12.12 Asia Transmission Corp. vs. Commissioner, CTA Case No.

3380, July 27, 1988

MP: If the loan agreements state nothing about the loan being obtained from Eximbank of Japan nor
can it be inferred or deduced from the loan agreements that foreign creditors acted for and in behalf of
Eximbank of Japan, or Eximbank of Japan had to finance or guarantee the loans extended by foreign
creditors, interest income is not exempt from the Philippine income tax.

Facts: In this suit for refund of alleged erroneously paid withholding tax source, the basic question
presented is whether interest payments of a domestic corporation on loans extended by Japanese
corporations, which are allegedly financed and guaranteed by the Export-Import Bank of Japan, are
excluded from gross income taxation pursuant to the then Sec 29(b)(8) of the NIRC now Sec(c)(8),
which provides in pertinent part:

Petitioner Asian Transmission Corporation is a domestic corporation organized and existing under
Philippine laws with principal office at Silangan Calubang Industrial Park, Canlubang, Laguna. It
entered into a loan agreement with Mitsubishi Motors Corporation., a corporation duly organized and
existing under the laws of Japan, on two occasions, a. with the amount of Japanese Yen One hundred
twenty-seven million five hundred thousand YEN, b. the amount of Japanese Yen Three hundred
Million YEN executed on Aug. 10, 1977.

Likewise, petitioner entered into loan agreement with the Nissho-Iwai Co., Ltd, also a corporation
duly organized and existing under Japan Law also in the amount of 127,500,000 YEN and
300,000,000 YEN on April 15, 1975 and Aug 10, 1977.

Petitioner Asian Transmission filed a refund to the BIR amounting to P517K. alleging that the loans
were extended to petitioner by Eximbank through Mitsubishi and Nissho, and therefore exempt from
PH withholding tax on income pursuant to the then Sec 29(b) (8) of NIRC, Eximbank being a
financial institution owned and controlled by the government of Japan.

Issue: Whether the interest income is not exempt from the Philippine income tax?

Ruling: If the loan agreements state nothing about the loan being obtained from Eximbank of Japan
nor can it be inferred or deduced from the loan agreements that foreign creditors acted for and in
behalf of Eximbank of Japan, or Eximbank of Japan had to finance or guarantee the loans extended by
foreign creditors, interest income is not exempt from the Philippine income tax. Refund Denied.

12.13 CIR v Castaneda G.R. No. 96016

Facts: Efren Castaneda retired from govt service as Revenue Attache in the Philippine Embassy,
London, England. Upon retirement, he received benefits such as the terminal leave pay. The
Commissioner of Internal Revenue withheld P12,557 allegedly representing that it was tax income.

Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from
income tax.

The Solicitor General contends that the terminal leave is based from an employer-employee
relationship and that as part of the services rendered by the employee, the terminal leave pay is part of
the gross income of the recipient.

CTA->ruled in favor of Castaneda and ordered the refund.

CA->affirmed decision of CTA.Hence, this petition for review on certiorari.

Issue: Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to
income tax.

Ruling: NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal
leave pays are subject to income tax is that:

. . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer
or employee who retires, resigns or is separated from the service through no fault of his own. In the
exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is always less than generous if
not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus
avoided. Terminal leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax. Petition denied.