G.R. No. 54908 & 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.

FACTS

Atlas Consolidated Mining and Development Corporation entered into a Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation, for a $20,000,000 loan to finance a new copper concentrator. Mitsubishi secured this amount through loans from the Export-Import Bank of Japan (Eximbank) and a consortium of Japanese banks. Atlas paid interest to Mitsubishi for 1974-1975 and 1977-1978, from which a 15% tax was withheld and remitted to the Philippine government pursuant to the National Internal Revenue Code.
Atlas and Mitsubishi subsequently filed claims for tax credit, arguing the interest payments were exempt from tax. They contended Mitsubishi was a mere agent or conduit, and the true lender was Eximbank, a financing institution owned by the Japanese government. They invoked Section 29(b)(7)(A) of the Tax Code, which exempts income received by foreign governments and their controlled financing institutions. The Court of Tax Appeals granted the claims, ruling the loans ultimately originated from Eximbank, making Mitsubishi a mere arranger.

ISSUE

Whether the interest income received by Mitsubishi from Atlas is exempt from Philippine income tax under Section 29(b)(7)(A) of the National Internal Revenue Code.

RULING

The Supreme Court reversed the Court of Tax Appeals and denied the claim for tax credit. The legal logic is anchored on the principle of strict interpretation of tax exemptions and the separate juridical personality of the contracting parties. The Court held that the exemption under Section 29(b)(7)(A) applies only to income received directly by the exempt entities: foreign governments, their owned/controlled financing institutions, or international financial institutions. Mitsubishi, a private Japanese corporation, was the direct recipient of the interest payments from Atlas. The loan contracts were explicitly between Atlas and Mitsubishi, and between Mitsubishi and Eximbank. Mitsubishi was an independent borrower from Eximbank and a separate lender to Atlas; it was not acting as an agent. The fact that Mitsubishi used funds from Eximbank does not alter the nature of its distinct transaction with Atlas or make the interest income accruing to Mitsubishi the income of Eximbank. The Court emphasized that tax exemptions are construed strictly against the taxpayer, and the burden of proof lies with the claimant. Atlas and Mitsubishi failed to prove that Mitsubishi itself was a financing institution owned or controlled by the Japanese government. The arrangement did not qualify for the statutory exemption, and allowing such a claim would open loopholes for tax evasion through intermediary loan structures.