Mitsubishi v. CIR (Case Digest. G.R. No. 175772)
CASE DIGEST: [ G.R. No. 175772[*], June 05, 2017 ] MITSUBISHI CORPORATION-MANILA BRANCH, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PERLAS-BERNABE, J.:SUMMARY OF RULING: Petitioner correctly filed its claim for tax refund under Sections 204 and 229 of the NIRC to recover the erroneously paid taxes amounting to P44,288,712.00 as income tax and P8,324,100.00 as BPRT from the BIR. Petitioner's entitlement to the refund is based on the tax assumption provision in the Exchange of Notes (which is an executive agreement). Given that this is a case of tax assumption and not an exemption, the BIR is, therefore, not without recourse; it can properly collect the subject taxes from the NPC as the proper party that assumed petitioner's tax liability.
FACTS: In 1987, the governments of Japan and the Philippines executed an Exchange of Notes, whereby the former agreed to extend a loan amounting to Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to the latter through the then Overseas Economic Cooperation Fund (OECF, now Japan Bank for International Cooperation) for the implementation of the Calaca II Coal-Fired Thermal Power Plant Project (Project). In Paragraph 5 (2) of the Exchange of Notes, the Philippine Government, by itself or through its executing agency, undertook to assume all taxes imposed by the Philippines on Japanese contractors engaged in the Project.
Consequently, the OECF and the Philippine Government entered into Loan Agreement No. PH-P76[8] dated September 25, 1987 for Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000). Due to the need for additional funding for the Project, they also executed Loan Agreement No. PH-P141 dated December 20, 1994 for Five Billion Five Hundred Thirteen Million Japanese Yen (¥5,513,000,000).
Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the executing government agency, entered into a contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for the engineering, supply, construction, installation, testing, and commissioning of a steam generator, auxiliaries, and associated civil works for the Project (Contract). The Contract's foreign currency portion was funded by the OECF loans.[12] In line with the Exchange of Notes, Article VIII (B) (1) of the Contract indicated NPC's undertaking to pay any and all forms of taxes that are directly imposable under the Contract.
Petitioner completed the project on December 2, 1995, but it was only accepted by NPC on January 31, 1998 through a Certificate of Completion and Final Acceptance.Mitsubishi later filed its Income Tax Return for the fiscal year that ended on March 31, 1998 with the BIR. Mitsubishi included in its income tax due the amount of P44,288,712.00, representing income from the OECF-funded portion of the Project. On the same day, petitioner also filed its Monthly Remittance Return of Income Taxes Withheld and remitted P8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998.
On June 30, 2000, petitioner filed with the respondent CIR an administrative claim for refund of Fifty Two Million Six Hundred Twelve Thousand, Eight Hundred Twelve Pesos (P52,612,812.00), representing the erroneously paid amounts of P44,288,712.00 as income tax and P8,324,100.00 as BPRT corresponding to the OECF-funded portion of the Project. To suspend the running of the two-year period to file a judicial claim for refund, Mitsubishi filed on July 13, 2000 a petition for review before the CTA pursuant to Section 229 of the National Internal Revenue Code (NIRC), which was docketed as C.T.A. Case No. 6139. Petitioner anchored its claim for refund on BIR Ruling No. DA-407-98 dated September 7, 1998, which interpreted paragraph 5 (2) of the Exchange of Notes.
CTA Division granted the petition and ordered the CIR to refund to petitioner the amounts it erroneously paid as income tax and BPRT. It held that based on the Exchange of Notes, the Philippine Government, through the NPC as its executing agency, bound itself to assume or shoulder petitioner's tax obligations. Therefore, petitioner's payments of income tax and BPRT to the CIR, when such payments should have been made by the NPC, undoubtedly constitute erroneous payments under Section 229 of the NIRC.
CTA Division acknowledged that based on RMC No. 42-99 dated June 2, 1999, the proper remedy for a Japanese contractor who previously paid the taxes directly to the BIR is to recover or obtain a refund from the government executing agency - the NPC in this case. However, it ruled that RMC No. 42-99 cannot be given retroactive effect. It took effect after the return was filed.
CTA En Banc reversed the CTA Division. En Banc said CIR has no power to grant a refund under Section 229 of the NIRC absent any tax exemption. En Banc said the Exchange of Notes granted no tax exemption to petitioner. Also said Exchange of Notes cannot be read as a treaty validly granting tax exemption without Senate concurrence. Said RMC No. 42-99 mandates Mitsubishi to recover the subject taxes from NPC, and not from the CIR.
As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this case) particularly assumed "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 [OECF] Loan."
This notwithstanding, petitioner included in its income tax due the amount of P44,288,712.00, representing income from the OECF-funded portion of the Project, and further remitted P8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998.[45] These taxes clearly fall within the ambit of the tax assumption provision under the Exchange of Notes, which was further fleshed out in the Contract. Hence, it is the Philippine Government, through the NPC, which should shoulder the payment of the same.
It bears stressing that the CIR had already acknowledged, through its administrative issuances, that Japanese contractors involved in the Project are not liable for the subject taxes. In RMC No. 42-99, the CIR interpreted the effect of the tax assumption clause in the Exchange of Notes on petitioner's tax liability.
The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-2005[47] addressed to specified BIR offices.
Therefore, considering that petitioner paid the subject taxes in the aggregate amount of P52,612,812.00, which it was not required to pay, the BIR erroneously collected such amount. Accordingly, petitioner is entitled to its refund.
ADDITIONAL READINGS:
[1] See CBK Power Company Limited, v. CIR, G.R. Nos. 193383-94 and 193407-08, January 14, 2015, 746 SCRA 93, 108.
[2] 544 Phil. 645 (2007).
[3] The relevant portions of RMC No. 42-99 read thus:
[5]Philippine Bank of Communications v. CIR, 361 Phil. 916, 928-929 (1999).
CTA Division acknowledged that based on RMC No. 42-99 dated June 2, 1999, the proper remedy for a Japanese contractor who previously paid the taxes directly to the BIR is to recover or obtain a refund from the government executing agency - the NPC in this case. However, it ruled that RMC No. 42-99 cannot be given retroactive effect. It took effect after the return was filed.
CTA En Banc reversed the CTA Division. En Banc said CIR has no power to grant a refund under Section 229 of the NIRC absent any tax exemption. En Banc said the Exchange of Notes granted no tax exemption to petitioner. Also said Exchange of Notes cannot be read as a treaty validly granting tax exemption without Senate concurrence. Said RMC No. 42-99 mandates Mitsubishi to recover the subject taxes from NPC, and not from the CIR.
ISSUES: [1] Whether petitioner is entitled to a refund; and
[2] If in the affirmative, from which government entity should the refund be claimed?
[2] If in the affirmative, from which government entity should the refund be claimed?
HELD: PETITION GRANTED.
FIRST ISSUE: Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are erroneously collected by the government. The authority of the CIR to refund erroneously collected taxes is likewise reflected in Section 229 of the NIRC.
In this case, it is fairly apparent that the subject taxes in the amount of P52,612,812.00 was erroneously collected from petitioner, considering that the obligation to pay the same had already been assumed by the Philippine Government by virtue of its Exchange of Notes with the Japanese Government. Case law explains that an exchange of notes is considered as an executive agreement, which is binding on the State even without Senate concurrence. (Abaya v. Ebdane)
Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption provision.
To "assume" means "[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability." This means that the obligation or liability remains, although the same is merely passed on to a different person. In this light, the concept of an assumption is therefore different from an exemption, the latter being the "[f]reedom from a duty, liability or other requirement" or "[a] privilege given to a judgment debtor by law, allowing the debtor to retain [a] certain property without liability." Thus, contrary to the CTA En Banc's opinion, the constitutional provisions on tax exemptions would not apply.
In this case, it is fairly apparent that the subject taxes in the amount of P52,612,812.00 was erroneously collected from petitioner, considering that the obligation to pay the same had already been assumed by the Philippine Government by virtue of its Exchange of Notes with the Japanese Government. Case law explains that an exchange of notes is considered as an executive agreement, which is binding on the State even without Senate concurrence. (Abaya v. Ebdane)
Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption provision.
To "assume" means "[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability." This means that the obligation or liability remains, although the same is merely passed on to a different person. In this light, the concept of an assumption is therefore different from an exemption, the latter being the "[f]reedom from a duty, liability or other requirement" or "[a] privilege given to a judgment debtor by law, allowing the debtor to retain [a] certain property without liability." Thus, contrary to the CTA En Banc's opinion, the constitutional provisions on tax exemptions would not apply.
As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this case) particularly assumed "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 [OECF] Loan."
This notwithstanding, petitioner included in its income tax due the amount of P44,288,712.00, representing income from the OECF-funded portion of the Project, and further remitted P8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the fiscal year that ended on March 31, 1998.[45] These taxes clearly fall within the ambit of the tax assumption provision under the Exchange of Notes, which was further fleshed out in the Contract. Hence, it is the Philippine Government, through the NPC, which should shoulder the payment of the same.
It bears stressing that the CIR had already acknowledged, through its administrative issuances, that Japanese contractors involved in the Project are not liable for the subject taxes. In RMC No. 42-99, the CIR interpreted the effect of the tax assumption clause in the Exchange of Notes on petitioner's tax liability.
The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-2005[47] addressed to specified BIR offices.
Therefore, considering that petitioner paid the subject taxes in the aggregate amount of P52,612,812.00, which it was not required to pay, the BIR erroneously collected such amount. Accordingly, petitioner is entitled to its refund.
SECOND ISSUE: The NIRC vests upon the CIR, being the head of the BIR, the authority to credit or refund taxes which are erroneously collected by the government. This specific statutory mandate cannot be overridden by averse interpretations made through mere administrative issuances, such as RMC No. 42-99, which - as argued by the CIR - shifts to the executing agencies (particularly, NPC in this case) the power to refund the subject taxes.
A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws. It is widely accepted that an interpretation by the executive officers, whose duty is to enforce the law, is entitled to great respect from the courts. However, such interpretation is not conclusive and will be disregarded if judicially found to be incorrect. Verily, courts will not tolerate administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to implement, as in this case.
Thus, Item B (3) of RMC No. 42-99, an administrative issuance directing petitioner to claim the refund from NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that claims for refund of erroneously collected taxes must be filed with the CIR.
Although the NPC is exempt from the payment of income tax pursuant to Section 13 of its charter (Republic Act No. 6395), the NPC is liable to pay petitioner's tax liabilities to the BIR, in view of the tax assumption provision in the Exchange of Notes and the Contract.
A revenue memorandum circular is an administrative ruling issued by the CIR to interpret tax laws. It is widely accepted that an interpretation by the executive officers, whose duty is to enforce the law, is entitled to great respect from the courts. However, such interpretation is not conclusive and will be disregarded if judicially found to be incorrect. Verily, courts will not tolerate administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to implement, as in this case.
Thus, Item B (3) of RMC No. 42-99, an administrative issuance directing petitioner to claim the refund from NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that claims for refund of erroneously collected taxes must be filed with the CIR.
Although the NPC is exempt from the payment of income tax pursuant to Section 13 of its charter (Republic Act No. 6395), the NPC is liable to pay petitioner's tax liabilities to the BIR, in view of the tax assumption provision in the Exchange of Notes and the Contract.
ADDITIONAL READINGS:
[1] See CBK Power Company Limited, v. CIR, G.R. Nos. 193383-94 and 193407-08, January 14, 2015, 746 SCRA 93, 108.
[2] 544 Phil. 645 (2007).
[3] The relevant portions of RMC No. 42-99 read thus:
B) INCOME TAX[4] ING Bank N.V. v. CIR, G.R. No. 167679, April 20, 2016, 790 SCRA 588, 598-599.
- Japanese firms or nationals operating as suppliers, contractors or consultants on and/or in connection with any income that 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 taxes thereunder.
- The concerned Revenue District Officer shall, in turn, collect the said income taxes from the concerned executing government agencies.
- 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 by the Japanese contractors or nationals."
[5]Philippine Bank of Communications v. CIR, 361 Phil. 916, 928-929 (1999).
