FACTS
The Philippines and Japan agreed that a loan will be given to the former to contruct the Calaca II project under the condition that the Philippines will assume all fiscal levies or taxes imposed in the Philippines on Japanese firms and nationals working or dealing with said project.
The project was implemented by the Overseas Economic Cooperation Fund (OECF). Pursuant to Calaca II, NPC entered into a contract with Mitsubishi Corporation.
Mitsubishi filed and paid its ITR. However, claiming that the income tax for the OECF-funded portion of the Calaca II project should not have been paid, Mitsubishi sought for a refund.
The CTA held that Mitsubishi erroneously paid its income and branch profit remittance taxes and was entitled to a proper claim for refund under the Tax Code. The CIR disagreed.
RULING
The Court ruled in favor of Mitsubishi.
There was an erroneous payment of the subject taxes by Mitsubishi for the reason that said taxes are to be assumed by the Government of the Philippines through its executing agency, the NPC. Granted, Judge Castaneda, in his dissenting opinion, noted that international comity should not be used as a reason to evade tax laws.
The exchange of notes is not a grant of tax exemption. Be that as it may, Mitsubishi may still recover from NPC based on the loan agreement and Contract, but not from the CIR. There are constitutional provisions that prohibit the grant of tax exemption under such Exchange of Notes and only treaties can grant tax exemption.
