63) BPI v. CIR

3/12/2015 SUPREMECOURTREPORTSANNOTATEDVOLUME496

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VOL. 496, JULY 27, 2006 601Bank of the Philippine Islands vs. Commissioner of

Internal Revenue

G.R. No. 137002. July 27, 2006.*

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

Documentary Stamp Tax Section 195 (now Section 182) of theNational Internal Revenue Code (NIRC) imposes a documentarystamp tax on (1) foreign bills of exchange, (2) letters of credit, and(3) orders, by telegraph or otherwise, for the payment of moneyissued by express or steamship companies or by any person orpersons.The first issue raised by the petitioner is whether BPIis liable for documentary stamp taxes in connection with its saleof foreign exchange to the Central Bank in 1986 under Section195 (now Section 182) of the NIRC, quoted hereunder: Sec. 182.Stamp tax on foreign bills of exchange and letters of credit. On allforeign bills of exchange and letters of credit (including orders, bytelegraph or otherwise, for the payment of money issued byexpress or steamship companies or by any person or persons)drawn in but payable out of the Philippines in a set of three ormore according to the custom of merchants and bankers, thereshall be collected a documentary stamp tax of thirty centavos oneach two hundred pesos, or fractional part thereof, of the facevalue of such bill of exchange or letter of credit, or the Philippineequivalent of such face value, if expressed in foreign country. Todetermine what is being taxed under this section, a discussion onthe nature of the acts covered by Section 195 (now Section 182) ofthe NIRC is indispensable. This section imposes a documentarystamp tax on (1) foreign bills of exchange, (2) letters of credit, and(3) orders, by telegraph or otherwise, for the payment of moneyissued by express or steamship companies or by any person orpersons. This enumeration is further limited by the qualificationthat they should be drawn in the Philippines and payable outsideof the Philippines.



Bills of Exchange Negotiable Instruments Law (Act No.2031) Words and Phrases Bills of Exchange, Defined.Adefinition of a bill of exchange is provided by Section 39 ofRegulations No. 26, the rules governing documentary taxespromulgated by the Bureau of Internal Revenue (BIR) in 1924:Sec. 39. Definition of bill of exchange. The term bill of exchangedenotes checks, drafts, and all

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* FIRST DIVISION.

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602 SUPREME COURT REPORTS ANNOTATED

Bank of the Philippine Islands vs. Commissioner of InternalRevenue

other kinds of orders for the payment of money, payable at sight,or on demand or after a specific period after sight or from a stateddate. Section 126 of The Negotiable Instruments Law (Act No.2031) reiterates that it is an order for the payment of money andspecifies the particular requisites that make it negotiable. Sec.126. Bill of exchange defined.A bill of exchange is anunconditional order in writing addressed by one person toanother, signed by the person giving it, requiring the person towhom it is addressed to pay on demand or at fixed ordeterminable future time a sum certain in money to order or tobearer.

Same A foreign bill of exchange may be drawn outside thePhilippines, payable outside the Philippines, or both drawn andpayable outside of the Philippines.Section 129 of the same lawclassifies bills of exchange as inland and foreign, the distinction islaid down by where the bills are drawn and paid. Thus, a foreignbill of exchange may be drawn outside the Philippines, payableoutside the Philippines, or both drawn and payable outside of thePhilippines. Sec. 129. Inland and foreign bills of exchange.Aninland bill of exchange is a bill which is, or on its face purports tobe, both drawn and payable within the Philippines. Any other billis a foreign bill. x x x



Letters of Credit Word and Phrases A letter of credit is onewhereby one person requests some other person to advance moneyor give credit to a third person, and promises that he will repay thesame to the person making the advancement, or accept the billdrawn upon himself for the like amount.The Code of Commerceloosely defines a letter of credit and provides for its essentialconditions, thus: Art. 567. Letters of credit are those issued by onemerchant to another or for the purpose of attending to acommercial transaction. Art. 568. The essential conditions ofletters of credit shall be: 1. To be issued in favor of a definiteperson and not to order. 2. To be limited to a fixed and specifiedamount, or to one or more undetermined amounts, but within amaximum the limits of which has to be stated exactly. A moreexplicit definition of a letter of credit can be found in thecommentaries: A letter of credit is one whereby one personrequests some other person to advance money or give credit to athird person, and promises that he will repay the same to theperson making the advancement, or accept the bills drawn uponhimself for the like amount. A bill of exchange and a letter ofcredit may differ

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as to their negotiability, and as to who owns the funds used forthe payment at the time payment is made. However, in both billsof exchange and letters of credit, a person orders another to paymoney to a third person.

Taxation Documentary Stamp Tax The phrase orders, bytelegraph or otherwise, for the payment of money used in referenceto documentary stamp taxes may be found in an earlierdocumentary tax provision, Section 1449(i) of the AdministrativeCode of 1917, which was substantially reproduced in Section 195(now Section 182) of the NIRC.The phrase orders, by telegraphor otherwise, for the payment of money used in reference todocumentary stamp taxes may be found in an earlierdocumentary tax provision, Section 1449(i) of the AdministrativeCode of 1917, which was substantially reproduced in Section 195



(now Section 182) of the NIRC. Regulations No. 26, whichprovided the rules and guidelines for the documentary stamp taximposed under the Administrative Code of 1917, contains anexplanation for the phrase orders, by telegraph or otherwise, forthe payment of money: What may be regarded as telegraphictransfer.A local bank cables to a certain bank in a foreigncountry with which bank said local bank has a credit, and directsthat foreign bank to pay to another bank or person in the samelocality a certain sum of money, the document for and in respectsuch transaction will be regarded as a telegraphic transfer,taxable under the provisions of Section 1449(i) of theAdministrative Code.

Same What is being taxed is the facility that allows a party todraw the draft or make the order to pay within the Philippines andhave the payment made in another country.BPI alleges that theassailed decision must be reversed since the sale between BPI andthe Central Bank of foreign exchange, as distinguished fromforeign bills of exchange, is not subject to the documentary stamptaxes prescribed in Section 195 (now Section 182) of the NIRC.This argument leaves much to be desired. In this case, it is notthe sale of foreign exchange per se that is being taxed underSection 195 of the NIRC. This section refers to a documentarystamp tax, which is an excise upon the facilities used in thetransaction of the business separate and apart from the businessitself. It is not a tax upon the business itself which is sotransacted, but it is a duty upon the facilities made use of andactually employed in the transaction of the business, and separateand apart from the business itself. Section

604



195 (now Section 182) of the NIRC covers foreign bills ofexchange, letters of credit, and orders of payment for money,drawn in Philippines, but payable outside the Philippines. Fromthis enumeration, two common elements need to be present: (1)drawing the instrument or ordering a drawee, within thePhilippines and (2) ordering that drawee to pay another person aspecified amount of money outside the Philippines. What is being



taxed is the facility that allows a party to draw the draft or makethe order to pay within the Philippines and have the paymentmade in another country.

Same Same Credit and Deposit, Defined Words andPhrases By the definition of credit being equated with the termdeposits, BPIs deposit account with its correspondent bank ismuch the same as the credit referred to in Section 51 ofRegulations No. 26the fact that the funds transferred to theCentral Banks account with the Federal Reserve Bank are fromBPIs deposit account with the correspondent bank can onlyunderline that the present case is the same situation describedunder Section 51 of Regulations No. 26.BPI further alleges thatsince the funds transferred to the Federal Reserve Bank weretaken from BPIs account with the correspondent bank, this is notthe transaction contemplated under Section 51 of Regulations No.26. BPI argues that Section 51 of Regulations No. 26, in using thephrase with which local bank has credit, involves transactionswherein the drawee bank pays with its own funds and excludesfrom the coverage of the law situations wherein the funds paidout by the correspondent bank are owned by the drawer. In thecase of Republic of the Philippines v. Philippine National Bank, 3SCRA 851 (1961), the Court equated credit with the termdeposits, and identified the depositor as the creditor and thebank as the debtor. And as correctly stated by the trial court, theterm credit in its usual meaning is a sum credited on the booksof a company to a person who appears to be entitled to it. Itpresupposes a creditordebtor relationship, and may be said toimply ability, by reason of property or estates, to make a promisedpayment. It is the correlative to debt or indebtedness, and thatwhich is due to any person, as distinguished from that which heowes. The same is true with the term deposits in banks wherethe relationship created between the depositor and the bank isthat of creditor and debtor. By this definition of credit, BPIsdeposit account with its correspondent bank is much the same asthe credit referred to in Section 51 of Regulations No. 26. Thus,the fact that the funds transferred to the Central

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Banks account with the Federal Reserve Bank are from BPIsdeposit account with the correspondent bank can only underlinethat the present case is the same situation described underSection 51 of Regulations No. 26.

Bills of Exchange Draft and Bank Draft, ExplainedWords and Phrases In the case of a bill of exchange, the fundsmay belong to the drawer and need not be advanced by the drawee,as in the case of a check or a draft A draft is a form of a bill ofexchange used mainly in transactions between persons physicallyremote from each other, an order made by one person, say thebuyer of goods, addressed to a person having in his possessionfunds of such buyer ordering the addressee to pay the purchaseprice to the seller of the goods, and where the order is made by onebank to another, it is referred to as a bank draft.The fact thatthe funds belong to BPI and were not advanced by thecorrespondent bank will not remove the transaction from thecoverage of Section 195 (now Section 182) of the NIRC. There aretransactions covered by this section wherein funds belonging tothe drawer are used for payment. A bill of exchange, when drawnin the Philippines but payable in another country, would surely becovered by this section. And in the case of a bill of exchange, thefunds may belong to the drawer and need not be advanced by thedrawee, as in the case of a check or a draft. In the description of adraft provided hereunder, the drawee is in possession of fundsbelonging to the drawer of the bill: A draft is a form of a bill ofexchange used mainly in transactions between persons physicallyremote from each other. It is an order made by one person, say thebuyer of goods, addressed to a person having in his possessionfunds of such buyer ordering the addressee to pay the purchaseprice to the seller of the goods. Where the order is made by onebank to another, it is referred to as a bank draft.

Excise Tax The power to levy an excise upon the performanceof an act or the engaging in an occupation does not depend uponthe domicile of the person subject to the excise, nor upon thephysical location of the property and in connection with the act oroccupation taxed, but depends upon the place in which the act isperformed or occupation engaged in Section 195 (now Section 182)of the NIRC would be rendered invalid if the fact that the paymentwas made outside of the country can be used as a basis fornonpayment of the tax.BPI argues that the foreign exchangesold was deposited and

606





transferred within the U.S. and is therefore outside Philippineterritory. This argument is unsubstantial. The documentarystamp tax is not imposed on the sale of foreign exchange, rather itis an excise tax on the privilege or facility which the parties usedin their transaction. In the case of Allied Thread Co., Inc. v. CityMayor of Manila, 133 SCRA 338 (1984), the Court explained thescope encompassed by the power to levy an excise tax: The taximposition here is upon the performance of an act, enjoyment of aprivilege, or the engaging in an occupation, and hence is in thenature of an excise tax. The power to levy an excise upon theperformance of an act or the engaging in an occupation does notdepend upon the domicile of the person subject to the excise, norupon the physical location of the property and in connection withthe act or occupation taxed, but depends upon the place inwhich the act is performed or occasion engaged in(Emphasis supplied). In this case, the act of BPI instructing thecorrespondent bank to transfer the funds to the Federal ReserveBank was performed in the Philippines. Therefore, the excise taxmay be levied by the Philippine government. Section 195 (nowSection 182) of the NIRC would be rendered invalid if the factthat the payment was made outside of the country can be used asa basis for nonpayment of the tax.

Taxation Interests Even if an assessment is later reduced bythe courts, a delinquency interest should still be imposed from thetime demand was made by the Commissioner of Internal RevenueThe intention of the law is precisely to discourage delay in thepayment of taxes due to the State and, in this sense, the surchargeand interest charged are not penal but compensatory in naturethey are compensation to the State for the delay in payment, or forthe concomitant use of the funds by the taxpayer beyond the datehe is supposed to have paid them to the State.In the case ofPhilippine Refining Company v. Court of Appeals, 256 SCRA 667(1996), this Court categorically ruled that even if an assessmentwas later reduced by the courts, a delinquency interest shouldstill be imposed from the time demand was made by the CIR. Ascorrectly pointed out by the Solicitor General, the deficiency taxassessment in this case, which was the subject of the demandletter of respondent Commissioner dated April 11, 1989, should



have been paid within thirty (30) days from receipt thereof. Byreason of petitioners default thereon, the delinquency penalties of25% surcharge and interest of 20% accrued from April 11, 1989.The fact that petitioner appealed

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the assessment to the CTA and that the same was modified doesnot relieve petitioner of the penalties incident to delinquency. Thereduced amount of P237,381.25 is but a part of the originalassessment of P1,892,584.00. This doctrine is consistent with theearlier decisions of this Court justifying the imposition ofadditional charges and interests incident to delinquency byexplaining that the nature of additional charges is compensatoryand not a penalty. The above legal provision makes nodistinctions nor does it establish exceptions. It directs thecollection of the surcharge and interest at the stated rate uponany sum or sums due and unpaid after the dates prescribed insubsections (b), (c), and (d) of the Act for the payment of theamounts due. The provision therefore is mandatory in case ofdelinquency. This is justified because the intention of the law isprecisely to discourage delay in the payment of taxes due to theState and, in this sense, the surcharge and interest charged arenot penal but compensatory in naturethey are compensation tothe State for the delay in payment, or for the concomitant use ofthe funds by the taxpayer beyond the date he is supposed to havepaid them to the State.

Same Collecting charges incident to tax delinquency ismandatory.Based on established doctrine, these chargesincident to delinquency are compensatory in nature and areimposed for the taxpayers use of the funds at the time when theState should have control of said funds. Collecting such charges ismandatory. Therefore, the Decision of the Court of Appealsimposing a 20% delinquency interest over the assessment reducedby the CTA was justified and in accordance with Section 249(c)(3)of the NIRC.

PETITION for review on certiorari of a decision of the



Court of Appeals.

The facts are stated in the opinion of the Court.Padilla Law Office for petitioner.The Solicitor General for respondent.

CHICONAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 ofthe 1997 Rules of Court, as amended, seeking to set aside a

608

608 SUPREME COURT REPORTS ANNOTATEDBank of the Philippine Islands vs. Commissioner of

Internal Revenue

Decision1 of the Court of Appeals dated 14 August 2004

ordering the petitioner to pay respondent Commissioner ofInternal Revenue (CIR) deficiency documentary stamp taxof P690,030 for the year 1986, inclusive of surcharge andcompromise penalty, plus 20% annual interest until fullypaid. The Court of Appeals in its assailed Decision affirmedthe Decision

2 of the Court of Tax Appeals (CTA) dated 31

May 1994.From 28 February 1986 to 8 October 1986, petitioner

Bank of the Philippine Islands (BPI) sold to the CentralBank of the Philippines (now Bangko Sentral ng Pilipinas)U.S. dollars for P1,608,541,900.00. BPI instructed, bycable, its correspondent bank in New York to transfer U.S.dollars deposited in BPIs account therein to the FederalReserve Bank in New York for credit to the Central Banksaccount therein. Thereafter, the Federal Reserve Bank sentto the Central Bank confirmation that such funds had beencredited to its account and the Central Bank promptlytransferred to the petitioners account in the Philippinesthe corresponding amount in Philippine pesos.

3

During the period starting 11 June 1985 until 9 March1987, the Central Bank enjoyed tax exemption privilegespursuant to Resolution No. 3585 dated 3 May 1985 of theFiscal Incentive Review Board. However, in 1985,Presidential Decree No. 1994An Act Further AmendingCertain Provisions of the National Internal Revenue Codewas enacted. This law amended Section 222 (now 173) ofthe National Internal Revenue Code (NIRC), by adding the



foregoing:

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1 Penned by Associate Justice Arturo B. Buena with Associate JusticeRamon Mabutas, Jr. and Associate Justice Hilarion L. Aquino, concurringRollo, pp. 4251.

2 CA Rollo, pp. 5264.3 Rollo, p. 42

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Internal Revenue

[W]henever one party to the taxable document enjoysexemption from the tax herein imposed, the other partythereto who is not exempt shall be the one directly liablefor the tax.

In 1988, respondent CIR ordered an investigation to bemade on BPIs sale of foreign currency. As a result thereof,the CIR issued a preassessment notice informing BPI thatin accordance with Section 195 (now Section 182)

4 of the

NIRC, BPI was liable for documentary stamp tax at therate of P0.30 per P200.00 on all foreign exchange sold tothe Central Bank. Total tax liability was assessed atP3,016,316.06, which consists of a documentary stamp taxliability of P2,412,812.85, a 25% surcharge of P603,203.21,and a compromise penalty of P300.00.

5

BPI disputed the findings contained in the preassessment notice. Nevertheless, the CIR issuedAssessment No. FAS58688003022, dated 30 September1988, which BPI received on 11 October 1988. BPI formallyprotested the assessment, but the protest was denied. On10 July 1990, BPI received the final notice and demand forpayment of its 1986 assessment for deficiency documentarystamp tax in the amount of P3,016,316.06. Consequently, apetition for review was filed with the CTA on 9 August1990.

6

On 31 May 1994, the CTA rendered the Decision holdingBPI liable for documentary stamp tax in connection withthe



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4 Sec. 182. Stamp tax on foreign bills of exchange and letters of credit.On all foreign bills of exchange and letters of credit (including orders, bytelegraph or otherwise, for the payment of money issued by express orsteamship companies or by any person or persons) drawn in but payableout of the Philippines in a set of three or more according to the custom ofmerchants and bankers, there shall be collected a documentary stamp taxof thirty centavos on each two hundred pesos, or fractional part thereof, ofthe face value of such bill of exchange or letter of credit, or the Philippineequivalent of such face value, if expressed in foreign country.

5 CA Rollo, p. 53.6 Id.

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Internal Revenue

sale of foreign exchange to the Central Bank from theperiod 29 July 1986 to 8 October 1986 only, thussubstantially reducing the CIRs original assessment. Thedispositive portion of the said Decision reads:

WHEREFORE, premises considered, petitioner is hereby orderedto pay respondent Commissioner of Internal Revenue, the amountof P690,030 inclusive of surcharge and compromise penalty, plus20% annual interest until fully paid pursuant to Section 249 (cc)(sic) (3) of the Tax Code.

7

The CTA ruled that BPIs instructions to its correspondentbank in the U.S. to pay to the Federal Reserve Bank inNew York, for the account of the Central Bank, a sum ofmoney falls squarely within the scope of Section 51 of TheRevised Documentary Stamp Tax Regulations (RegulationsNo. 26), dated 26 March 1924, the implementing rules tothe earlier provisions on documentary stamp tax, whichprovides that:

8

What may be regarded as telegraphic transfer.A local bankcables to a certain bank in a foreign country with which bank saidlocal bank has a credit, and directs that foreign bank to pay toanother bank or person in the same locality a certain sum ofmoney, the document for and in respect such transaction will beregarded as a telegraphic transfer, taxable under the provisions of



Section 1449(i) of the Administrative Code.

Nevertheless, the CTA also noted that althoughPresidential Decree No. 1994, the law which passes theliability on to the nonexempt party, was published in theOfficial Gazette issue of 2 December 1985, the same wasreleased to the public only on 18 June 1986, as certified bythe National Printing Office. Therefore, PresidentialDecree No. 1994 took effect only in July 1986 or 15 daysafter the issue of Official Gazette where the law wasactually published, that is, circulated to the public. As aresult of the delay, BPIs transactions prior to

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7 Id., at pp. 6364.8 Id., at pp. 5455.

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Internal Revenue

the effectivity of Presidential Decree No. 1994 were notsubject to documentary stamp tax. Hence, the CTA reducedthe assessment from P3,016,316.06 to P690,030.00, plus20% annual interest until fully paid pursuant to Section249(c) of the NIRC.

9

Both parties filed their respective Motions forReconsideration, which the CTA denied in a Resolutiondated 26 September 1994. BPI filed a Petition for Reviewwith the Court of Appeals on 11 November 1994. On 14August 1998, the Court of Appeals affirmed the Decision ofthe CTA. The Court of Appeals ruled that the documentarystamp tax imposed under Section 195 (now Section 182) isnot limited only to foreign bills of exchange and letters ofcredit but also includes the orders made by telegraph or byany other means for the payment of money made by anyperson drawn in but payable out of the Philippines. TheCourt of Appeals also maintained that telegraphictransfers, such as the one BPI sent to its correspondentbank in the U.S., are proper subjects for the imposition ofdocumentary stamp tax under Section 195 (now Section182) and Section 51 of Revenue Regulation No. 26. The



Court of Appeals likewise affirmed the CTAs Decisionimposing a 20% delinquency on the reduced assessment, inaccordance with Section 24(c)(3) of the NIRC and the caseof Philippine Refining Company v. Court of Appeals.

10

Petitioner filed a Partial Motion for Reconsideration on9 September 1998, which the Court of Appeals denied on 29December 1998.

11

Hence this petition, wherein the petitioner raised thefollowing issues:

I

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9 Id., at pp. 6063.10 326 Phil. 680 256 SCRA 676 (1996).11 Rollo, p. 54.

612


Internal Revenue

WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLYERRED IN HOLDING THAT SALES OF FOREIGN EXCHANGE(SPOT CASH), AS DISTINGUISHED FROM SALES OFFOREIGN BILLS OF EXCHANGE, ARE SUBJECT TODOCUMENTARY STAMP TAX UNDER SECTION 182 OF THETAX CODE.

II

WHETHER OR NOT, THE COURT OF APPEALSGRIEVOUSLY ERRED IN AFFIRMING THE IMPOSITION OFA DELINQUENCY INTEREST OF 20% ON THE REVISEDDEFICIENCY STAMP ASSESSMENT DESPITE A REDUCTIONTHEREOF BY THE COURT OF TAX APPEALS WHICH ERREDIN ITS ORIGINAL ASSESSMENT.

12

The first issue raised by the petitioner is whether BPI isliable for documentary stamp taxes in connection with itssale of foreign exchange to the Central Bank in 1986 underSection 195 (now Section 182) of the NIRC, quotedhereunder:



Sec. 182. Stamp tax on foreign bills of exchange and letters ofcredit. On all foreign bills of exchange and letters of credit(including orders, by telegraph or otherwise, for the payment ofmoney issued by express or steamship companies or by anyperson or persons) drawn in but payable out of the Philippines ina set of three or more according to the custom of merchants andbankers, there shall be collected a documentary stamp tax ofthirty centavos on each two hundred pesos, or fractional partthereof, of the face value of such bill of exchange or letter ofcredit, or the Philippine equivalent of such face value, if expressedin foreign country.

To determine what is being taxed under this section, adiscussion on the nature of the acts covered by Section 195(now Section 182) of the NIRC is indispensable. Thissection imposes a documentary stamp tax on (1) foreignbills of exchange, (2) letters of credit, and (3) orders, bytelegraph or otherwise, for the payment of money issued byexpress or steamship companies or by any person orpersons. This enumeration is further limited by thequalification that they

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12 Id., at p. 5.

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Internal Revenue

should be drawn in the Philippines and payable outside ofthe Philippines.

A definition of a bill of exchange is provided by Section39 of Regulations No. 26, the rules governing documentarytaxes promulgated by the Bureau of Internal Revenue(BIR) in 1924:

Sec. 39. Definition of bill of exchange.The term bill ofexchange denotes checks, drafts, and all other kinds of orders forthe payment of money, payable at sight, or on demand or after aspecific period after sight or from a stated date.

Section 126 of The Negotiable Instruments Law (Act No.2031) reiterates that it is an order for the payment of



1.2.

money and specifies the particular requisites that make itnegotiable.

Sec. 126. Bill of exchange defined.A bill of exchange is anunconditional order in writing addressed by one person toanother, signed by the person giving it, requiring the person towhom it is addressed to pay on demand or at fixed ordeterminable future time a sum certain in money to order or tobearer.

Section 129 of the same law classifies bills of exchange asinland and foreign, the distinction is laid down by wherethe bills are drawn and paid. Thus, a foreign bill ofexchange may be drawn outside the Philippines, payableoutside the Philippines, or both drawn and payable outsideof the Philippines.

Sec. 129. Inland and foreign bills of exchange.An inland bill ofexchange is a bill which is, or on its face purports to be, bothdrawn and payable within the Philippines. Any other bill is aforeign bill. x x x

The Code of Commerce loosely defines a letter of creditand provides for its essential conditions, thus:

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Internal Revenue

Art. 567. Letters of credit are those issued by one merchant toanother or for the purpose of attending to a commercialtransaction.

Art. 568. The essential conditions of letters of credit shall be:

To be issued in favor of a definite person and not to order.To be limited to a fixed and specified amount, or to one ormore undetermined amounts, but within a maximum thelimits of which has to be stated exactly.

A more explicit definition of a letter of credit can be foundin the commentaries:

A letter of credit is one whereby one person requestssome other person to advance money or give credit to athird person, and promises that he will repay the same to



the person making the advancement, or accept the billsdrawn upon himself for the like amount.

13

A bill of exchange and a letter of credit may differ as totheir negotiability, and as to who owns the funds used forthe payment at the time payment is made. However, inboth bills of exchange and letters of credit, a person ordersanother to pay money to a third person.

The phrase orders, by telegraph or otherwise, for thepayment of money used in reference to documentarystamp taxes may be found in an earlier documentary taxprovision, Section 1449(i) of the Administrative Code of1917, which was substantially reproduced in Section 195(now Section 182) of the NIRC. Regulations No. 26, whichprovided the rules and guidelines for the documentarystamp tax imposed under the Administrative Code of 1917,contains an explanation for the phrase orders, bytelegraph or otherwise, for the payment of money:

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13 Jose Campos, Jr. and Maria Clara LopezCampos, Notes and SelectedCases on Negotiable Instruments Law, Fifth Edition. Quezon City:Central Professional Books, Inc., 1994, p. 878.

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VOL. 496, JULY 27, 2006 615Bank of the Philippine Islands vs. Commissioner

of Internal Revenue

What may be regarded as telegraphic transfer.A local bankcables to a certain bank in a foreign country with which bank saidlocal bank has a credit, and directs that foreign bank to pay toanother bank or person in the same locality a certain sum ofmoney, the document for and in respect such transaction will beregarded as a telegraphic transfer, taxable under the provisions ofSection 1449(i) of the Administrative Code.

In this case, BPI ordered its correspondent bank in the U.S.to pay the Federal Reserve Bank in New York a sum ofmoney, which is to be credited to the account of the CentralBank. These are the same acts described under Section 51of Regulations No. 26, interpreting the documentary stamptax provision in the Administrative Code of 1917, which issubstantially identical to Section 195 (now Section 182) of



the NIRC. These acts performed by BPI incidental to itssale of foreign exchange to the Central Bank are includedamong those taxed under Section 195 (now Section 182) ofthe NIRC.

BPI alleges that the assailed decision must be reversedsince the sale between BPI and the Central Bank of foreignexchange, as distinguished from foreign bills of exchange,is not subject to the documentary stamp taxes prescribed inSection 195 (now Section 182) of the NIRC. This argumentleaves much to be desired. In this case, it is not the sale offoreign exchange per se that is being taxed under Section195 of the NIRC. This section refers to a documentarystamp tax, which is an excise upon the facilities used in thetransaction of the business separate and apart from thebusiness itself.

14 It is not a tax upon the business itself

which is so transacted, but it is a duty upon the facilitiesmade use of and actually employed in the transaction of thebusiness, and separate and apart from the business itself.

15

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14 DuPont v. U.S., 300 U.S. 150 (1937)15 Lincoln Philippine Life Insurance Company, Inc. v. Court of Appeals,

354 Phil. 896, 904 293 SCRA 92, 99 (1998) Nicol v. Ames, 173 US 509(1899).

616

616 SUPREME COURT REPORTS ANNOTATEDBank of the Philippine Islands vs. Commissioner

of Internal Revenue

Section 195 (now Section 182) of the NIRC covers foreignbills of exchange, letters of credit, and orders of paymentfor money, drawn in Philippines, but payable outside thePhilippines. From this enumeration, two common elementsneed to be present: (1) drawing the instrument or orderinga drawee, within the Philippines and (2) ordering thatdrawee to pay another person a specified amount of moneyoutside the Philippines. What is being taxed is the facilitythat allows a party to draw the draft or make the order topay within the Philippines and have the payment made inanother country.

A perusal of the facts contained in the record in this case



shows that BPI, while in the Philippines, ordered itscorrespondent bank by cable to make a payment, and thatpayment is to be made to the Federal Reserve Bank in NewYork. Thus, BPI made use of the aforementioned facility.As a result, BPI need not have sent a representative toNew York, nor did the Federal Reserve Bank have to go tothe Philippines to collect the funds which were to becredited to the Central Banks account with them. Thetransaction was made at the shortest time possible and atthe greatest convenience to the parties. The tax was laidupon this privilege or facility used by the parties in theirtransactions, transactions which they may effect throughour courts, and which are regulated and protected by ourgovernment.

BPI further alleges that since the funds transferred tothe Federal Reserve Bank were taken from BPIs accountwith the correspondent bank, this is not the transactioncontemplated under Section 51 of Regulations No. 26. BPIargues that Section 51 of Regulations No. 26, in using thephrase with which local bank has credit, involvestransactions wherein the drawee bank pays with its ownfunds and excludes from the coverage of the law situationswherein the funds paid out by the correspondent bank areowned by the drawer. In the case of Republic of thePhilippines v. Philip

617


of Internal Revenue

pine National Bank,16 the Court equated credit with the

term deposits, and identified the depositor as the creditorand the bank as the debtor.

And as correctly stated by the trial court, the termcredit in its usual meaning is a sum credited on the booksof a company to a person who appears to be entitled to it. Itpresupposes a creditordebtor relationship, and may be saidto imply ability, by reason of property or estates, to make apromised payment. It is the correlative to debt orindebtedness, and that which is due to any person, asdistinguished from that which he owes. The same is truewith the term deposits in banks where the relationship



created between the depositor and the bank is that ofcreditor and debtor.

By this definition of credit, BPIs deposit account withits correspondent bank is much the same as the creditreferred to in Section 51 of Regulations No. 26. Thus, thefact that the funds transferred to the Central Banksaccount with the Federal Reserve Bank are from BPIsdeposit account with the correspondent bank can onlyunderline that the present case is the same situationdescribed under Section 51 of Regulations No. 26.

Moreover, the fact that the funds belong to BPI andwere not advanced by the correspondent bank will notremove the transaction from the coverage of Section 195(now Section 182) of the NIRC. There are transactionscovered by this section wherein funds belonging to thedrawer are used for payment. A bill of exchange, whendrawn in the Philippines but payable in another country,would surely be covered by this section. And in the case of abill of exchange, the funds may belong to the drawer andneed not be advanced by the drawee, as in the case of acheck or a draft. In the description of a draft providedhereunder, the drawee is in possession of funds belongingto the drawer of the bill:

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16 113 Phil. 828, 830831 3 SCRA 851, 854 (1961).

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A draft is a form of a bill of exchange used mainly in transactionsbetween persons physically remote from each other. It is an ordermade by one person, say the buyer of goods, addressed to a personhaving in his possession funds of such buyer ordering theaddressee to pay the purchase price to the seller of the goods.Where the order is made by one bank to another, it is referred toas a bank draft.

17

BPI argues that the foreign exchange sold was depositedand transferred within the U.S. and is therefore outsidePhilippine territory. This argument is unsubstantial. The



documentary stamp tax is not imposed on the sale offoreign exchange, rather it is an excise tax on the privilegeor facility which the parties used in their transaction. Inthe case of Allied Thread Co., Inc. v. City Mayor ofManila,

18 the Court explained the scope encompassed by

the power to levy an excise tax:

The tax imposition here is upon the performance of an act,enjoyment of a privilege, or the engaging in an occupation, andhence is in the nature of an excise tax.

The power to levy an excise upon the performance of an act orthe engaging in an occupation does not depend upon the domicileof the person subject to the excise, nor upon the physical locationof the property and in connection with the act or occupation taxed,but depends upon the place in which the act is performedor occasion engaged in. (Emphasis supplied).

In this case, the act of BPI instructing the correspondentbank to transfer the funds to the Federal Reserve Bankwas performed in the Philippines. Therefore, the excise taxmay be levied by the Philippine government. Section 195(now Section 182) of the NIRC would be rendered invalid ifthe fact that the payment was made outside of the countrycan be used as a basis for nonpayment of the tax.

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17 Supra note 13 at p. 3.18 218 Phil. 308, 313314 133 SCRA 338, 343 (1984).

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of Internal Revenue

The second issue is whether the delinquency interest of20% per annum, as provided under Section 249(c)(3) of theNIRC, is applicable in this case.

In the case of Philippine Refining Company v. Court ofAppeals,

19 this Court categorically ruled that even if an

assessment was later reduced by the courts, a delinquencyinterest should still be imposed from the time demand wasmade by the CIR.



As correctly pointed out by the Solicitor General, the deficiencytax assessment in this case, which was the subject of the demandletter of respondent Commissioner dated April 11, 1989, shouldhave been paid within thirty (30) days from receipt thereof. Byreason of petitioners default thereon, the delinquency penalties of25% surcharge and interest of 20% accrued from April 11, 1989.The fact that petitioner appealed the assessment to the CTA andthat the same was modified does not relieve petitioner of thepenalties incident to delinquency. The reduced amount ofP237,381.25 is but a part of the original assessment ofP1,892,584.00.

This doctrine is consistent with the earlier decisions of thisCourt justifying the imposition of additional charges andinterests incident to delinquency by explaining that thenature of additional charges is compensatory and not apenalty.

The above legal provision makes no distinctions nor does itestablish exceptions. It directs the collection of the surcharge andinterest at the stated rate upon any sum or sums due and unpaidafter the dates prescribed in subsections (b), (c), and (d) of the Actfor the payment of the amounts due. The provision therefore ismandatory in case of delinquency. This is justified because theintention of the law is precisely to discourage delay in thepayment of taxes due to the State and, in this sense, thesurcharge and interest charged are not penal but compensatory innaturethey are compensation to the State for the delay inpayment, or for the concomitant use of the

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19 Supra note 10 at p. 691 pp. 677678.

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funds by the taxpayer beyond the date he is supposed to have paidthem to the State.

20

The same principle was used in Ross v. U.S.21 when the

U.S. Supreme Court ruled that it was only equitable for thegovernment to collect interest from a taxpayer who, by the



governments error, received a refund which was not duehim.

Even though [the] taxpayer here did not request the refund madeto him, and the situation is entirely due to an error on the part ofthe government, taxpayer and not the government has had theuse of the money during the period involved and it is not unjustlypenalizing taxpayer to require him to pay compensation for thisuse of money.

Based on established doctrine, these charges incident todelinquency are compensatory in nature and are imposedfor the taxpayers use of the funds at the time when theState should have control of said funds. Collecting suchcharges is mandatory. Therefore, the Decision of the Courtof Appeals imposing a 20% delinquency interest over theassessment reduced by the CTA was justified and inaccordance with Section 249(c)(3) of the NIRC.

WHEREFORE, premises considered, this CourtDENIES this petition and AFFIRMS the Decision of theCourt of Appeals in CAG.R. SP No. 57362 dated 14 August1998, ordering that petitioner Bank of the PhilippineIslands to pay Respondent Commissioner of InternalRevenue the deficiency documentary stamp tax in theamount of P690,030.00 inclusive of surcharge andcompromise penalty, plus 20% annual interest from 7 June1990 until fully paid. Costs against the petitioner.

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20 Republic v. Philippine Bank of Commerce, 145 Phil. 81, 89 34 SCRA361, 369 (1970).

21 148 F. Supp. 330 (1957), p. 333.

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SO ORDERED.

Panganiban (C.J., Chairperson), YnaresSantiago,AustriaMartinez and Callejo, Sr., JJ., concur.



Petition denied, judgment affirmed.

Notes.Documentary stamp taxes are levied on theexercise by persons of certain privileges conferred by lawfor the creation, revision, or termination of specific legalrelationships through the execution of specific instruments.(Philippine Home Assurance Corporation vs. Court ofAppeals, 301 SCRA 443 [1999])

The payment of documentary stamp taxes is done at thetime the act is done or transaction had and the tax base forthe computation of documentary stamp taxes on lifeinsurance policies under Section 183 of the Insurance Codeis the amount fixed in policy, unless the interest of a personinsured is susceptible of exact pecuniary measurement.The amount fixed in the policy is the figure written on itsface and whatever increases will take effect in the futureby reason of any automatic increase clause embodied inthe policy without the need of another contract.(Commissioner of Internal Revenue vs. Lincoln PhilippineLife Insurance Company, Inc., 379 SCRA 423 [2002])

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63) BPI v. CIR

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