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INTEREST INCOME

[G.R. No. 54908. January 22, 1990.]

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.MITSUBISHI METAL CORPORATION,

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX

APPEALS,respondents.

[G.R. No. 80041. January 22, 1990.]COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.MITSUBISHI METAL CORPORATION,

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX

APPEALS,respondents.

Gadioma Law Officesfor respondents.

SYLLABUS

1. REMEDIAL LAW; APPEAL; FINDINGS OF FACT OF COURT OF APPEALS RESPECTED; EXCEPTION. We

have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only

be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross

error or abuse on the part of the tax court.

2. ID.; ID.; ID.; ID.; CASE AT BAR. Ordinarily, we could give due consideration to the holding of

respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and

proven in these cases, however, warrant a departure from said general rule, since we are convinced that

there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are

speculative in nature.

3. TAXATION; EXEMPTION THEREFROM; STRICTLY CONSTRUED.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 jurisagainst 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 provethat it is in fact covered by the exemption so claimed.

4. ID.; ID.; SECTION 29(b) (7) (4) OF THE TAX CODE; CASE AT BAR NOT COVERED. The principal issue

in both petitions is 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. Apropos thereto, the focal question is whether or not Mitsubishi is a mere

conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on

loans are exempt from taxes under the code. The loan and sales contract between Mitsubishi and Atlas

does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly

between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates.

From the categorical language used in the document, one prestation was in consideration of the other. Thespecific terms and the reciprocal nature of their obligations make it implausible, if not vacuous, to give

credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction. Surely, Eximbank had

nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application

with the former was that the amount being procured would be used as a loan to and in consideration for

importing copper concentrates from Atlas. Such an innocuous statement of purpose could not have been

intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as

respondent court believes, said corporations would have specifically so stated, especially considering their

experience and expertise in financial transactions, not to speak of the amount involved and its purchasing

value in 1970. Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter

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prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Not

only is there a failure to establish such submission by adequate evidence but it posits the unfair and

unexplained imputation that, for reasons subject only of surmise, said financing institution would

deliberately circumvent its own charter to accommodate an alien borrower through a manipulated

subterfuge, but with it as a principal and the real obligee. 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 thistime, 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.

D E C I S I O N

REGALADO, J p:

These cases, involving the same issue being contested by the same parties and having originated from thesame factual antecedents generating the claims for tax credit of private respondents, the same were

consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.

The records reflect that on April 17,1970, Atlas Consolidated Mining and Development Corporation

(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for

brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the

projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract,

Mitsubishi agreed to extend a loan to Atlas in the amount of $20,000,000.00, United States currency, for

the installation of a new concentrator for copper production. Atlas, in turn, undertook to sell to Mitsubishi

all the copper concentrates produced from said machine for a period of fifteen (15) years. It was

contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentratormachinery from Japan.1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank, for short)

obviously for purposes of its obligation under said contract. Its loan application was approved on May 26,

1970 in the sum of Y4,320,000,000.00, at about the same time as the approval of its loan for

Y2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to

$20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau

of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the

condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing

copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September

30, 1981.2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the

latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the

amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the

National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the

Government.3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01

be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent

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Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of

its interest in the claim for tax credit in favor of Atlas.4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a

petition for review with respondent court, docketed therein as CTA Case No. 2801.5The petition was

grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution

owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it

may be so called, is the basis for private respondents' claim for exemption from paying the tax on the

interest payments on the loan as earlier stated. It was further claimed that the interest payments on the

loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came

from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon

is Section 29 (b) (7) (A),6which excludes from gross income:

"(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic

securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2)

financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional

financing institutions established by governments."

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 16, 1977 but was later

reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment wasstill being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on

November 16, 1976, the said division recommended to petitioner the approval of private respondent's

claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on

September 30, 1977, during which trial private respondents presented their evidence while petitioner

submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings.7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in

favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the

material averments of private respondents when he supposedly prayed "for judgment on the pleadings

without offering proof as to the truth of his allegations."8Furthermore, the court declared that all papers

and documents pertaining to the loan of Y4,320,000,000.00 obtained by Mitsubishi from Eximbank's showthat this was the same amount given to Atlas. It also observed that the money for the loans from the

consortium of private Japanese banks in the sum of Y2,880,000,000.00 "originated" from Eximbank. From

these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting

as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of

Japan to the debtor Atlas Consolidated Mining & Development Corporation."9

A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to

this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount

of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and

remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same

basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as

CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private

respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis.10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment

ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed

on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of

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appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was

filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is

consolidated with G.R. No. 54908.

The principal issue in both petitions is 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. Apropos thereto, the focal question is whether or not

Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments

in the Philippines on loans are exempt from taxes under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner

should be deemed to have admitted the allegations of the private respondents when it submitted the case

on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the

part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to

prove the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were

duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted,

with presentation of evidence, and the findings of respondent court were based not only on the pleadings

but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the

pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest

respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is

a showing of gross error or abuse on the part of the tax court.11Thus, ordinarily, we could give due

consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling

circumstances obtaining and proven in these cases, however, warrant a departure from said general rule,

since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent

that its conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential

reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract

of loan and Atlas as the seller of the copper concentrates. From the categorical language used in thedocument, one prestation was in consideration of the other. The specific terms and the reciprocal nature of

their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi

was a mere agent in said transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated

in its loan application with the former was that the amount being procured would be used as a loan to and

in consideration for importing copper concentrates from Atlas.12Such an innocuous statement of purpose

could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the

purpose as respondent court believes, said corporations would have specifically so stated, especially

considering their experience and expertise in financial transactions, not to speak of the amount involved

and its purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these eases impels us to give weight to the

following arguments of petitioner:

"The nature of the above contract shows that the same is not just a simple contract of loan. It is not a

mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI

where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo

mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the

entire copper concentrate that will be produced by the installed concentrator.

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"Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the

consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part

of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from

what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20

million from the EXIMBANK of Japan and the consortium of Japanese banks financed through the

EXIMBANK of Japan.

"When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity

and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans were

secured by MITSUBISHI primarily 'as a loan to and in consideration for importing copper concentrates from

ATLAS,' the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.

"Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract

from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK that

was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract

cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the

contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK of Japan nor of any

entity, private or public, for that matter.

"Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contractof loan is completed, the money ceases to be the property of the former owner and becomes the sole

property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).

"In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK of Japan, said

amount ceased to be the property of the bank and became the property of MITSUBISHI.

"The conclusion is indubitable: MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former

being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan.

"The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the

interest income paid by MITSUBISHI to EXIMBANK of Japan. What was the subject of the 15% withholding

tax is not the interest income paid by MITSUBISHI to EXIMBANK but the interest income earned byMITSUBISHI from the loan to ATLAS. . . . "13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does

not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other

considerations aliunde.The application for the loan was approved on May 20, 1970, or more than a month

after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the

contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for

importing copper concentrates from Atlas, but all that this proves is the justification for the loan as

represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment.

There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful

terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain personor to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its

financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from

making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a

failure to establish such submission by adequate evidence but it posits the unfair and unexplained

imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent

its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a

principal and the real obligee.

http://online.cdasia.com/jurisprudences/19386?hits%5B%5D%5Bid%5D=19386&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55410&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=19883&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=10008&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=9711&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=58145&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55692&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=12543&hits%5B%5D%5Btype%5D=Jurisprudence&path=%2Fjurisprudences%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=54908&q%5Bissue_no%5D=&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote13_0http://online.cdasia.com/jurisprudences/19386?hits%5B%5D%5Bid%5D=19386&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55410&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=19883&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=10008&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=9711&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=58145&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55692&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=12543&hits%5B%5D%5Btype%5D=Jurisprudence&path=%2Fjurisprudences%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=54908&q%5Bissue_no%5D=&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote13_0http://online.cdasia.com/jurisprudences/19386?hits%5B%5D%5Bid%5D=19386&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55410&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=19883&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=10008&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=9711&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=58145&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55692&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=12543&hits%5B%5D%5Btype%5D=Jurisprudence&path=%2Fjurisprudences%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=54908&q%5Bissue_no%5D=&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote13_0http://online.cdasia.com/jurisprudences/19386?hits%5B%5D%5Bid%5D=19386&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55410&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=19883&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=10008&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=9711&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=58145&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=55692&hits%5B%5D%5Btype%5D=Jurisprudence&hits%5B%5D%5Bid%5D=12543&hits%5B%5D%5Btype%5D=Jurisprudence&path=%2Fjurisprudences%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=54908&q%5Bissue_no%5D=&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote13_0

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The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the

truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.

Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in

paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and

Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It

should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum,

while Mitsubishi's contract with Atlas merely states that the "interest on the amount of the loan shall be the

actual cost beginning from and including other dates of releases against loan."14

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 jurisagainst 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.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18,

1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

SO ORDERED.

|||(Commr. v. Mitsubishi Metal Corp., G.R. No. 54908, 80041, January 22, 1990)

DIVIDENDS

[G.R. No. 108576. January 20, 1999.]

COMMISSIONER OF INTERNAL REVENUE,petitioner, vs. THE COURT OF APPEALS, COURT OF

TAX APPEALS and A. SORIANO CORP.,respondents.

M. L. Gadioma Law Office for private respondent.

The Solicitor General for petitioner.

SYNOPSIS

Don Andres Soriano, a citizen and resident of the United States formed in the 1930's the corporation "A

Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964 Don Andres died. On June 30, 1968,

pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from Don Andres' estate. By

November 1968, the Board further increased ANSCOR's capital stock to P75M divided into 150,000

preferred shares and 600,000 common shares. About a year later ANSCOR again redeemed 80,000

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common shares from Don Andres' estate, further reducing the latter's common shareholdings. ANSCOR's

business purpose for both redemptions of stock is to partially retire said stocks as treasury shares in order

to reduce the company's foreign exchange remittances in case cash dividends are declared. In 1973, after

examining ANSCOR's books of account and records Revenue Examiners issued a report proposing that

ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939

Revenue Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange

and redemption of stocks. Subsequently, ANSCOR filed a petition for review with the Court of Tax Appeals

assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the CTA reversedthe BIR's ruling after finding sufficient evidence to overcome theprima faciecorrectness of the questioned

assessments. In a petition for review, the Court of Appeals affirmed the ruling of the CTA. Hence, the

present petition. The issue is whether ANSCOR's redemption of stocks from its stockholders as well as the

exchange of common shares can be considered as equivalent to the distribution of taxable dividend making

the proceeds thereof taxable under the provisions Section 83 (B) of the 1939 Revenue Act.

The Supreme Court modified the decision of the Court of Appeals in that ANSCOR'S redemption of 82,752.5

stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which

it is liable for the withholding tax-at-source. While the Board Resolutions authorizing the redemptions state

only one purpose reduction of foreign exchange remittances in case cash dividends are declared. Said

purpose was not given credence by the court in case at bar. Records show that despite the existence ofenormous corporate profits no cash dividends were ever declared by ANSCOR from 1945 until the BIR

started making assessments in the early 1970's. Although a corporation under certain exceptions, has the

prerogative when to issue dividends, yet when no cash dividends are issued for about three decades, this

circumstance negate the legitimacy of ANSCOR's alleged purposes. With regard to the exchange of shares,

the Court ruled that the exchange of common with preferred shares is not taxable because it produces no

realized income to the subscriber but only a modification of the subscriber's rights and privileges which is

not a flow of wealth for tax purposes.

SYLLABUS

1.TAXATION; Presidential Decree No. 67; NOT BEING A TAXPAYER, A WITHHOLDING AGENT LIKE THE

PRIVATE RESPONDENT IS NOT PROTECTED BY THE AMNESTY UNDER THE DECREE.

An incometaxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency

withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as

a withholding agent and not in its personality as a taxpayer. In the operation of the withholding tax system,

the withholding agent is the payor, a separate entity acting no more than an agent of the government for

the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person

subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent

is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes

a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the

income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed

into him

he earned no income. The Tax Code only makes the agent personally liable for the tax arisingfrom the breach of its legal duty to withhold as distinguish from its duty to pay tax since: "the government's

cause of action against the withholding agent is not for the collection of income tax, but for the

enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed

on the withholding agent and not upon the taxpayer." Not being a taxpayer, a withholding agent, like

ANSCOR in this transaction is not protected by the amnesty under the decree. Codal provisions on

withholding tax are mandatory and must be complied with by the withholding agent. The taxpayer should

not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is

collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent

performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail

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tax evasion and give tax evaders a chance to reform, it was deemed administratively feasible to grant tax

amnesty in certain instances. In addition, a "tax amnesty, much like a tax exemption, is never favored nor

presumed in law and if granted by a statute, the terms of the amnesty like that of a tax exemption must be

construed strictly against the taxpayer and liberally in favor of the taxing authority." The rule on strictissimi

jurisequally applies. So that, any doubt in the application of an amnesty law/decree should be resolved in

favor of the taxing authority.

2.ID.; NATIONAL INTERNAL REVENUE CODE OF 1939; TAX ON STOCK DIVIDENDS; REDEMPTION AND

CANCELLATION; PURPOSES INVOKED BY PRIVATE RESPONDENT CORPORATION, UNDER THE FACTS OF

THE PRESENT CASE ARE NO EXCUSE FOR ITS TAX LIABILITY; REASON. First, the alleged "filipinization"

plan cannot be considered legitimate as it was not implemented until the BIR started making assessments

on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board

Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the

corporation can act only through its Board of Directors. The Board Resolutions authorizing the redemptions

state only one purpose reduction of foreign exchange remittances in case cash dividends are declared.

Not even this purpose can be given credence. Records show that despite the existence of enormous

corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making

assessments in the early 1970's. Although a corporation under certain exceptions, has the prerogative when

to issue dividends, yet when no cash dividends was issued for about three decades, this circumstancesnegates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the

shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also increase

rather than reduce their need for foreign exchange remittances in case of cash dividend declaration,

considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were

held by Don Andres' foreign heirs. Secondly, assuming arguendo, that those business purposes are

legitimate, the same cannot be valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to

pay income tax would be made to depend upon a third person who did not earn the income being taxed.

Furthermore, even if the said purposes support the redemption and justify the issuance of stock dividends,

the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of

the redemption are deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as 'taxable dividend' the proceeds of the redeemed stock dividendswould be to impose on such stock an undisclosed lien and would be extremely unfair to intervening

purchasers, i.e. those who buys the stock dividends after their issuance. Such argument, however, bears no

relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it is

necessary to look into the factual milieu of the case if income was realized from the transaction. Again, we

reiterate that the dividend equivalence test depends on such "time and manner" of the transaction and its

net effect. The undisclosed lien may be unfair to a subsequent stock buyer who has no capital interest in

the company. But the unfairness may not be true to an original subscriber like Don Andres, who holds stock

dividends as gains from his investments. The subsequent buyer who buys stock dividends is investing

capital. It just so happen that what he bought is stock dividends. The effect of its (stock dividends)

redemption from that subsequent buyer is merely to return his capital subscription, which is income if

redeemed from the original subscriber. After considering the manner and the circumstances by which the

issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds

thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend"

under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Section

21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income."

As income, it is subject to income tax which is required to be withheld at source. The 1997 Tax Code may

have altered the situation but it does not change this disposition.

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3.ID.; ID.; ID.; THE EXCHANGE OF COMMON WITH PREFERRED SHARES IN CASE AT BAR IS NOT

TAXABLE; IT PRODUCES NO REALIZED INCOME TO THE SUBSCRIBER BUT ONLY A MODIFICATION OF

THE SUBSCRIBER'S RIGHTS AND PRIVILEGES WHICH IS NOT A FLOW OF WEALTH FOR TAX PURPOSES.

Both the Tax Court and the Court of Appeals found that ANSCOR reclassifiedits shares into common and

preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares

were exchangedfor the whole 150,000 preferred shares. Thereafter, both the Don Andres estate and Doa

Carmen remained as corporate subscribers except that their subscriptions now include preferred shares.

There was no change in their proportional interest after the exchange. There was no cash flow. Both stockshad the same par value. Under the facts herein, any difference in their market value would be immaterial at

the time of exchange because no income is yet realized it was a mere corporate paper transaction. It

would have been different, if the exchange transaction resulted into a flow of wealth, in which case income

tax may be imposed. Reclassification of shares does not always bring any substantial alteration in the

subscriber's proportional interest. But the exchange is different there would be a shifting of the balance

of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the

reclassification nor exchangeper se, yields realize income for tax purposes. A common stock represents the

residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued

without extraordinary rights or privileges and entitles the shareholder to apro ratadivision of profits.

Preferred stocks are those which entitle the shareholder to some priority on dividends and asset

distribution. Both shares are part of the corporation's capital stock. Both stockholders are no different fromordinary investors who take on the same investment risks. Preferred and common shareholders participate

in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the

doctrine of equality of shares all stocks issued by the corporation are presumed equal with the same

privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. In this

case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a

modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes. The

issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when

there is still maintenance of proprietary interest.

D E C I S I O N

MARTINEZ,J p:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of

Appeals (CA)1which affirmed the ruling of the Court of Tax Appeals (CTA)2that private respondent A.

Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign

stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under

Section 83(b) of the 1939 Internal Revenue Act.3

The undisputed facts are as follows:

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the

corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family

of Don Andres, who are all non-resident aliens.4In 1937, Don Andres subscribed to 4,963 shares of the

5,000 shares originally issued.5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into

25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued

which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their

pre-emptive rights to subscribe to the new issues.6This increased his subscription to 14,963 common

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