G.R. No.

175772

MITSUBISHI CORPORATION - MANILA BRANCH, Petitioner

vs
COMMISSIONER OF INTERNAL REVENUE, Respondent

Petition for review on certiorari against the decision of CTA En Banc which reversed the decision of
CTA Division ruling granting the claim for refund paid by Mitsubishi Corp for income tax and BPRT
(branch profit remittance tax)

FACTS:

1. On June 11, 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 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).

2. Based on the provisions of the Exchange 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. This means that PH Gov’t through its
executing agencies or instrumentalities assume all taxes imposed on Japanese firms and
nationals operating as suppliers, contractors or consultants.

3. Thereafter, OECF and PH Gov’t entered into a loan agreement for the Forty Billion yen. Due
to the need of additional funds for the project, they later on executed another loan for 5.5
billion yen.

4. In the meantime, National Power Corporation (NPC), as the executing gov’t agency, entered
into a contract with Mitsubishi Corporation generator, auxiliaries, and associated civil works
for the Project. The contract’s foreign currency portion was funded by the OECF loans. The
contract indicated that NPC undertake to pay any and all forms of taxes that are indirectly
imposable under the said contract.

5. Mitsubishi Corp finished the project and it was accepted by NPC on January 31, 1998
through a Certificate of Completion and Final Acceptance.

6. June 15, 1998, petitioner filed with the BIR its ITR for the fiscal year that ended on March 31,
1998. Included in income tax due is the amount of 44 Million pesos coming from the income
from OECF-funded portion of the project. On the same day, petitioner also filed its Monthly
Remittance Return of Income Taxes amounting to 8 Million pesos as BPRT for branch profit
remitted to its head office in Japan for the same fiscal year.

7. On June 30, 2000, petitioner filed with the CIR an administrative claim for refund of 52 Million
pesos coming from the erroneously paid amounts of 44 million pesos as income tax and 8
Million pesos coming from BRPT corresponding to OECF-funded portion of the project. On
July 13, 2000, to suspend the running of two-year period to file a judicial claim for refund,
petitioner filed a petition for review before CTA. Petitioner anchored its claim for refund in
 the BIR ruling which interpreted the Exchange note which provides that the petitioners are
not tax exempted but instead the PH Gov’t assumed to pay those taxes.

8. In its decision, CTA granted the petition and ordered CIR to refund the petitioner for the
erroneously paid income tax and BPRT

9. CTA En Banc reversed CTA Division’s ruling and declared that petitioner is not entitled to a
refund. It held that CIR under NIRC Sec 229 provides that CIR has no power to grant a
refund absent any tax exemption. It ruled that Exchange of Notes granted no tax exemption
to petitioner. It also said that Exchange notes cannot be read as a treaty validly granting tax
exemption considering the lack of Senate concurrence as required under Article VII Sec 21
of the constitution. Also, RMC No. 42-99 (revenue memorandum circular) was in effect and
the proper remedy according to the circular is to recover the subject taxes from NPC and not
from CIR.

ISSUES:

1) Whether or not the petitioner is entitled to refund

2) Whether or not the petitioner should recover refund from NPC and not CIR

HELD:

1) Yes, SC has held that petitioner is entitled to refund.

NIRC SEC 204 (C) grants power to CIR to credit or refund taxes which are erroneously collected by
the government. This power is likewise reflected in Sec 229 of NIRC.

Here, it is apparent that the subject taxes amounting to 52 Million pesos were erroneously collected
from petitioner since the obligation to pay had been assumed by PH Government pursuant to the
Exchange notes with the Japanese Gov’t. The Exchange of notes is considered as an Executive
Agreement, which is binding on the State even without Senate Concurrence. The Constitutional
provision on tax exemptions would not apply in this case. Hence, it is the PH Government, through
the NPC, should shoulder the payment of the taxes which is clearly a form of concession given to
Japanese suppliers, contractor or consultant in consideration of the OECF Loan, which proceeds
were used for the implementation of the project.

2) SC has held that the petitioner correctly filed its claim to CIR for tax refund pursuant to Sec 204
and 229 of NIRC. Petitioner’s entitlement to the refund is based on tax assumption provision in the
Exchange notes. Since this is a tax assumption and not an exemption, BIR can collect the subject
tax from the NPC as the proper party that assumed petitioner’s tax liability.

A revenue memorandum circular (RMC) is an administrative ruling issued by the CIR to interpret tax
law. Even if RMC No. 42-99 has interpreted the Contract so that it directs MC to claim the refund
from NPC, this cannot prevail over provisions of tax laws. RMC is entitled to great respect from the
courts. However, such interpretation is not conclusive and will be disregarded if judicially found to
be incorrect.