Title
Mitsubishi Corp. - Manila Branch vs. Commissioner of Internal Revenue
Case
G.R. No. 175772
Decision Date
Jun 5, 2017
Mitsubishi sought a refund of income and branch profit remittance taxes erroneously paid for a Japan-funded power project, citing a tax assumption agreement under an executive Exchange of Notes. The Supreme Court ruled in favor, ordering the CIR to refund the taxes, as NPC assumed liability under the agreement.
taxes
erroneously collected
refund

Case Summary (G.R. No. L-46558)

Factual Background

The Philippines and Japan executed an Exchange of Notes on June 11, 1987 under which Japan extended an OECF loan for the Calaca II Coal-Fired Thermal Power Plant Project and the Philippine Government undertook in Paragraph 5(2) that it would, itself or through its executing agencies, assume all fiscal levies or taxes imposed in the Philippines on Japanese firms and nationals operating as suppliers, contractors, or consultants in connection with income that may accrue from supplies and services provided under the loan.

Contract and Loan Arrangements

Pursuant to the Exchange of Notes, the OECF and the Philippine Government executed Loan Agreement No. PH-P76 dated September 25, 1987 and later Loan Agreement No. PH-P141 dated December 20, 1994 to fund the Project; the National Power Corporation (NPC), as executing government agency, entered into a contract dated June 21, 1991 with Mitsubishi Corporation (the petitioner's head office in Japan) for engineering, supply, construction, installation, testing, and commissioning work, and Article VIII(B)(1) of that Contract provided that NPC shall pay any and all forms of taxes directly imposable under the Contract, including VAT, thereby reflecting the tax-assumption arrangement in the Exchange of Notes.

Completion, Tax Filings, and Payments

Petitioner Mitsubishi Corporation-Manila Branch completed the project on December 2, 1995 and NPC accepted the work on January 31, 1998; petitioner filed its Income Tax Return for the fiscal year ended March 31, 1998 on July 15, 1998, reporting income tax due that included P44,288,712.00 attributable to the OECF-funded portion, and on the same day remitted P8,324,100.00 as branch profit remittance tax.

Administrative Claim and CTA Division Proceedings

Petitioner filed an administrative claim for refund with the Commissioner of Internal Revenue on June 30, 2000 for the aggregate P52,612,812.00, and filed a petition for review with the Court of Tax Appeals on July 13, 2000 docketed as C.T.A. Case No. 6139; the CTA Division, after verification of supporting documents, found petitioner’s payments to be erroneous and in a Decision dated December 17, 2003 ordered refund of the income tax and BPRT, reasoning that the Philippine Government, through NPC, had assumed the tax obligations under the Exchange of Notes and the Contract and that RMC No. 42-99 amending RMC No. 32-99 did not apply retroactively to deprive petitioner of relief.

CTA En Banc Ruling and Grounds for Reversal

On appeal, the CTA En Banc in a Decision dated May 24, 2006 reversed the CTA Division and denied refund, holding first that petitioner failed to establish an "erroneous" payment warranting refund under the law and that the Exchange of Notes did not operate as a grant of tax exemption entitling the Commissioner to refund; second, that the Exchange of Notes could not be treated as a treaty granting tax exemption absent Senate concurrence pursuant to Art. VII, Sec. 21; and third, that RMC No. 42-99, already in effect when petitioner filed its administrative claim, prescribed the proper remedy of recovery from NPC rather than refund by the BIR; the En Banc thereafter denied reconsideration on December 4, 2006.

Issues Presented to the Supreme Court

The Supreme Court stated the issues as twofold: whether petitioner was entitled to a refund of the taxes it paid; and if so, from which government entity the refund should be claimed.

Supreme Court Disposition

The Supreme Court granted the petition for review on certiorari, reversed and set aside the CTA En Banc Decision and Resolution, and reinstated the CTA Division Decision dated December 17, 2003, thereby affirming petitioner’s entitlement to refund of the erroneously collected income tax and BPRT.

Legal Reasoning — Authority to Refund and Erroneous Collection

The Court began from the statutory grant of authority to the Commissioner of Internal Revenue under Sec. 204 of the NIRC to credit or refund taxes erroneously or illegally received and under Sec. 229 of the NIRC to require a claim for refund or credit before judicial proceedings, and concluded that the P52,612,812.00 was erroneously collected from petitioner because the tax obligation had been assumed by the Philippine Government pursuant to the Exchange of Notes.

Legal Reasoning — Nature of the Exchange of Notes and Tax Assumption

Relying on precedent treating an exchange of notes as an executive agreement binding on the State without Senate concurrence, the Court construed Paragraph 5(2) of the Exchange of Notes as an undertaking by the Philippine Government to assume the fiscal levies or taxes, and it analyzed the phrase "assume" to mean taking on another’s liability rather than granting a tax exemption; the Court therefore held that constitutional limits on granting tax exemptions did not apply because the instrument effected assumption of liability and not an exemption.

Legal Reasoning — Administrative Issuances and Their Limits

The Court recognized the BIR’s administrative interpretations, including RMC No. 42-99 and RMO No. 24-2005, which acknowledged that Japanese contractors need not shoulder taxes under the Exchange of Notes and directed refund procedures, but it emphasized that administrative issuances cannot override or displace the statutory refund mechanism establi

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