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

SEVENTH DIVISION [CA-G.R. SP No. 77580. July 8, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HONGKONG & SHANGHAI BANKING CORPORATION LIMITED PHILIPPINE BRANCHES , respondent . D E C I S I O N VASQUEZ , JR . , J p : This is a Petition for Review of the Decision of the Court of Tax Appeals dated December 18, 2002, in C.T.A. Case No. 5951. The facts of the case are ably stated in the said decision. We quote: "Petitioner is a corporation duly organized and existing under and by virtue of the laws of Hongkong (sic), and authorized by the Securities and Exchange Commission (SEC) to engage in business in the Philippines. It is registered with the Bureau of Internal Revenue (BIR) with taxpayer's identification number 047-000-504-44 and principal office address at 6780 Ayala Avenue, Makati City (par. 1, Petition for Review: Exhibits 'V' and 'V-1'). Petitioner performs 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, particularly investments in shares of stock in domestic corporations and, as such, acts as collection/payment agent with respect to dividends and other income derived from these passive investments ( par. 1, Stipulation of Facts ). The investor-clients maintain Philippine peso and/or foreign currency accounts. In the management of their funds maintained in the said peso and/or foreign currency accounts, e.g. transfer and disbursements of funds payment or for reinvestment, said investor-clients give instructions to petitioner from outside the Philippines via electronic messages. These electronic message instructions are standard forms known in the banking industry as SWIFT MT 100, MT 202 and/or MT 521. In case of purchase of shares of stock and other investment securities, the investor-clients send electronic messages from abroad to petitioner in the form of SWIFT MT 100, MT 202, and/or MT 521, instructing the latter to debit its local or foreign currency account and to pay the purchase price upon receipt of the securities ( pars. 4 and 5, Petition for Review ). From August to October 1997, petitioner allegedly purchased and paid DST in the total amount of P35,000,000.00, broken down as follows: Date of Purchase Amount August 28, 1997 P5,000,000.00 September 22, 1997 5,000,000.00 October 29, 1997 25,000,000.00 Total P35,000,000.00 =========== ( Annexes 'A", 'B' and 'C', Petition for Review ) According to petitioner, for the period September 1997 to December 1997, it paid DST on electronic instructions/advises (SWIFT MT 100, MT 202 and/or MT 521) received from abroad at the rate of P0.30 on each P200.00 based on the settlement price on the face of the advise under Section 181 of the National Internal Revenue Code (NIRC), totaling P19,572,992.10, detailed as follows: September 1997 P6,981,447.90 October 1997 6,209,316.60 November 1997 3,978,510.30 December 1997 2,403,717.30 P19,572,992.10 ( Annexes 'D', 'E', 'F' and 'G', Petition for Review ). On August 23, 1999, the BIR issued BIR Ruling No. 132-99, stating that instructions/advises from abroad on the management of funds located in the Philippines which do not involve transfer of from funds (sic) abroad are not subject to DST. On the basis of this ruling, petitioner filed with the BIR on October 8, 1999 an administrative claim for refund of the DST it erroneously paid on the electronic instructions it received from its investor-clients abroad during the period September to December 1997 in the amount of P19,572,992.10 ( par. 2, Stipulation of Facts ). On even date, the present case was filed in order to suspend the running of the two-year prescriptive period under the law." ( CTA Decision, pp. 1-3; Rollo, pp. 41-43 ) EcTDCI On the basis of the foregoing facts, the Court of Tax Appeals ruled in favor of Hong Kong and Shanghai Banking Corporation Limited Philippine Branches (HSBC-LPB, for brevity). The dispositive portion of the decision reads: "WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P16,436,395.83 representing erroneously paid documentary stamp tax for the months of September 1997 to December 1997. SO ORDERED." ( CTA Decision, p. 9; Rollo, p. 49 ) The Commissioner of Internal Revenue now challenges the said decision and implores Us to resolve whether: "1. THE HONORABLE COURT OF TAX APPEALS COMMITTED A REVERSIBLE ERROR WHEN IT PARTIALLY GRANTED THE PETITION FOR REVIEW FILED BY RESPONDENT BANK DESPITE LACK OF LEGAL BASIS. 2. THE HONORABLE TAX COURT COMMITTED A REVERSIBLE ERROR WHEN IT APPLIED AND USED AS ITS BASIS FOR ITS DECISION BIR RULING NO. 132-99. 3. THE HONORABLE TAX COURT COMMITTED A REVERSIBLE ERROR WHEN IT GRANTED RESPONDENT'S CLAIM FOR REFUND DESPITE THE RECOMMENDATION OF REVENUE OFFICER CELESTINO MEJIA DENYING THE SAME." (Petition, pp. 7-8; Rollo , pp. 16-17) Worth mentioning is that in its petition filed before the Court of Tax Appeals ( Annex "C", Petition; Rollo, pp. 59-63 ), the HSBC-LPB seeks the refund of P19,572,992.10 representing documentary stamp taxes it paid from September 1, 1997 until December 31, 1997. The respondent contends that the said amount was erroneously collected by the Bureau of Internal Revenue (BIR) considering that the electronic instructions or advises it received from its investor-clients from abroad on the management of funds located in the Philippines, which do not involve transfer of funds from abroad, are not subject to documentary stamp taxes. We do not think so. We entrenched in our jurisprudence is that tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption ( Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 [1999] ). A tax refund or credit may accordingly be granted only in cases where a tax, penalty, or any sum was erroneously or illegally assessed or collected (Section 229, NIRC). Aptly so, the claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund ( Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 [1997] ). Guided by the foregoing principles, two crucial questions are addressed and which must be resolved in the instant petition, to wit: 1. Did the HSBC-LPB actually pay the documentary stamp taxes it seeks to recover? 2. Was the said tax erroneously or illegally assessed or collected? To begin with, We see no need to indulge in a protracted discussion of the first issue regarding the payment of the documentary stamp tax sought to be refunded. Suffice it to say, the finding of the CTA that HSBC-LPB actually paid P16,436,395.83 in documentary stamp taxes for the disputed period remains uncontested by both parties in the instant case. Consequentially, there is just but one lingering issue to address here: Was the documentary stamp tax imposed in the instant case erroneously or illegally assessed and collected so as to warrant the grant of tax refund or tax credit in favor of HSBC-LPB? It was not. Section 181 of the National Internal Revenue Code , as amended by P.D. 1158, P.D. 1994, E.O. 273 and R.A. 7660 , which was in effect at the time the subject documentary stamp tax was collected ( Republic Act No. 8424 or the National Internal Revenue Code of 1997 took effect some time later on January 1, 1998), specifically provides: "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 on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, it expressed in foreign currency." ( Italics and Emphasis, Ours ) Two concerns are immediately apparent from the foregoing provision. First , the documentary stamp tax is imposed either: ( a ) upon any acceptance of a bill of exchange or order for the payment of money, or ( b ) upon any payment of a bill of exchange or order for the payment of money. Second , the bill of exchange or the order for the payment of money purports to be drawn in a foreign country but payable in the Philippines. Succinctly put, the documentary stamp tax shall be assessed and collected each time a drawee or person so authorized either accepts a bill of exchange or order for the payment of money, or pays a sum of money by virtue of the drawer's instructions therein, provided that the said bill of exchange or order to pay money was drawn in a foreign country but payable in the Philippines. 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. 1-2; Rollo, pp. 41-42 ). 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. 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. ). The Court of Tax Appeals nevertheless granted the respondent's entreated refund, ratiocinating that BIR Ruling No. 132-99 exempts " electronic message instructions " from the payment of the documentary stamp tax under Section 181 of the NIRC. The Tax Court committed a reversible error in this regard. cIaHDA BIR Ruling No. 132-99 was issued by then Commissioner Beethoven L. Rualo on August 23, 1999 based on a request made by Citibank and Standard Chartered Bank for a ruling on the issue of whether instructions sent by overseas clients to their banks in the Philippines to debit their local or foreign currency accounts and pay a named recipient in the Philippines is subject to documentary stamp tax. The ruling declared: "In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code which 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 (P0.30) on each Two hundred pesos (P200.00), or fractional part thereof, of the face value of any such bill of exchange, or order , or Philippine equivalent of such value, if expressed in foreign currency' ( Emphasis supplied ) a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a foreign country but payable in the Philippines. Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill of exchange or order for payment of money, which purports to draw money from a foreign country but payable in the Philippines . In the instant case, however, while the payor is residing outside the Philippines, he maintains a local and foreign currency account in the Philippines from where he will draw the money intended to pay a named recipient. The instruction or order to pay shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the meantime, such electronic. instructions by the non-resident payor cannot be considered as a transaction per se considering that the same do not involve any transfer of funds from abroad or from the place where the instruction originates. Insofar as the local bank is concerned, such instruction could be considered only as a memorandum and shall be entered as such in its books of accounts. The actual debiting of the payor's account, local or foreign currency account in the Philippines, is the actual transaction that should be properly entered as such." ( Rollo , pp. 121-122) At once apparent is the conviction of the Commissioner of Internal Revenue that the documentary stamp tax under Section 181 of the tax code is imposed on any bill of exchange or order for the payment of money which is purportedly drawn from a foreign country but payable in the Philippines. The Commissioner is also of the opinion that in order for the tax to be charged there has to be a negotiable instrument to be made, signed or issued by the payee. He did not consider the electronic instructions as transactions per se considering that the same do not involve any transfer of funds from abroad or from the place where the instruction originated. The Commissioner misses the point completely. As We have already discussed at length, the documentary stamp tax is not being imposed on the bill of exchange or the order for the payment of money. The tax is charged against the acceptance or payment of the said bill or order. Such acceptance or payment is the instrument or facility out of which the obligation to pay the tax arises. Moreover, the law does not require the actual transfer of funds from abroad for the obligation to pay the tax to arise. What is required to be drawn from abroad is the bill of exchange or order made by the client-investor and not the funds out of which payment is to be made, as the Commissioner erroneously suggests. As the law undeniably requires, the payment is to be made in the Philippines from the local or foreign currency account in the concerned banks located here. What are essential for the imposition of the tax is that the drawee accepts or pays the bill of exchange or order for the payment of money and that the bill or order was drawn abroad but payable in the Philippines. Fittingly, We are not bound by such erroneous ruling of the BIR. The rule that the construction given to a statute by an administrative agency charged with the interpretation and application of a statute is normally entitled to great respect and should be accorded great weight by the courts is not absolute. The exception is when such construction is clearly shown to be in sharp conflict with the governing statute and other laws, as is the case here ( United Harbor Pilots' Association of the Philippines, Inc. vs. Association of International Shipping Lines, Inc. , 391 SCRA 522 [2002] ). When an administrative agency renders an opinion or issues a statement of policy, it merely interprets a pre-existing law and the administrative interpretation is at best advisory for it is the courts that finally determine what the law means. Thus, an action by an administrative agency may be set aside by the judicial department if there is an error of law clearly conflicting with the letter and spirit of the law ( Energy Regulatory Board vs. Court of Appeals, 357 SCRA 30 [2001] ). IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and SET ASIDE, and a new one entered dismissing C.T.A. Case No. 5951. No cost. SO ORDERED. Guevarra-Salonga and Lampas Peralta, JJ ., concur.