TAXATION 1 - Smith V Commissioner

[C.T.A. CASE NO. 6268. September 12, 2002.
DONALD L. SMITH, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,

respondent.
DECISION
This Petition for Review involves a claim for refund in the amount of One Million
Five Hundred Thirty Three Thousand Six Hundred and Sixty Pesos & 70/100
(P1,533,660.70) allegedly representing the income tax erroneously paid by herein
petitioner 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 employee
of Coastal Subic Bay Terminal, Inc., with address at 42A Grayling Street, West
Kalayaan, 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 Subic
Special Economic Zone, as created by Republic Act 7227, and was issued by the
Subic Bay Metropolitan Authority a Certificate of Registration and Tax Exemption
No. 93-0019 on December 4, 1997, valid until December 4, 1998 (par. 5 Joint
Stipulation of Facts).
On April 15, 1999, petitioner, with tax identification number 170-302-240, filed his
annual income tax return and paid P1,533,660.70 in compensation income taxes
for 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 no
immediate action on his claim for refund and the two-year prescriptive period was
about to lapse, petitioner elevated his case to this court by way of Petition for
Review on April 6, 2001.
On May 10, 2001, petitioner filed a Manifestation and Motion to Correct Petition
for Review. As alleged, said errors were due to some typographical errors
committed in the finalization of the draft-petition. The motion was granted in open
court on May 25, 2001 and confirmed in a resolution dated May 31, 2001.
On August 14, 2001, herein respondent filed his Answer, raising the following
Special and Affirmative Defenses:
1. Petitioner's alleged claim for refund is still subject to administrative

routinary investigation/examination by respondent's bureau.
2. Section 12(c) of RA 7227, otherwise known as the Bases Conversion and
Development Act of 1992", relied upon by petitioner in claiming the refund
provides:
Section 12. Subic Special Economic Zones. —
xxx xxx xxx
(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special
Economic Zone shall be remitted to the National Government, one percent (1%)
each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of the gross income earned
by all businesses and enterprises within the Subic Special Economic Zone to be
utilized for the development of municipalities outside the City of Olongapo and
the Municipality of Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor
of the latter. (Emphasis Supplied)
Under the foregoing provisions, only business establishments operating within the
Subic Special Economic Zone are exempt from national and local taxes. Petitioner
is not covered by the exemption granted under Section 12 (c) of Republic Act
7227, 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 to

establish its right to refund and failure to sustain the burden is fatal to the action
for refund.
Upon approval of their Joint Stipulation of Facts and Issues, the parties agreed to
dispense with the trial and submit this case for decision, considering that the
issues 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 are
subject to Philippine income taxes on income earned from such employment;
2. Whether or not petitioner is entitled to a refund or tax credit for income

taxes paid on compensation earned from working within the Subic Special
Economic Zone;
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 territory
known as Subic Special Economic Zone (SSEZ, for brevity) is a tax-free territory
and as such, all income derived within the zone, including that of an alien
individual, is exempt from income tax and other taxes. Consequently, according to
petitioner, SSEZ is beyond the coverage of RA 8424, otherwise known as the
National Internal Revenue Code and the Tariff and Customs Code, as well as other
Philippine 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 Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special
Economic Zone shall be remitted to the National Government, one percent (1%)
each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of the gross income earned
by all businesses and enterprises within the Subic Special Economic Zone to be
utilized for the development of the municipalities outside the City of Olongapo
and the Municipality of Subic, and other municipalities contiguous to the base
areas.
In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor
of the latter (Emphasis ours).
In interpreting the aforequoted section of RA 7227, fundamental rules of

construction shall accordingly be applied. The phrase "no taxes, local and national
shall be imposed within the SSEZ" shall not be treated in isolation with the other
subsequent phrases as it might convey a meaning different from that of its
context taken as a whole. It is important that every section, provision or clause of
the 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 within
the SSEZ" must be read together with the following sentence "In lieu of paying
taxes, 3% of the gross income earned by all businesses and enterprises within the
SSEZ shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to
their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all
businesses and enterprises within the Subic Special Economic Zone to be utilized
for the development of the municipalities outside the City of Olongapo and the
Municipality of Subic, and other municipalities contiguous to the base areas." This
phrase belies petitioner's assertion that SSEZ is indeed a tax-free territory. The
term "in lieu of paying taxes" as used in the law does not constitute an absolute
exemption from taxation. While spared from national and local taxes, businesses
and 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 taxes
imposed on businesses or enterprises operating within the SSEZ. Thus, it is
incorrect to say that SSEZ is actually a tax-free territory.
Individual aliens employed within the Subic Special Economic Zone (SSEZ) are not
exempt from the awesome power of Philippine taxation especially so that they
sourced out their earnings from within the Philippines. The secured area of SSEZ,
which is virtually delineated in metes and bounds by Proclamation No. 532, issued
by the then President Fidel Ramos on February 1, 1995, is in reality part of the
territorial jurisdiction of the Philippines. To buttress the point that SSEZ is indeed
within the Philippine jurisdiction, Section 12 (h) of RA 7227, actually placed the
fenced-off area of SSEZ under the responsibility of the Philippine National
Government, thus,
"The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own internal security and fire-fighting forces."
Such being the case, all subjects over which the Philippines can exercise dominion
are necessarily objects of taxation. As such, all subjects of taxation within its
jurisdiction 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, February
17, 1988). Thus, the SSEZ, being within the territorial boundaries of the
Philippines, the aliens residing therein, who enjoy the benefits and protection from
the said state are not exempt from contributing their share in the running of the
government. They have the bounden duty to surrender part of their hard-earned
income to the taxing authorities. SAHaTc
Contrary to petitioner's assertion, the National Internal Revenue Code operates

with equal force and effect to all subjects within the territorial boundary of the
Philippines. 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 over
the general law but only in so far as a certain group of persons or things is
concerned. Since the law, in granting tax incentives, only made mention of
businesses and enterprises within the SSEZ, it follows then that said RA 7227
operates only on the said group. As no mention was made to individual taxpayers
being tax-exempt, it follows that they still fall within the ambit of the general law
pursuant to the maxim excepto firmat regulam in casibus non exceptis, a thing
not being excepted must be regarded as coming within the purview of the general
rule.
Parenthetically, there is not much of a substantial difference between individual
citizen and an individual resident alien working in the Philippines as far as income
taxation is concerned. In fact, under the National Internal Revenue Code (NIRC) of
1997, 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 resident
citizen 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 of

income taxes paid on compensation earned from working within the SSEZ, we
answer in the negative. As previously discussed, resident aliens within the SSEZ
are still subject to the NIRC as far as their income from within the Philippines is
concerned. Accordingly, no refund of the said tax can be granted to petitioner as
the said tax due the petitioner in the amount of P1,533,660.70 was correctly
remitted 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 that
the exemption from taxes, local or national, is actually intended to benefit only
those registered businesses and establishments operating within the territory and
not to individual taxpayers working within its parameters. The grant of said
incentive is premised on the fact that the influx of new investments in our
economy could very well meet the country's avowed policy of accelerating
economic growth and development.
As held by the Supreme Court in the case of Tiu vs. Court of Appeals, 301 SCRA
278, January 20, 1999, thus:
"From the above provisions of the law, it can easily be deduced that the real
concern of RA 7227 is to convert the lands formerly occupied by the US military
bases into economic or industrial areas. In furtherance of such objective, Congress
deemed it necessary to extend economic incentives to attract and encourage
investors, both local and foreign. Among such enticements are: (1) a separate
customs territory within the zone, (2) tax-and duty free importations, (3)
restructured income tax rates on business enterprises within the zone, (4) no
foreign exchange control, (5) liberalized regulations on banking and finance, and
(6) the grant of resident status to certain investors and of working visas to certain
foreign executives and workers" (emphasis supplied).
It is clear from the foregoing that the purpose of the law is to attract and
encourage investors who could spur economic growth and resultantly could
generate employment opportunities for the Filipinos. Nothing has been said about
the employees and personnel working thereat to be likewise tax-exempt on their
compensation income as no objective of national magnitude is actually realized if
the law intends to exempt them from tax. Except for the privilege of granting a
working 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 coverage
of the law a little bit too far. This court cannot indulge in expansive construction
and write into the law an exemption not therein set forth.
If the law intended to exempt individuals employed within the SSEZ from taxes, it
could have expressly stated it in clear and unequivocal language. The exemption
from the common burden cannot be permitted to exist upon vague implication nor
can 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 claim
by showing that the legislature intended to exempt him by words too plain to be
mistaken (Surigao Consolidated Mining Co., Inc. vs. Collector of Internal Revenue,
et al., L-14878, December 26, 1963). Since RA 7227 does not specifically mention
the granting of tax exemptions to individuals working within the SSEZ, then no tax
refund should be accorded to herein petitioner.
The oft-repeated rule that "a refund partakes of the nature of a tax exemption and
so it must be construed in strictissimi juris against the grantee and liberally in
favor of the taxing power" deserves reiteration in this case.
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. TEAaDC
SO ORDERED.
(SGD.) ERNESTO D. ACOSTA
Presiding Judge
I CONCUR:
(SGD.) JUANITO C. CASTAÑEDA, JR.
Associate Judge
[C.T.A. CASE NO. 6139. December 17, 2003.]
MITSUBISHI CORPORATION — MANILA BRANCH, petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent.
DECISION
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 to
P44,288,712 and P8,324,100, respectively, arising from petitioner's Overseas
Economic Cooperation Fund — funded Batangas Coal-Fired Thermal Power Plant
Project. cEHSTC
Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly

organized and existing under the laws of Japan and duly licensed to engage in
business 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 the

Government of the Philippines dated June 11, 1987 (Exhibit "J"), it was agreed that
a 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 then
Overseas Economic Cooperation Fund (hereinafter, "OECF"), (now the Japan Bank
for International Cooperation or "JIBC" for the implementation of the Calaca II
Coal-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 its
instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the
Philippines on Japanese firms and nationals operating as suppliers, contractors or
consultants on and /or in connection with any income that may accrue from the
supply of products of Japan and services of Japanese nationals to be provided
under the Loan" (Exhibit "J").
Subsequently, the OECF and the Government of the Republic of the Philippines
entered into a Loan Agreement (Loan Agreement No. PH-P76) dated September
25, 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") and
Mitsubishi Corporation, petitioner's head office in Japan, entered into a contract
for the engineering, supply, construction, installation, testing and commissioning
of 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").
Article VI of the Contract provided that "The Foreign Currency Portion of the
Contract Price for Phase I is funded by OECF Loan No. PH-P76. Any Foreign
Currency Portion of the Contract which is not covered by OECF Loan No. PH-P76
shall constitute as Phase II of the Contract. Corporation (NPC) shall secure
additional financing from OECF for Phase II within one (1) year after the date of
Contract effectivity (Exhibit "I"). IAcTaC
Thus, a second loan agreement (Loan Agreement No. PH-P141) dated December
20, 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 of
the 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 but
was only accepted by NPC on January 31, 1998 through a Certificate of
Completion and Final Acceptance dated February 4, 1998 (Exhibit "D").
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year ended
March 31, 1998 with the Bureau of Internal Revenue (par. 3, Joint Stipulation of
Facts and Issues; Exhibits "B", "B-1" and "B-2"). In the return, petitioner (being the
Manila Branch of Mitsubishi Corporation) reported an income tax due of
P90,481,711.00 computed in accordance with the provisions of Revenue
Memorandum Order ("RAMO") No. 1-95, as follows:
Solicitation and Trading Activities
Worldwide Operating Income P6,421,609,029.00
Sales to the Philippines 15,342,816,283.00
—————————
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
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 and
cost incurred for its Calaca II Project, in accordance with the completed contract
method 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
——————
Gross Profit 305,122,277
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 Income P151,997,705
============
(Exhibit "B-16")
Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return of
Income Taxes Withheld (Exhibit "C") and remitted the amount of P8,324,100
representing its branch profit remittance tax (BPRT) for branch profits remitted to
the 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 Ruling

No. DA-407-98 (Exhibit K) where it held that "Mitsubishi has no liability for income
tax and other taxes and fiscal levies, including VAT, . . . on the 100% of its foreign
currency portion of the Calaca II Project since the said taxes were assumed by the
Philippine Government." (par. 5, Stipulation of Facts, Joint Stipulation of Facts and
Issues).
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 the
project, 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 entire
Calaca II Project (inclusive of the OECF-funded and non-OECF funded portions) and
P8,324,100.00 BPRT for the remittance of its income (inclusive of the income on
the OECF-funded portion of the Calaca II Project), petitioner now seeks a tax
refund/credit of the P44,288,712 erroneously paid income tax and the
P8,324,100.00 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 operating

expenses)
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
========== portion and, therefor, should not
have been paid by Mitsubishi
(Exhibit "A")
Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits from
OECF 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, should
not have been paid by Mitsubishi
(Exhibit "A")
On June 30, 2000, petitioner filed an administrative claim for refund and/or tax
credit with respondent in the amount of P52,612,812.00, representing its
erroneously paid income taxes in the amount of P44,288,712 and erroneously
paid branch profit remittance tax in the amount of P8,324,100.00 corresponding
to 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 for
review pursuant to Section 229 of the Tax Code.
Respondent, on September 12, 2000, filed his answer raising the following Special
and Affirmative Defenses, to wit:
"7. Petitioner's alleged claim for refund is subject to administrative routinary

investigation/examination by respondent's bureau.
8. Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-serving

representations 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 to

establish its right to refund and its failure to sustain the burden is fatal to the
claim for refund/credit.
11. Petitioner must show that it has complied with the provisions of Sections
204(c) and 229 of the Tax Code."
On April 6, 2001, petitioner, by leave of court, moved for the adoption of the
procedure under CTA Circular No. 1-95, as amended by CTA Circular No. 10-97
which was granted by this court on April 23, 2001. Mr. Ruben R. Rubio, a partner
of Sycip Gorres Velayo & Co. was commissioned to examine and verify the
voluminous documents supporting petitioner's claim. Thereafter, on August 28,
2001, Mr. Ruben R. Rubio submitted his report (Exhibit "S") relative to his
verification of petitioner's claim for refund. The report reveals an erroneously paid
income tax and erroneously paid branch profit remittance tax amounting to
P44,288,712 and P8,324,100, respectively. This court noted that there is no
discrepancy between the amount cited in the report and the amount being
claimed by petitioner. cEAIHa
In support of its claim for refund petitioner, presented documentary and

testimonial evidence. On the contrary, respondent did not present any testimonial
or 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 his
memorandum, failed to file the same. And so, this court, in its resolution dated
July 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 profit

remittance taxes for the fiscal year ended March 31, 1998, which is a proper claim
for refund pursuant to Sections 204 and 229 of the Tax Code; and
2. Whether the erroneously paid income and branch profit remittance taxes for
the 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 of
the 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 consequences
of its OECF-funded NAIA II and Calaca II Projects.
It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a private
corporation duly organized and existing under and by virtue of the laws of Japan;
that Mitsubishi was duly authorized by the Securities and Exchange Commission
to operate a branch in the Philippines; that Mitsubishi is a member of the MTOB
Consortium, 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 pursuant
to 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 of
Y47,036,000,000.00 was extended to the Philippine Government to fund, among
other projects stated therein, the Ninoy Aquino International Airport Terminal 2 or
the NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; that
item 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 imposed
in the Republic of the Philippines on Japanese firms and nationals operating as
suppliers, contractors or consultants on and/or in connection with any income that
may accrue from the supply of products of Japan and/or services of Japanese
nationals to be provided under the Loan.
It is likewise represented that on June 21, 1991, Mitsubishi entered into a contract
with the National Power Corporation (NPC) for the supply of equipment and
services, engineering, construction, testing and commissioning of equipment in
connection with the Calaca II Project; that funding of the project is made through a
grant 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 implement
the Calaca II Project; that Item 5, paragraph 2 Notes-Calaca provides;
"5. ...
may 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 Government

through the OECF represents 75% of the NAIA II Projects and 100% of the foreign
currency portion of the Calaca II project both of which will benefit not Japan but
the 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 made
the obligation of Japanese firms engaged in the Projects.
In reply, please be informed that the aforequoted provisions of Notes-NAIA and
Notes-Calaca are not grants of direct tax exemption privilege to the Japanese
firms, Mitsubishi in this case, and Japanese nationals operating as suppliers,
contractors or consultants involved in either of the two projects 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 taxes they may be liable to. Thus there
is no tax exemption to speak of because the said taxes shall be assumed by the
Philippine Government; hence the said provision is not violative of the
Constitutional prohibition against grants of tax exemption without the concurrence
of 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 the

Government of Japan is Y18,120,000,000.00 in the NAIA II Project and
Y40,400,000,000.00 in the Calaca II Project and that the beneficiary is the
Philippine 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 foreign
Philippine Government.
This ruling is being issued based on the foregoing representation. If upon

investigation, 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 erroneous
pursuant to Section 229 of the Tax Code, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. — No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not
such 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
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was made, such
payment 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 the
Philippines through its executing agency, the NPC, in connection with Item 5(2) of
the 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 as
to an obligation or liability". As can be gleaned from the definition, the
Government of the Philippines, through NPC, binds itself to shoulder the tax
obligations and liabilities of petitioner. This finds support under the provision of
Article VII (B) (1) of the Contract (Exhibit "I") executed between petitioner and
NPC, to wit:
Article VII (B) (1)
"B. FOR ONSHORE PORTION
1.) CORPORATION (NPC) shall, subject to the provisions under the Contract
Documents on Taxes, pay any and all forms of taxes which are directly imposable
under the Contract including VAT, that may be imposed by the Philippine
Government, 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's
claim, thus:
xxx xxx xxx
Atty. Manalo:
Now, based on the amendment to the contract between National Power

Corporation and Mitsubishi Corporation, who will pay the taxes for the onshore
portion of the Contract?
Witness:
Under Article VII (B) of the original contract, the National Power Corporation
shall 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 the
original contract as Exhibit "I-1".
xxx xxx xxx
Therefore, the income tax and BPRT payments made by petitioner to respondent
when such payments should have been made by the NPC, undoubtedly, put
petitioner's case in the operation of Section 229 of the Tax Code as one involving
erroneous 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 the
payment 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 covenant
that the funded amount should not be subject to any taxes. This statement finds
support under item 8(a) of the Exchange of Notes, to wit:
"8. The Government of the Republic of the Philippines will take necessary
measures 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 of
Notes as a basis for the refund of erroneously collected taxes. In the case of P & N
Corporation (Manila Branch Office) vs. Commissioner of Internal Revenue, CTA
Case Nos. 4163 and 4293 (July 24, 1991), which involved a claim for refund of
erroneously collected contractors' and withholding taxes, this court in granting the
petition on the ground that the subject provision of the Exchange of Notes
partakes 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 or
compensation for services rendered in the performance of some function deemed
socially desirable . . . are favored on the theory that the concession is due to quid
pro quo for the performance of services essentially public by which the State is
relieved pro tanto from performing (84 C.J.S. No. 215, pp. 413–414). Thus it is
important 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 that
time, the President may contract and guarantee foreign and domestic loans on
behalf of the Republic of the Philippines subject to such limitations as may be
provided 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. The
contract, involved in this case which was entered into pursuant to the loan merely
embodies the exemption provision in said exchange of notes."
Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and

Co., 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, CTA
Case No. 6037, November 11, 2002, this court, again pursuant to the Exchange of
Notes, granted the claim of petitioners for the refund of unutilized creditable
withholding value-added tax (VAT) in recognition of the validity of the Exchange of
Notes. This court has noted that in these decisions, the subject claim for refund
was based on the Notes-NAIA mentioned in BIR Ruling DA 407-98 in which herein
petitioner was one of the claimants. Thus, in consideration of the above-stated
pronouncements 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 reason
to 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, which
has for its subject the standard clauses (referring to Item 5 paragraphs 1 and 2 of
said Exchange of Notes) pertaining to the tax treatment of participating Japanese
contractors and nationals under the exchange of notes between the Japanese
Government and the Republic of the Philippines, providing for the proper
procedure for petitioner in case where it already paid the taxes subject of this
case to the BIR. Pertinent portions of which read as follows:
The foregoing provisions of the Exchange of Notes mean that the Japanese
contractors or nationals engaged in OECF-funded projects in the Philippines shall
not be required to shoulder all fiscal levies or taxes associated with the project.
Instead, the taxes shall be shouldered and borne by the executing government
agencies. Hence, for the comprehensive treatment of the tax implications arising
therefrom, the following rulings are hereby promulgated:
A) ...
B) INCOME TAX
1. Japanese firms or nationals operating as suppliers, contractors or

consultants on and/or in connection with any income that may accrue from the
supply of products and/or services to be provided under the Project Loan, shall file
the prescribed income tax returns. Since the executing government agencies are
mandated to assume the payment thereof under the Exchange of Notes, the said
Japanese firms or nationals need not pay the taxes due thereunder.
2. The concerned Revenue District Officer shall, in turn, collect the said income
taxes from the concerned executing government agencies.
3. In cases where income taxes were previously paid directly by the Japanese
contractors or nationals, the corresponding cash refund shall be recovered from
the government executing agencies upon the presentation of proof of payment
thereof by the Japanese contractors or nationals. (Emphasis supplied).
C) ...
Indubitably, under the RMC as regards income taxes, petitioner is only required to
file its ITR but need not pay the taxes due thereunder. The Commissioner of the
BIR has mandated the District Officer to collect the income taxes from the
government executing agency. But in cases where income taxes were previously
paid directly by petitioner to the BIR, as what petitioner did in this case, the cash
refund shall be recovered from the NPC. However, the RMD dated June 2, 1999
only 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 refund
must be claimed directly by petitioner from the respondent for it would be unfair
on the part of the petitioner that said RMC be given retroactive effect.
Anent the second issue, this court finds that petitioner has properly presented
sufficient evidence to substantiate its claim for erroneously paid income and
branch profit remittance taxes for the fiscal year ended March 31, 1998.
WHEREFORE, in the light of the foregoing, petitioner's claim for refund is

GRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED to
REFUND 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 remittance
tax pursuant to the Exchange of Notes between the Government of Japan and the
Government of the Philippines (Exhibit "J") and BIR Ruling DA-407-98 dated
September 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa
1. There are constitutional grounds to prohibit the grant of tax exemption

under such Exchange of Notes.
2. Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grant
income tax exemption.
3. The Exchange of Notes only provides for the assumption of tax liabilities by
the Philippine Government. It does not provide for tax exemption.
4. BIR Ruling DA-407-98 dated September 7, 1998 does not entitle petitioner
to a refund of income taxes paid by it.
Section 28(4), Article VI (Legislative Department) of the 1987 Constitution of the

Philippines expressly provides: "No law granting any tax exemption shall be
passed 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 the
grant of tax exemption clearly manifests the intent of the framers of our
Constitution that tax exemptions are not to be frivolously granted.
On the other hand, Section 21, Article VII (Executive Department) of the
Constitution states: "No treaty or international agreement shall be valid and
effective unless concurred in by at least two-thirds of all the Members of the
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 included
in 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 required
by 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 its
claim 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 for
in pertinent part: HScAEC
. . . that item 7, paragraph 2 of Notes-NAIA states:
"7. ...
"5. ...

firms, . . . 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 taxes
they may be liable to. Thus there is no tax exemption to speak of because the said
taxes shall be assumed by the Philippine Government; hence the said provision is
not violative of the Constitutional prohibition against grants of tax exemption
without the concurrence of the majority of the members of Congress (BIR Ruling
No. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). aHECST

The aforequoted ruling clearly states that the Exchange of Notes grants no tax
exemption and merely provides that the Philippine Government assumes all tax
liabilities. Hence, there is no violation of "the Constitutional prohibition against
grants of tax exemption without the concurrence of the majority of the members
of Congress (BIR Ruling No. 071-97 citing Sec. 28(4) Art. VI, 1987 Philippine
Constitution)."
It must be noted that the Exchange of Notes is merely an agreement between the
two governments (Philippines and Japan) involved. The Exchange of Notes is not a
source 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 be
assumed by the Philippine Government." Undoubtedly, a tax assumption is not
equivalent to tax exemption. The former arises from contract while the latter is
granted by law through the legislative branch of the government. As a rule, "the
claim of tax exemption must expressly be granted in a statute stated in a
language too clear to be mistaken'' (Commissioner of Internal Revenue vs. Court
of Appeals, 298 SCRA 83).
The Exchange of Notes is just a preparatory agreement or a mere understanding

between the two governments in which the government of Japan will grant a loan
in favor of the Philippine government to be used in the latter's economic
development program. This is evident from the opening statements of the
Exchange of Notes wherein it provided that:
"Excellency,
I have the honour to confirm the following understanding recently reached

between the representatives of the Government of Japan and of the Government
of the Republic of the Philippines concerning a Japanese loan to be extended with
a view to promoting economic development efforts of the Republic of the
Philippines: . . . " (p. 1, Exhibit "J")
Clearly, the Exchange of Notes is not a "self-executing" agreement. This was the
reason why the two loan agreements, Loan Agreement No. PH-P76 (Exhibit "O")
dated September 25, 1987 and Loan Agreement No. PH-P141 (Exhibit "P") dated
December 20, 1994, were executed providing the Philippine government enough
funds to implement the Calaca II Project. Accordingly, in order to realize this
project, the NPC, the executing agency of the Philippine government entered into
a 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 by
the Philippine government (through the NPC), to wit: HAICTD
Article VIII (B) (1)
Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
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 the
two governments not to use the proceeds of the loan in the payment of all fiscal
levies or taxes imposed by the Philippines. This statement finds support under
Item 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 tax
liabilities of petitioner, the latter still made payments of the subject taxes to
respondent. And now, petitioner, believing that it has made erroneous payments
of the subject taxes, is before us invoking the provision of Section 229 in relation
to 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 to
petitioner, to wit:

proceeding, shall be maintained in any court for the recovery of any national
wrongfully collected, until a claim for refund or credit has been duty filed with the
payment 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, or
of any sum alleged to have been excessively or in any manner wrongfully
collected. Undeniably, it is not proper for us to allow a claim for refund in favor of
petitioner who, by law, is legally mandated to pay the taxes due from it. The
allegation of petitioner that the subject taxes it paid comes within the purview of
an erroneous payment merely because said taxes, by virtue of a contract, are to
be assumed by NPC is unavailing.
It is a basic principle in civil law that with certain exceptions not obtaining in this
case, a contract can only bind the parties who had entered into it or their
successors 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 the
Civil Code of the Philippines provides that "Contracts take effect only between the
parties, 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 or
by 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 and
between the parties (NPC and herein petitioner) and the herein respondent was
neither 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 the
parties, otherwise, the principle of relativity of contracts, long enshrined in our
substantive 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 the
Tax Code. The payments of petitioner to respondent of the income taxes and the
BPRT were made legally by it and the Contract is not enough ground to grant
petitioner'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 the
equivalent amount of the income taxes and branch profit remittance taxes it paid
to the BIR. This remedy is recognized by the respondent himself when he issued
Revenue Memorandum Circular (RMC) No. 32-99, as amended by Revenue
Memorandum Circular 42-99 dated June 2, 1999, which provides that "In cases
where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government
executing agencies upon the presentation of proof of payment thereof by the
Japanese contractors or nationals".
International comity may not be invoked to evade our tax laws. Thus, the
Supreme Court held:
"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. Significantly, private respondents are
not even among the entities which, under Section 29(b)(7)(A) of the tax code, are
entitled to exemption and which should indispensably be the party in interest in
this case. AaDSTH
Definitely, the taxability of a party cannot be blandly glossed over on the basis of
a supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed
funds. Nor can we close this discussion without taking cognizance of petitioner's
warning, of pervasive relevance at this time, that while international comity is
invoked in this case on the nebulous representation that the funds involved in the
loans are those of a foreign government, scrupulous care must be taken to avoid
opening the floodgates to the violation of our tax laws. Otherwise, the mere
expedient of having a Philippine corporation enter into a contract for loans or
other domestic securities with private foreign entities, which in turn will negotiate
independently with their governments, could be availed of to take advantage of
the 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 be
held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention of the parties (Philippine Acetylene
Co., 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; Surigao
Consolidated 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 the
Philippines, 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 in
the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person
claiming the exemption (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., 309 SCRA 87 [1999]).
In the light of the foregoing, we cannot conclude that the Exchange of Notes
grants tax exemption to petitioner. Hence, petitioner's claim for refund should be
denied for lack of merit. ScTCIE
Associate Judge[C.T.A. CASE NO. 6139. December 17, 2003.]
MITSUBISHI CORPORATION — MANILA BRANCH, petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent.
DECISION
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 to
P44,288,712 and P8,324,100, respectively, arising from petitioner's Overseas
Economic Cooperation Fund — funded Batangas Coal-Fired Thermal Power Plant
Project. cEHSTC
Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly

organized and existing under the laws of Japan and duly licensed to engage in
business 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 the

Government of the Philippines dated June 11, 1987 (Exhibit "J"), it was agreed that
a 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 then
Overseas Economic Cooperation Fund (hereinafter, "OECF"), (now the Japan Bank
for International Cooperation or "JIBC" for the implementation of the Calaca II
Coal-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 its
instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the
Philippines on Japanese firms and nationals operating as suppliers, contractors or
consultants on and /or in connection with any income that may accrue from the
supply of products of Japan and services of Japanese nationals to be provided
under the Loan" (Exhibit "J").
Subsequently, the OECF and the Government of the Republic of the Philippines
entered into a Loan Agreement (Loan Agreement No. PH-P76) dated September
25, 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") and
Mitsubishi Corporation, petitioner's head office in Japan, entered into a contract
for the engineering, supply, construction, installation, testing and commissioning
of 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").
Article VI of the Contract provided that "The Foreign Currency Portion of the
Contract Price for Phase I is funded by OECF Loan No. PH-P76. Any Foreign
Currency Portion of the Contract which is not covered by OECF Loan No. PH-P76
shall constitute as Phase II of the Contract. Corporation (NPC) shall secure
additional financing from OECF for Phase II within one (1) year after the date of
Contract effectivity (Exhibit "I"). IAcTaC
Thus, a second loan agreement (Loan Agreement No. PH-P141) dated December
20, 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 of
the 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 but
was only accepted by NPC on January 31, 1998 through a Certificate of
Completion and Final Acceptance dated February 4, 1998 (Exhibit "D").
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year ended
March 31, 1998 with the Bureau of Internal Revenue (par. 3, Joint Stipulation of
Facts and Issues; Exhibits "B", "B-1" and "B-2"). In the return, petitioner (being the
Manila Branch of Mitsubishi Corporation) reported an income tax due of
P90,481,711.00 computed in accordance with the provisions of Revenue
Memorandum Order ("RAMO") No. 1-95, as follows:
Solicitation and Trading Activities
Worldwide Operating Income P6,421,609,029.00
Sales to the Philippines 15,342,816,283.00
—————————
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

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 and
cost incurred for its Calaca II Project, in accordance with the completed contract
method 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
——————
Income Before Income Tax 234,441,913
Provision for Income Tax 82,444,208
——————
Net Income P151,997,705
============
(Exhibit "B-16")
Likewise, on July 15, 1998, petitioner filed its Monthly Remittance Return of
Income Taxes Withheld (Exhibit "C") and remitted the amount of P8,324,100
representing its branch profit remittance tax (BPRT) for branch profits remitted to
the 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 Ruling

No. DA-407-98 (Exhibit K) where it held that "Mitsubishi has no liability for income
tax and other taxes and fiscal levies, including VAT, . . . on the 100% of its foreign
Philippine Government." (par. 5, Stipulation of Facts, Joint Stipulation of Facts and
Issues).
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 the
project, 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 entire
Calaca II Project (inclusive of the OECF-funded and non-OECF funded portions) and
P8,324,100.00 BPRT for the remittance of its income (inclusive of the income on
the OECF-funded portion of the Calaca II Project), petitioner now seeks a tax
refund/credit of the P44,288,712 erroneously paid income tax and the
P8,324,100.00 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)
Less: Operating Expenses 33,551,240 — P74,162,777(total operating

expenses)
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

========== portion and, therefor, should not
have been paid by Mitsubishi
(Exhibit "A")
Erroneously Paid Branch Profit Remittance Tax Pertaining to Branch Profits from
OECF 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, should
not have been paid by Mitsubishi
(Exhibit "A")
On June 30, 2000, petitioner filed an administrative claim for refund and/or tax
credit with respondent in the amount of P52,612,812.00, representing its
erroneously paid income taxes in the amount of P44,288,712 and erroneously
paid branch profit remittance tax in the amount of P8,324,100.00 corresponding
to 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 for
review pursuant to Section 229 of the Tax Code.
Respondent, on September 12, 2000, filed his answer raising the following Special
and Affirmative Defenses, to wit:
"7. Petitioner's alleged claim for refund is subject to administrative routinary

investigation/examination by respondent's bureau.
8. Since BIR Ruling No. DA-407-98 is based merely on petitioner's self-serving

representations 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 to

establish its right to refund and its failure to sustain the burden is fatal to the
claim for refund/credit.
11. Petitioner must show that it has complied with the provisions of Sections
204(c) and 229 of the Tax Code."
On April 6, 2001, petitioner, by leave of court, moved for the adoption of the
procedure under CTA Circular No. 1-95, as amended by CTA Circular No. 10-97
which was granted by this court on April 23, 2001. Mr. Ruben R. Rubio, a partner
of Sycip Gorres Velayo & Co. was commissioned to examine and verify the
voluminous documents supporting petitioner's claim. Thereafter, on August 28,
2001, Mr. Ruben R. Rubio submitted his report (Exhibit "S") relative to his
verification of petitioner's claim for refund. The report reveals an erroneously paid
income tax and erroneously paid branch profit remittance tax amounting to
P44,288,712 and P8,324,100, respectively. This court noted that there is no
discrepancy between the amount cited in the report and the amount being
claimed by petitioner. cEAIHa
In support of its claim for refund petitioner, presented documentary and

testimonial evidence. On the contrary, respondent did not present any testimonial
or 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 his
memorandum, failed to file the same. And so, this court, in its resolution dated
July 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 profit

remittance taxes for the fiscal year ended March 31, 1998, which is a proper claim
for refund pursuant to Sections 204 and 229 of the Tax Code; and
2. Whether the erroneously paid income and branch profit remittance taxes for
the 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 of
the 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 consequences
of its OECF-funded NAIA II and Calaca II Projects.
It is represented that your client, Mitsubishi Corporation (Mitsubishi), is a private

corporation duly organized and existing under and by virtue of the laws of Japan;
that Mitsubishi was duly authorized by the Securities and Exchange Commission
to operate a branch in the Philippines; that Mitsubishi is a member of the MTOB
Consortium, 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 pursuant
to 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 of
Y47,036,000,000.00 was extended to the Philippine Government to fund, among
other projects stated therein, the Ninoy Aquino International Airport Terminal 2 or
the NAIA II project; that the NAIA II Project was allocated Y18,120,000,000.00; that
item 7, paragraph 2 of Notes-NAIA states:
"7. ...
"5. ...
It is further represented that the above contributions of the Japanese Government

through the OECF represents 75% of the NAIA II Projects and 100% of the foreign
currency portion of the Calaca II project both of which will benefit not Japan but
the 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 made
the obligation of Japanese firms engaged in the Projects.

firms, Mitsubishi in this case, and Japanese nationals operating as suppliers,
contractors or consultants involved in either of the two projects 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 taxes they may be liable to. Thus there
is no tax exemption to speak of because the said taxes shall be assumed by the
Philippine Government; hence the said provision is not violative of the
Constitutional prohibition against grants of tax exemption without the concurrence
of the majority of the members of Congress (BIR Ruling No. 071-97 citing Sec.
28(4), Art. VI, 1987 Philippine Constitution).

This ruling is being issued based on the foregoing representation. If upon

investigation, 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 erroneous
pursuant to Section 229 of the Tax Code, to wit:

proceeding shall be maintained in any court for the recovery of any national
wrongfully collected, until a claim for refund or credit has been duly filed with the
payment 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 the
Philippines through its executing agency, the NPC, in connection with Item 5(2) of
the 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 as
to an obligation or liability". As can be gleaned from the definition, the
Government of the Philippines, through NPC, binds itself to shoulder the tax
obligations and liabilities of petitioner. This finds support under the provision of
Article VII (B) (1) of the Contract (Exhibit "I") executed between petitioner and
NPC, to wit:
Article VII (B) (1)
Government, 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's
claim, thus:
xxx xxx xxx
Atty. Manalo:
Now, based on the amendment to the contract between National Power

Corporation and Mitsubishi Corporation, who will pay the taxes for the onshore
portion of the Contract?
Witness:
Under Article VII (B) of the original contract, the National Power Corporation
shall 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 the
original contract as Exhibit "I-1".
xxx xxx xxx
Therefore, the income tax and BPRT payments made by petitioner to respondent
when such payments should have been made by the NPC, undoubtedly, put
petitioner's case in the operation of Section 229 of the Tax Code as one involving
erroneous 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 the
payment 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 covenant
that the funded amount should not be subject to any taxes. This statement finds
support under item 8(a) of the Exchange of Notes, to wit:
(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 of
Notes as a basis for the refund of erroneously collected taxes. In the case of P & N
Corporation (Manila Branch Office) vs. Commissioner of Internal Revenue, CTA
Case Nos. 4163 and 4293 (July 24, 1991), which involved a claim for refund of
erroneously collected contractors' and withholding taxes, this court in granting the
petition on the ground that the subject provision of the Exchange of Notes
partakes 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 or
compensation for services rendered in the performance of some function deemed
socially desirable . . . are favored on the theory that the concession is due to quid
pro quo for the performance of services essentially public by which the State is
relieved pro tanto from performing (84 C.J.S. No. 215, pp. 413–414). Thus it is
important 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 that
time, the President may contract and guarantee foreign and domestic loans on
behalf of the Republic of the Philippines subject to such limitations as may be
provided 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. The
contract, involved in this case which was entered into pursuant to the loan merely
embodies the exemption provision in said exchange of notes."
Moreover, in Mitsubishi Corporation, Tokyu Construction Co., Ltd., A. M. Oreta and

Co., 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, CTA
Case No. 6037, November 11, 2002, this court, again pursuant to the Exchange of
Notes, granted the claim of petitioners for the refund of unutilized creditable
withholding value-added tax (VAT) in recognition of the validity of the Exchange of
Notes. This court has noted that in these decisions, the subject claim for refund
was based on the Notes-NAIA mentioned in BIR Ruling DA 407-98 in which herein
petitioner was one of the claimants. Thus, in consideration of the above-stated
pronouncements 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 reason
to 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, which
has for its subject the standard clauses (referring to Item 5 paragraphs 1 and 2 of
said Exchange of Notes) pertaining to the tax treatment of participating Japanese
contractors and nationals under the exchange of notes between the Japanese
Government and the Republic of the Philippines, providing for the proper
procedure for petitioner in case where it already paid the taxes subject of this
case to the BIR. Pertinent portions of which read as follows:
The foregoing provisions of the Exchange of Notes mean that the Japanese
contractors or nationals engaged in OECF-funded projects in the Philippines shall
not be required to shoulder all fiscal levies or taxes associated with the project.
Instead, the taxes shall be shouldered and borne by the executing government
agencies. Hence, for the comprehensive treatment of the tax implications arising
therefrom, the following rulings are hereby promulgated:
A) ...
B) INCOME TAX
1. Japanese firms or nationals operating as suppliers, contractors or

consultants on and/or in connection with any income that may accrue from the
supply of products and/or services to be provided under the Project Loan, shall file
the prescribed income tax returns. Since the executing government agencies are
mandated to assume the payment thereof under the Exchange of Notes, the said
Japanese firms or nationals need not pay the taxes due thereunder.
2. The concerned Revenue District Officer shall, in turn, collect the said income
taxes from the concerned executing government agencies.
3. In cases where income taxes were previously paid directly by the Japanese
contractors or nationals, the corresponding cash refund shall be recovered from
the government executing agencies upon the presentation of proof of payment
thereof by the Japanese contractors or nationals. (Emphasis supplied).
C) ...
Indubitably, under the RMC as regards income taxes, petitioner is only required to
file its ITR but need not pay the taxes due thereunder. The Commissioner of the
BIR has mandated the District Officer to collect the income taxes from the
government executing agency. But in cases where income taxes were previously
paid directly by petitioner to the BIR, as what petitioner did in this case, the cash
refund shall be recovered from the NPC. However, the RMD dated June 2, 1999
only 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 refund
must be claimed directly by petitioner from the respondent for it would be unfair
on the part of the petitioner that said RMC be given retroactive effect.
Anent the second issue, this court finds that petitioner has properly presented
sufficient evidence to substantiate its claim for erroneously paid income and
branch profit remittance taxes for the fiscal year ended March 31, 1998.
WHEREFORE, in the light of the foregoing, petitioner's claim for refund is

GRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED to
REFUND 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 remittance
tax pursuant to the Exchange of Notes between the Government of Japan and the
Government of the Philippines (Exhibit "J") and BIR Ruling DA-407-98 dated
September 7, 1998 (Exhibit "K") based on the following legal grounds: TSIDEa
1. There are constitutional grounds to prohibit the grant of tax exemption

under such Exchange of Notes.
2. Section 32(B)(5) of the 1997 Tax Code provides that only treaties can grant
income tax exemption.
3. The Exchange of Notes only provides for the assumption of tax liabilities by
the Philippine Government. It does not provide for tax exemption.
4. BIR Ruling DA-407-98 dated September 7, 1998 does not entitle petitioner
to a refund of income taxes paid by it.
Section 28(4), Article VI (Legislative Department) of the 1987 Constitution of the

Philippines expressly provides: "No law granting any tax exemption shall be
passed 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 the
grant of tax exemption clearly manifests the intent of the framers of our
Constitution that tax exemptions are not to be frivolously granted.
On the other hand, Section 21, Article VII (Executive Department) of the
Constitution states: "No treaty or international agreement shall be valid and
effective unless concurred in by at least two-thirds of all the Members of the
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 included
in 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 required
by 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 its
claim 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 for
in pertinent part: HScAEC
. . . that item 7, paragraph 2 of Notes-NAIA states:
"7. ...
"5. ...

firms, . . . 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 taxes
they may be liable to. Thus there is no tax exemption to speak of because the said
taxes shall be assumed by the Philippine Government; hence the said provision is
not violative of the Constitutional prohibition against grants of tax exemption
without the concurrence of the majority of the members of Congress (BIR Ruling
No. 071-97 citing Sec. 28(4), Art. VI, 1987 Philippine Constitution). aHECST

The aforequoted ruling clearly states that the Exchange of Notes grants no tax
exemption and merely provides that the Philippine Government assumes all tax
liabilities. Hence, there is no violation of "the Constitutional prohibition against
grants of tax exemption without the concurrence of the majority of the members
of Congress (BIR Ruling No. 071-97 citing Sec. 28(4) Art. VI, 1987 Philippine
Constitution)."
It must be noted that the Exchange of Notes is merely an agreement between the
two governments (Philippines and Japan) involved. The Exchange of Notes is not a
source 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 be
assumed by the Philippine Government." Undoubtedly, a tax assumption is not
equivalent to tax exemption. The former arises from contract while the latter is
granted by law through the legislative branch of the government. As a rule, "the
claim of tax exemption must expressly be granted in a statute stated in a
language too clear to be mistaken'' (Commissioner of Internal Revenue vs. Court
of Appeals, 298 SCRA 83).
The Exchange of Notes is just a preparatory agreement or a mere understanding

between the two governments in which the government of Japan will grant a loan
in favor of the Philippine government to be used in the latter's economic
development program. This is evident from the opening statements of the
Exchange of Notes wherein it provided that:
"Excellency,
I have the honour to confirm the following understanding recently reached

between the representatives of the Government of Japan and of the Government
of the Republic of the Philippines concerning a Japanese loan to be extended with
a view to promoting economic development efforts of the Republic of the
Philippines: . . . " (p. 1, Exhibit "J")
Clearly, the Exchange of Notes is not a "self-executing" agreement. This was the
reason why the two loan agreements, Loan Agreement No. PH-P76 (Exhibit "O")
dated September 25, 1987 and Loan Agreement No. PH-P141 (Exhibit "P") dated
December 20, 1994, were executed providing the Philippine government enough
funds to implement the Calaca II Project. Accordingly, in order to realize this
project, the NPC, the executing agency of the Philippine government entered into
a 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 by
the Philippine government (through the NPC), to wit: HAICTD
Article VIII (B) (1)
Government, or any of its agencies and political subdivisions."
(Exhibit "I-1")
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 the
two governments not to use the proceeds of the loan in the payment of all fiscal
levies or taxes imposed by the Philippines. This statement finds support under
Item 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 tax
liabilities of petitioner, the latter still made payments of the subject taxes to
respondent. And now, petitioner, believing that it has made erroneous payments
of the subject taxes, is before us invoking the provision of Section 229 in relation
to 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 to
petitioner, to wit:

proceeding, shall be maintained in any court for the recovery of any national
wrongfully collected, until a claim for refund or credit has been duty filed with the
payment 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, or
of any sum alleged to have been excessively or in any manner wrongfully
collected. Undeniably, it is not proper for us to allow a claim for refund in favor of
petitioner who, by law, is legally mandated to pay the taxes due from it. The
allegation of petitioner that the subject taxes it paid comes within the purview of
an erroneous payment merely because said taxes, by virtue of a contract, are to
be assumed by NPC is unavailing.
It is a basic principle in civil law that with certain exceptions not obtaining in this
case, a contract can only bind the parties who had entered into it or their
successors 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 the
Civil Code of the Philippines provides that "Contracts take effect only between the
parties, 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 or
by 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 and
between the parties (NPC and herein petitioner) and the herein respondent was
neither 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 the
parties, otherwise, the principle of relativity of contracts, long enshrined in our
substantive 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 the
Tax Code. The payments of petitioner to respondent of the income taxes and the
BPRT were made legally by it and the Contract is not enough ground to grant
petitioner'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 the
equivalent amount of the income taxes and branch profit remittance taxes it paid
to the BIR. This remedy is recognized by the respondent himself when he issued
Revenue Memorandum Circular (RMC) No. 32-99, as amended by Revenue
Memorandum Circular 42-99 dated June 2, 1999, which provides that "In cases
where income taxes were previously paid directly by the Japanese contractors or
nationals, the corresponding cash refund shall be recovered from the government
executing agencies upon the presentation of proof of payment thereof by the
Japanese contractors or nationals".
International comity may not be invoked to evade our tax laws. Thus, the
Supreme Court held:
"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. Significantly, private respondents are
not even among the entities which, under Section 29(b)(7)(A) of the tax code, are
entitled to exemption and which should indispensably be the party in interest in
this case. AaDSTH
Definitely, the taxability of a party cannot be blandly glossed over on the basis of
a supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed
funds. Nor can we close this discussion without taking cognizance of petitioner's
warning, of pervasive relevance at this time, that while international comity is
invoked in this case on the nebulous representation that the funds involved in the
loans are those of a foreign government, scrupulous care must be taken to avoid
opening the floodgates to the violation of our tax laws. Otherwise, the mere
expedient of having a Philippine corporation enter into a contract for loans or
other domestic securities with private foreign entities, which in turn will negotiate
independently with their governments, could be availed of to take advantage of
the 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 be
held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention of the parties (Philippine Acetylene
Co., 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; Surigao
Consolidated 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 the
Philippines, 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 in
the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person
claiming the exemption (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., 309 SCRA 87 [1999]).
In the light of the foregoing, we cannot conclude that the Exchange of Notes
grants tax exemption to petitioner. Hence, petitioner's claim for refund should be
denied for lack of merit. ScTCIE
Associate Judge

TAXATION 1 - Smith V Commissioner

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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,

The antecedent facts of the case are as follows:

1. Petitioner's alleged claim for refund is still subject to administrative

Section 12. Subic Special Economic Zones. —

xxx xxx xxx

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 to

2. Whether or not petitioner is entitled to a refund or tax credit for income

Said contention deserves scant consideration.

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

Section 12. Subic Special Economic Zones. —

In interpreting the aforequoted section of RA 7227, fundamental rules of

Contrary to petitioner's assertion, the National Internal Revenue Code operates

Proceeding now to the issue of whether herein petitioner is entitled to a refund of

(SGD.) ERNESTO D. ACOSTA

(SGD.) JUANITO C. CASTAÑEDA, JR.

MITSUBISHI CORPORATION — MANILA BRANCH, petitioner, vs. COMMISSIONER OF

Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly

Through an Exchange of Notes between the Government of Japan and the

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

Solicitation and Trading Activities

Worldwide Operating Income P6,421,609,029.00

Sales to the Philippines 15,342,816,283.00

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

Taxable Income from

Solicitation Activities 30,024,023.00

Attribution Rate 75%

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

Taxable Income April-December 1997 236,162,001.00

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")

Gross Profit 305,122,277

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 Income P151,997,705

On September 7, 1998, the respondent issued Bureau of Internal Revenue Ruling

Erroneously Paid Income Tax on Calaca II Project

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)

Gross Profit 137,971,562

Less: Operating Expenses 33,551,240 — P74,162,777(total operating

x 45.24% (non-OECF funded portion)

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

Add: Other Income 3,482,413

Income before tax 107,902,735

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

Income taxes paid for

the entire project 82,444,208