer�e n ce. ( Manila Electric , Co. vs. Vera, L-23847, Oc t . . ..-,~, 1.97 ~.1 ' 67 scr;:A 351.. ) :: ...::.

DECISION CTA CASE NO . 3380 - 14 - WHEREF 0 RE, fin d ing the petition for review without merit, the same is dismissed and the refund sought is hereby denied, at petitioner's costs. SO ORDERED . Quezon City ~ Metro Manila~ July 27~ 1988. Presid . WE CONCUR: r--... CONS TANT E C . ROAQUIN jssociate Judge -~ Associate Judge

DECISION CTA CASE NO . 3380 - 15 - CERT I F I CAT I 0 N I t. h C1. t. t. h i~ dE~cis.i.on was r� f."!Cl.c h (?. d <:':\ 'f te r� due co n su l. ta t.ion atnoi'Yq t h e rnetnber�s of the Co u rt of Tax Appea l s in accordance with S ection 13, Art i c l e VIII of th e Constitution. AMANTE ILLER Presiding Judge Court of Tax Appeals �.:.