Case Digest: Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation

COMMISSIONER OF INTERNAL REVENUE vs. MITSUBISHI METAL CORPORATION, et al.

G.R. NO. L-54908 22 January 1990

FACTS:

In 1970, Atlas Consolidated Mining and Development Corporation entered into a Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese company, for purposes of the projected expansion of the productive capacity of the former’s mines in Toledo, Cebu. Mitsubishi agreed to extend a loan of $20 million for the installation of a new concentrator for copper production. Atlas in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of 15 years. Mitsubishi later undertook a loan with Eximbank for the purposes of its obligation under said contract.

In lieu with the 15% tax on the interest payments paid from 1977-1978 by Atlas to Mitsubishi amounting to almost Php2 million, the latter filed a claim for tax credit requesting that said sum be applied against their existing and future tax liabilities. The CIR not having acted on the claim for tax credit, private respondents filed a petition for review with the CTA. The CTA rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid.

ISSUE: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code and, therefore, exempt from withholding tax. 

RULING:

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.

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.