Case Digest

G.R. No.
166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner, vs.COMMISSIONER OF INTERNAL
REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
NATURE: Petitions for review on certiorari assailing the Decision and Resolution of
the CA. The respective Decisions in the said cases similarly reversed and set aside
the decisions of the CTA and dismissed the petition of Petitioner HSBC.
FACTS:
1. HSBC performs custodial services on behalf of its investor-clients with
respect to their passive investments in the Philippines, particularly
investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent.
2. HSBC’s investor-clients maintain Philippine peso and/or foreign currency

accounts, which are managed by HSBC through instructions given through
electronic messages. The said instructions are standard forms known in the
banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts and to pay
the purchase price therefor upon receipt of the securities.
3. Pursuant to the electronic messages of its investor-clients, HSBC purchased

and paid Documentary Stamp Tax (DST) from September to December 1997
and also from January to December 1998 amounting to P19,572,992.10 and
P32,904,437.30, respectively.
4. BIR, thru its then Commissioner, issued BIR Ruling to the effect that
instructions or advises 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. 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.
a. 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. Consequently, there is no negotiable
instrument to be made, signed or issued by the payee.
b. 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.
Under the Documentary Stamp Tax Law, the mere withdrawal of
money from a bank deposit, local or foreign currency account, is not
subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank
drafts is subject to the documentary stamp tax.
c. Likewise, the receipt of funds from another bank in the Philippines
for deposit to the payee’s account and thereafter upon instruction of
the non-resident depositor-payor, through an electronic message, the
depository bank to debit his account and pay a named recipient shall
not be subject to documentary stamp tax. It should be noted that the
receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of
its regular banking transaction which is not subject to documentary
stamp tax.
5. With the above BIR Ruling as its basis, HSBC filed on an administrative
claim for the refund of allegedly representing erroneously paid DST to the
BIR
6. As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA, which favored HSBC and ordered payment of
refund or issuance of tax credit.
7. However, the CA reversed decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST.
a. DST is 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.
ISSUE: Whether or not the electronic messages are considered transactions

pertaining to negotiable instruments that warrant the payment of DST.
HELD: NO.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is
levied on the acceptance or payment of "a bill of exchange purporting to be drawn in
a foreign country but payable in the Philippines" and that "a bill of exchange is an
unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer."
The Court further agrees with the CTA that the electronic messages of HSBC’s
investor-clients containing instructions to debit their respective local or foreign
currency accounts in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181 of
the Tax Code as such instructions are "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 Court favorably adopts the finding of the CTA that the electronic
messages "cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred" and that the said electronic
messages are "mere memoranda" of the transaction consisting of the "actual debiting
of the [investor-client-payor’s] local or foreign currency account in the Philippines"
and "entered as such in the books of account of the local bank," HSBC.
The instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the requisites
of negotiability under Section 1 of the Negotiable Instruments Law. The electronic
messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money
as the payment is supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a specifically designated
third party. Thus, the electronic messages are not bills of exchange. As there was no
bill of exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will trigger
the imposition of the DST under Section 181 of the Tax Code.
In these cases, the electronic messages received by HSBC from its investor-clients
abroad instructing the former to debit the latter's local and foreign currency
accounts and to pay the purchase price of shares of stock or investment in
securities do not properly qualify as either presentment for acceptance or
presentment for payment. There being neither presentment for acceptance nor
presentment for payment, then there was no acceptance or payment that could have
been subjected to DST to speak of.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2,
2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of
the Court of Tax Appeals are REINSTATED. SO ORDERED.
Caltex (Phils.), Inc. vs. Court of Appeals and Security Bank and Trust Co. G.R.
No. 97753, Aug. 10, 1992
FACTS:
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The same
were given by Dela Cruz to Caltex in connection to his purchase of fuel products of
the latter. On a later date, Dela Cruz approached the bank manager,
communicated the loss of the certificates and requested for a reissuance.
Upon compliance with some formal requirements, he was issued replacements.

Thereafter, he secured a loan from the bank where he assigned the certificates as
security. Here comes the petitioner, averred that the certificates were not
actually lost but were given as security for payment for fuel purchases.
The bank demanded some proof of the agreement but the petitioner failed to comply.
The loan matured and the time deposits were terminated and then applied to the
payment of the loan.
Petitioner demands the payment of the certificates but to no avail.
ISSUE:
Whether or not the certificates of time deposits (CTDs) are negotiable instruments?
HELD:
Yes. The Court held that the CTDs are negotiable instruments. The CTDs in
question undoubtedly meet the requirements of the law for negotiability.
The Negotiable Instruments Law provides, an instrument to be negotiable must

conform to certain requirements, hence,
It must be in writing and signed by the maker or drawer;

Must contain an unconditional promise or order to pay a sum certain in money;
Must be payable on demand, or at a fixed or determinable future time;
Must be payable to order or to bearer; and
Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The documents provide that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the depositor? It is the “bearer.”
The documents do not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the amounts are to be
repayable to the bearer of the documents or, for that matter, whosoever may
be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word “BEARER” stamped
on the space provided for the name of the depositor in each CTD. On the wordings
of the documents, therefore, the amounts deposited are repayable to whoever
may be the bearer thereof.
Thus, petitioner’s aforesaid witness merely declared that Angel de la Cruz is the
depositor “insofar as the bank is concerned,” but obviously other parties not
privy to the transaction between them would not be in a position to know
that the depositor is not the bearer stated in the CTDs. Hence, the situation would
require any party dealing with the CTDs to go behind the plain import of what is
written thereon to unravel the agreement of the parties thereto through facts
aliunde. This need for resort to extrinsic evidence is what is sought to be
avoided by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.

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G.R. No.

166018 June 4, 2014

2. HSBC’s investor-clients maintain Philippine peso and/or foreign currency

3. Pursuant to the electronic messages of its investor-clients, HSBC purchased

a. While the payor is residing outside the Philippines, he maintains

ISSUE: Whether or not the electronic messages are considered transactions

Upon compliance with some formal requirements, he was issued replacements.

Petitioner demands the payment of the certificates but to no avail.

The Negotiable Instruments Law provides, an instrument to be negotiable must

It must be in writing and signed by the maker or drawer;

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