Hongkong and Shanghai Banking Corp. Limited-Philippine Branches v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 6234. June 4, 2003.] HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED PHILIPPINE BRANCHES , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund or issuance of tax credit certificate in the amount of P31,873,800.60, allegedly representing erroneously paid documentary stamp tax (DST) for the period January 1, 1999 to August 31, 1999. Petitioner is a corporation duly organized and existing under and by virtue of the laws of Hongkong with principal office address at The Enterprise Center, Tower I, 6766 Ayala Avenue corner Paseo de Roxas, Makati City. It is authorized by the Securities and Exchange Commission to engage in business in the Philippines and is registered with the Bureau of Internal Revenue with Taxpayers Identification Number 047-000-504-444. Petitioner performs, among others, custodial services on behalf of its investor-clients, corporate or individual, resident or non-resident, with respect to the latter's passive investments in the Philippines, majority of which are investments in shares of stock in domestic corporations. As the custodian bank, petitioner acts as their collection/payment agent with respect to dividends and other income derived from their passive investments. The investor-clients maintain Philippine peso and/or foreign currency accounts with petitioner. In the management of their funds maintained in the said peso and/or foreign currency accounts, e.g. transfer and/or disbursement of funds or payment for reinvestment, said investor-clients give instructions to petitioner from outside of the Philippines via electronic messages. These electronic message instructions are standard forms known in the banking industry as SWIFT MT 100, MT 199, MT 200, MT 202, MT 299, MT 521, MT 599, MT 999, hexagon and/or manual telex. In case of purchase of shares of stock and other investment in securities, the investor-clients send electronic messages from abroad to petitioner in the form of SWIFT MT 100, MT 199, MT 200, MT 202, MT 299, MT 521, MT 599, MT 999, hexagon and/or manual telex, instructing the latter to debit their local or foreign currency account and to pay the purchase price upon receipt of the securities. According to petitioner, it pays DST for these electronic instructions/advices received from abroad at the rate of P0.30 on each P200.00 based on the settlement price appearing on the face of the said instructions/advices pursuant to Section 181 of the Tax Code. For the period January to August 1999, petitioner allegedly paid DST in the total amount of P31,873,800.60, broken down as follows: Date of Purchase Amount January 1999 P3,005,488.50 February 1999 3,271,372.70 March 1999 3,729,977.50 April 1999 4,593,642.80 May 1999 6,127,458.30 June 1999 3,647,897.80 July 1999 4,725,596.40 August 1999 2,772,366.60 T o t a l P31,873,800.60 =========== On August 23, 1999, the BIR issued BIR Ruling No. 132-99, stating that instructions/advices from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST. On the basis of this ruling, petitioner filed with the BIR on December 14, 2000 an administrative claim for refund in the amount of P31,873,800.60 representing erroneously paid DST on the electronic instructions it received from its investor-clients abroad for the period January to August 1999 ( Annex L, Petition for Review ). On February 9, 2001, petitioner filed the instant petition for review in order to suspend the running of the two-year prescriptive period under the law for claiming a refund. This case was submitted for decision on February 12, 2003 sans the evidence and memorandum of the respondent. The following are the jointly stipulated issues to be resolved by the court: 1. Whether or not for the period January 1, 1999 to August 31, 1999, petitioner in fact paid DST in the total amount of P31,873,800.60 on electronic instructions/advises (SWIFT MT 100, MT 199, MT 200, MT 202, MT 299, MT 521, MT 599, MT 999, hexagon and/or manual telex); and 2. Whether or not petitioner is entitled to a refund of the DST paid in accordance with BIR Ruling No. 132-99 dated August 23, 1999. ( page 76, CTA records ) We rule in favor of petitioner. The case at bar is not one of first impression. The court had already settled the legal issue in favor of petitioner in the cases of Hongkong Shanghai Banking Corporation Limited-Philippine Branches vs. Commissioner of Internal Revenue, CTA Cases Nos. 6009 and 5951, promulgated on May 2, 2002 and December 18, 2002 , respectively, involving the same parties and issues, where we held that the "electronic message instructions" which have been subjected to DST are similar to the "electronic message instructions" mentioned in BIR Ruling 132-99. For easy reference, pertinent portion of the earlier decision is reproduced hereunder: cHDaEI BIR Ruling No. 132-99 ". . . this office hereby holds that the instruction made through an electronic message by a non-resident payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic instruction purporting to draw funds from a local account intended to be paid to a named recipient in the Philippines is not subject to documentary stamp tax imposed under the foregoing Section." Section 181 of the 1997 Tax Code, on the other hand, provides: "Section 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others . Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty centavos (P.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency." In the aforesaid case, this court upheld the arguments of herein petitioner that these electronic messages are not the transactions contemplated in Section 181 of NIRC, thus: " The instruction made through an electronic message by a non-resident investor-client, which is to debit his local or foreign currency account in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated in Section 181 of the Code . In this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank. The act of debiting the account is not subject to the documentary stamp tax under Section 181. Neither is the transaction subject to the documentary stamp tax under Section 180 of the same Code. These electronic message instructions cannot be considered negotiable instruments as they lack the essential feature of negotiability, which is, the ability to be transferred (Words and Phrases). These instructions are considered as mere memoranda and entered as such in the books of accounts of the local bank, and the actual debiting of the payor's local or foreign currency account in the Philippines is the actual transaction that should be properly entered as such." (Emphasis supplied) Having settled the legal controversy, we now proceed to the factual aspect of the case. To bolster its claim for refund, petitioner presented the following exhibits: 1. Documentary stamp purchases report for the year 1999 (Exhibit A); 2. Documentary Stamp Tax Declarations, official receipts and various documents relating to petitioners purchase of DST for the year 1999 (Exhibits B, C, and D, inclusive of submarkings) ; 3. Various Monthly Information Returns for DST [consolidated and internal] paid for the year 1999 ( Exhibits E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, and T, inclusive of submarkings ); 4. Samples of Swift MT 100, MT 599, 521, Telex and Hexagon ( Exhibits U, V, W, X and Y ); 5. DST Process Flowchart ( Exhibit Z ); 6. Independent CPA report with amendment ( Exhibits AA, AA-1, EE, and EE-1 ); 7. Various supporting documents examined by the independent CPA ( Exhibit BB ); 8. Schedule of DST payments for the months of January to August 1999 ( Exhibit CC ); and 9. Statement of History ( Exhibit DD ). Based on the above evidence, petitioner was able to prove that it had paid DST for the electronic instructions/advices of its clients-investors abroad. The DST payments for the electronic instructions/advices which under BIR Ruling No. 132-99 and our previous decisions on the matter should not be subjected to DST were included in the Monthly Information Returns of DST for the months of January to August 1999 (Exhibits E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, and T, inclusive of submarkings). However, not all of the amount claimed by petitioner can be granted. In the report of the commissioned independent CPA, the following findings were noted: Based on our review and validation, the amount of claim for refund that we determined to be substantiated by supporting documents is P22,522,541.41 broken down as follows: Amount Particulars Reference Settlements Operations Total Amount of the Claim Exhibit AA-6 P18,725,045.81 P3,827,495.60 P2,552,541.41 supported by original copies of the SWIFT message instructions and other documentation (e.g., customer receipts or statements of accounts or securities order form) The amount validated above can be further increased, however, if the Honorable Judges will allow the Bank to claim the DST paid on the following: 1. DST paid on similar transactions covered by SWIFT messages/instructions ( i.e. , message type MT 199, EBS 100, SWT 599 telex, or HEX) other than those types (i.e., SWIFT MT 100 or MT 202 and/or MT 521) mentioned in BIR Ruling No. 132-99. The message types covered in the Ruling represent payment instructions which follow SWIFT format specifications and authorizations. The other message types, not included in the Ruling, are likewise payment instructions but makes use of a free format message. These DST amount to: Amount Reference Settlements Operations Total Exception B P3,246,598.90 P122,322.10 P3,368,921.00 (Exhibit AA-7) 2. DST paid on transactions that were validated against original copies of message instructions and customer receipts or statements of accounts. The photocopies of said documents were not provided since the original copies thereof were misplaced as a result of the Banks transfer of office location. These DST amount to: Amount Reference Settlements Operations Total Exception B P P479,412.10 P479,412.10 (Exhibit AA-7) xxx xxx xxx On the other hand, we were not able to verify the following amounts noted below, details of which are presented in the attached exhibits: Amount Particulars Reference Settlements Operations Total Copies of the message Exception A P1,243,544.70 P1,407,810.50 P2,651,355.20 instructions (SWIFT (Exhibit AA-7) messages) and customer receipt or statement of account or securities order form are not available. The message instructions Exception C 269,101.50 2,665.60 271,767.10 are not available. (Exhibit AA-7) The supporting customer Exception D 1,308,588.40 168,200.10 1,476,788.50 receipt or statement of (Exhibit AA-7) account or securities order form are not available The customer account Exception E 7,379.40 7,379.40 number per DST schedule (Exhibit AA-7) and supporting document do not match. The account debited was a Exception F 319,572.90 319,572.90 suspense account (Exhibit AA-7) DST Usage without Exhibit AA-6 746,062.99 746,062.99 Supporting documents TOTAL P2,821,234.60 P2,651,691.49 P5,472,926.09 The above findings were based on audit procedures which we consider sufficient to establish the veracity of petitioners claim for refund. Hence, the court adopts the afore-quoted report of the independent CPA but nonetheless disallows the refund of the DST paid on transactions with misplaced original documents in the amount of P479,412.10. The court also allows the refund of DST paid on similar transactions covered by SWIFT messages/instructions ( i.e. , message type MT 199, EBS 100, SWT 599, telex, or HEX) other than those types ( i.e. , SWIFT MT 100 or MT202 and/or MT 521) mentioned in BIR Ruling No. 132-99 in the amount of P3,368,921.00. The court grants the refund thereof because they are likewise payment instructions similar to that of payment instructions covered in the ruling. The only difference is that the message types covered in the ruling are payment instructions which follow SWIFT format specifications and authorizations whereas the other message types not included in the ruling make use of a free format message. In sum, petitioner is entitled to the claim for refund of erroneously paid DST in a reduced amount of P25,921,462.41, computed as follows: Total Amount Claimed P31,873,800.60 Less: Disallowances a) Exceptions noted P5,472,926.09 b) DST paid on transactions with misplaced original documentation 479,412.10 5,952,338.19 Amount Refundable P25,921,462.41 =========== WHEREFORE, in view of the foregoing, the instant petition is hereby PARTIALLY GRANTED. Respondent is ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of P25,921,462.41 representing erroneously paid documentary stamp tax for the period January to August 1999. SO ORDERED. SHcDAI (SGD.) ERNESTO D. ACOSTA Presiding Judge WE CONCUR: (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge (SGD.) LOVELL R. BAUTISTA Associate Judge