CIR vs Mitsubishi GR 54908 – January 22, 1990

Facts:
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines,for purposes of the projected expansion of the productive capacity of the former's mines in Toledo,Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copperproduction. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced fromsaid machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of saidloan was to be used for the purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)obviously for purposes of its obligation under said contract. Its loan application was approved onMay 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loanfor ¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans isequivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. Therecords in the Bureau of Internal Revenue show that the approval of the loan by Eximbank toMitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas andas a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to payback the total amount of loan by September 30, 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by theformer to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15%tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) andSection 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No.131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it waslater noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.

Issues:

1. Whether or not the interest income from the loans extended to Atlas by Mitsubishi isexcludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and,therefore, exempt from withholding tax.
   
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered asthe creditor whose investments in the Philippines on loans are exempt from taxes under thecode.
   

Ruling:

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferentialreference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in thecontract of loan and Atlas as the seller of the copper concentrates. From the categorical languageused in the document, one prestation was in consideration of the other. The specific terms and thereciprocal nature of their obligations make it implausible, if not vacuous to give credit to thecavalier assertion that Mitsubishi was a mere agent in said transaction. The contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, doesnot appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerations aliunde. The application for the loan was approved on May 20, 1970, ormore than a month after the contract between Mitsubishi and Atlas was entered into on April 17,1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amountas a loan to and in consideration for importing copper concentrates from Atlas, but all that thisproves is the justification for the loan as represented by Mitsubishi, a standard banking practice forevaluating the prospects of due repayment. There is nothing wrong with such stipulation as theparties in a contract are free to agree on such lawful terms and conditions as they see fit. Limitingthe disbursement of the amount borrowed to a certain person or to a certain purpose is notunusual, especially in the case of Eximbank which, aside from protecting its financial exposure,must see to it that the same are in line with the provisions and objectives of its charter.Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents itfrom making loans except to Japanese individuals and corporations. We are not impressed. The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,assuming the truth thereof, is too tenuous and conjectural to support the proposition thatMitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also belogically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whateverarrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for thepayment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract withAtlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases against loan." It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and 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, which onus petitioners have failed to discharge.