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

SPECIAL TWELFTH DIVISION [CA-G.R. SP No. 70814. September 2, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HONGKONG AND SHANGHAI BANKING CORPORATION, LIMITED PHILIPPINE BRANCHES , respondent . D E C I S I O N BUZON , J p : Before us is a petition for review of the Decision of the Court of Tax Appeals (CTA), which ordered petitioner Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of respondent Hongkong and Shanghai Banking Corporation, Limited Philippine Branches the amount of P30,360,570.75 representing erroneous payment of documentary stamp tax for the taxable year 1998. Respondent is a corporation duly organized and existing under and by virtue of the laws of Hongkong and authorized by the Securities and Exchange Commission to engage in business in the Philippines. Among its functions is the performance of custodial services on behalf of its investor-clients, corporate or individual, resident or non-resident of the Philippines, with respect to their passive investments in the Philippines, majority of which are investments in shares of stocks in domestic companies. As a custodian bank, respondent acts as the safekeeper of the investor-clients' investments, as well as the collection/payment agent with respect to dividends and other income derived form their passive investments. aESIHT Respondent's investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by respondent through instructions given through electronic messages. Said instructions are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial Telecommunication", the standard forms of which are identified as SWIFT MT 100, MT 202, MT 521, MT 199, MT 299, MT 999, TELEX HEXAGON and/or MT 200. In purchasing shares of stock and other investment in securities, the investor-clients would send electronic messages from abroad instructing respondent to debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities. By virtue of the electronic messages, respondent purchased and paid documentary stamp tax (DST) for the period January to December 1998 in the total amount of P32,904,437.30, pursuant to Section 181 of the 1997 National Internal Revenue Code (NIRC), which reads: "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." ADETca On August 23, 1999, Commissioner of Internal Revenue Beethoven L. Rualo, acting upon the request of CITIBANK and STANDARD CHARTERED BANK, issued Bureau of Internal Revenue (BIR) Ruling No. 132-99, which reads in part: " . . . this office hereby holds that the instruction made through an electronic message by 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 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." 1 On January 31, 2000, respondent filed an administrative claim with the BIR for refund of the amount of P32,904,437.30 representing the documentary stamp tax allegedly erroneously paid by it for the period January to December 1998. On February 10, 2000, respondent filed a petition for review with the CTA in order to suspend the running of the two-year prescriptive period under the law. An answer was filed by petitioner Commissioner of Internal Revenue alleging that respondent's' claim is subject to investigation by the BIR; that respondent failed to show that the documentary stamp tax was erroneously or illegally collected; that taxes paid and collected are presumed to have been paid in accordance with law and regulations, hence, not refundable; that in an action for tax refund/credit, the burden of proof is on the taxpayer to establish its right to refund and failure to adduce sufficient proof is fatal to the action for tax refund/credit; that it is incumbent upon respondent to show that it has complied with the provisions of Section 229 of the Tax Code, as amended; and that claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation. DIECTc On May 2, 2002, the CTA rendered judgment ordering petitioner to refund or issue a tax credit certificate in favor of respondent the amount of P30,360,570.75 representing erroneous payment of documentary stamp tax for the taxable year 1998, ruling as follows: "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. DcITaC The Court likewise finds that the 'electronic message instructions' other than those mentioned in BIR Ruling No. 132-99 are not subject to Sections 180 and 181, of the NIRC of 1997." 2 Hence, the instant petition on the following grounds: "1. THE COURT OF TAX APPEALS ERRED WHEN IT FAILED TO RULE THAT ELECTRONIC MESSAGES MEET THE CONDITIONS FOR TAXABILITY UNDER SECTION 181 OF THE TAX CODE, AS AMENDED. 2. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT BIR RULING NO. 132-99 DATED AUGUST 23, 1999 IS APPLICABLE TO THE INSTANT PETITION." In support of the petition, petitioner cites the case of Philippine Home Assurance Corporation vs. Court of Appeals , 3 which held as follows: "In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effected through the issuance of particular documents, are subject to the payment of documentary stamp taxes are leases of lands, mortgages, pledges, and trusts, and conveyances of real property. Documentary stamp taxes are thus levied, on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. The documentary stamp taxes must be paid upon the issuance of the said instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. As the Supreme Court of the United States held in Du Point vs. United States : The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. In this view it is immaterial whether the transfer of the account constituted a sale." On August 2, 2004, petitioner filed a Manifestation 4 alleging that on July 8, 2004, this Court's Seventh Division 5 promulgated a Decision in CA-G.R. SP No. 77580, entitled " Commissioner of Internal Revenue vs. Hongkong & Shanghai Banking Corporation Limited Philippine Branches ", ruling that the instructions of investor-clients sent to Hongkong and Shanghai Banking Corporation from abroad, through electronic messages in the form of SWIFT MT 100, MT 202 or MT 521, to debit their local or foreign currency account and to pay the purchase price of shares of stock and other investment securities, covering the period from September to December, 1997, are subject to documentary stamp tax under Section 181 of the Tax Code. A copy of said Decision is attached to the Manifestation. The petition is meritorious. acTDCI It is interesting to note that the petition at bench and CA-G.R. SP No. 77580 involve the same parties, the same transaction and the same issue, i.e. , whether the electronic messages received by respondent from its clients abroad instructing it to debit their local and foreign currency accounts and to pay the purchase price of shares of stock or investment in securities are subject to documentary stamp tax under Section 181 of the NIRC. In finding that the documentary stamp tax was not erroneously paid, the Seventh Division ratiocinated as follows: "At bar, the respondent performs custodial services in behalf of its investor-clients as regards their passive investments in the Philippines mainly involving shares of stocks in domestic corporations. These investor-clients maintain Philippine peso and/or foreign currency accounts with HSBC-LPB. Should they desire to purchase shares of stock and other investments securities in the Philippines, the investor-clients send their instructions and advises via electronic messages from abroad to HSBC-LPB in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency account and to pay the purchase price upon receipt of the securities ( CTA Decision, pp. 12; Rollo, pp. 4142 ). Pursuant to Section 181 of the NIRC, the respondent was thus required to pay documentary stamp taxes based on its acceptance of these electronic messages which, as HSBC-LPB readily admits in its petition filed before the Court of Tax Appeals, were essentially orders to pay the purchases of securities made by its client-investors ( Rollo, p. 60 ). Appositely, the BIR correctly and legally assessed and collected the documentary stamp tax from respondent considering that the said tax was levied against the acceptances and payments by HSBC-LPB of the subject electronic messages/orders for payment. The issue of whether such electronic messages may be equated as a written document and thus be subject to tax is beside the point. As We have already stressed, Section 181 of the law cited earlier imposes the documentary stamp tax not on the bill of exchange or order for payment of money but on the acceptance or payment of the said bill or order. The acceptance of a bill or order is the signification by the drawee of its assent to the order of the drawer to pay a given sum of money while payment implies not only the assent to the said order of the drawer and a recognition of the drawer's obligation to pay such aforesaid sum, but also a compliance with such obligation ( Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992] ). What is vital to the valid imposition of the documentary stamp tax under Section 181 is the existence of the requirement of acceptance or payment by the drawee (in this case, HSBC-LPB) of the order for payment of money from its investor-clients and that the said order was drawn from a foreign country and payable in the Philippines. These requisites are surely present here. ICAcaH It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. In the same case, the High Court also declared citing Du Pont vs. United States (300 U.S. 150, 153 [1936]). `The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business . It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. ' (Emphasis and Italics, Ours) To reiterate, the subject documentary stamp tax was levied on the acceptance and payment made by HSBC-LPB pursuant to the order made by its client-investors as embodied in the cited electronic messages, through which the herein parties' privilege and opportunity to transact business respectively as drawee and drawers was exercised, separate and apart from the circumstances and conditions related to such acceptance and subsequent payment of the sum of money authorized by the concerned drawers. Stated another way, the documentary stamp tax was exacted on the respondent's exercise of its privilege under its drawee-drawer relationship with its client-investor through the execution of a specific instrument which, in the case at bar, is the acceptance of the order for payment of money. The acceptance of a bill or order for payment may be done in writing by the drawee in the bill or order itself, or in a separate instrument ( Prudential Bank vs. Intermediate Appellate Court, supra ). Here, the respondent's acceptance of the orders for the payment of money was veritably `done in writing in a separate instrument' each time it debited the local or foreign currency accounts of its client-investors pursuant to the latter's instructions and advises sent by electronic messages to the respondent bank. The documentary stamp tax therefore must be paid upon the execution of the specified instruments or facilities covered by the tax in this case, the acceptance by HSBC-LPB of the order for payment of money sent by the client-investors through electronic messages ( Philippine Home Assurance Corporation vs. Court of Appeals, supra )." We are in complete agreement with the above-disquisition of our esteemed colleagues. In the petition at bench, petitioner quoted portions of the testimony of respondent's witness, Mr. Gerardo Lim, who admitted that the electronic messages received by the bank from its clients abroad are in the nature of instructions to the bank to pay out or debit an amount from the clients' funds with it to another bank or a designated third party. 6 Thus, the order for the payment of money by said clients of respondent and the acceptance thereof by the latter come within the purview of Section 181 of the NIRC. aIcSED Moreover, petitioner is not bound by the erroneous opinion of former Commissioner of Internal Revenue Beethoven L. Rualo, as embodied in BIR Ruling No. 132-99. It bear stressing that the government can never be in estoppel, particularly in matters involving taxes. It is a well-known rule that erroneous application and enforcement of the law by public officers do not preclude subsequent correct application of the statute, and that the Government is never estopped by mistake or error on the part of its agents. 7 WHEREFORE, the Decision of the Court of Tax Appeals is REVERSED and SET ASIDE and another one rendered declaring that respondent Hongkong and Shanghai Banking Corporation, Limited Philippine Branches is not entitled to a refund or tax credit of the amount of P30,360,570.75 representing the documentary stamp tax it paid for the taxable year 1998. SO ORDERED. Guaria III and Abdulwahid, * JJ ., concur. Footnotes * Vice Justice Santiago Javier Ranada, who is on leave, per Office Order No. 250-04-CG dated August 27, 2004. 1. Rollo , p. 38. 2. Id. , at 4243. 3. 301 SCRA 443, 447448. 4. Rollo , pp. 163164. 5. Composed of Justice Conrado M. Vasquez, Jr., Chairman and Ponente , Justice Josefina Guevara-Salonga and Justice Fernanda Lampas Peralta, Members. 6. Petition, pp. 2325. 7. Philippine Basketball Association vs. Court of Appeals , 337 SCRA 358, 368369.