CTA Case No. 4256 (Decision)

REPUBLIC OF THE PHILIPP I NES COURT OF TAX APPEALS QUEZON CITY BPI FAMILY BANK, C. T. A. CASE NO. 42S6 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - X DEC s 0N Thi~ is an appeal instituted by petitioner primarily to interrupt the prescriptive period for ref�Jnd considering that since the filing of this claim for refund with the respondent on October 6, 1987, he has not granted nor acted on the said claim for refund up to the date of the fi 1 i ng' of _, thi~ petition for review. Petitioner BPI Fa�ily Bank, for the period April 28, 1986 to Dece11ber 19, 1986, affixed and paid docu�entary stamps tax on c onfir�ations of sale of Central Bank and treasury bills a�ounting to P1,116,612.00. On April 6, 1987 , the BIR issued Revenue Circular No. 13-87 whi ch states, a11ong others, that docu�ents of conveyance of instru11ents enuMerated in Section 229 of the National Internal Revenue Code as distinguished fro� instru�ents � 568

\' DECISION CTA CASE NO. 4256 - 2- ,I enumerated in Sections 223 and 224, at'e not subject to documentary stamp tax. In view of the circular, petitioner, in a letter dated August 20, 1987 filed with the Bureau of Internal Revenue on October 6, 1987, a cl~im for refund alleging that since government securities fall within the purview of instrt..uwent s enumerated in Section 229 of the Reven�Je Code, confirmations of sale s covet'ing said securities are not subject to documentary stamp tax. Since the p~escriptive period to file a valid suit or proceeding for refund was about to expire, petitioner filed the instant appeal or petition for review. The issue for resolution is whether or not c onfirmation� of sale of Central Bank bills and treasury bills are subject to documentary stamp tax. Petitioner contends that confirmation of sale of Central Bank bi 11 s and treasury bi 11 s at'e not subject to documentary stamp tax because these CB and treasury bills are instt'uments falling under Section 229 of the NIRC which, by virtue of Revenue Memorandum Circular No. 13-87, the documents of conveyance thereof at'e not subject to docllmentary 569 ,I

DECISION CTA CASE NO. 4256 - 3- \ Respondent, on his part, does n ot dispute the f act s of the case but maintains tha t pursuant to S e c tion 222 <now Section 173> of the Internal Re ve nue Code, documentary stamp tax is imposed on or instrument by r eason of the tran s action and, thet'efore, is payab le at the time t h e transaction is had. So that in the instant c as e, the confirmation of sale �ad e by petitioner i s the vet' Y tt'ansaction itsel f subject to doc umentary sta�p tax which peti t ioner pr operly p a id at the ti�e . the sale was made or consummated. Fur ther, he avers that petitioner h a s the burden of proof to show that the tax was erroneous ly paid or il l egally collected, otherwise, suc h tax would be pre!Htmed to have been paid an d colle c ted in a c cordance with law. Finally, respondent p o st ulates that the right to recover the tax a llegedly paid by petitioner from Ap t' il 15, 1986 to De ce mber 19, 1986 has alre a dy presc r ibed ~ For a better understanding and analy s is of the 1 e ga 1 questions i nvo 1 ved, we rept' oduce het' et..mder the pertinent provisions of the National Internal Revenue Code, thuss eJtP-.t ion 222 <1 at er Sec. 186, and now Sec. 173) �. Stamp taxes upon docu�ent s, instrument�, and paper�. .. 570

DECISION _, CTA CASE NO. 4256 - 4- "Upon documents, instrument, and papers, and upon acceptances, assignments, sales, and tt'ansfers of the obligation, right, or � property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction had ot' accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the pet'son making, signing, issuing, accepting, or transferring the sa11e, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. <As amended by PD No. 1994. > Section 223 � <lat et' Sec. 187 and, now Sec. 174). Stamp tax on bonds, de bent ut'es, and certificates of indebtedne s s. - "On all bonds, debentures, and certificates of indebtedness issued by any association, co�pany, or cot' porat ion, there shall be co 11 ect ed a documentary stamp tax of one peso on each two hundred pesos, or fractional part thereof, of the face value of such documents. <As a�ended by PO No. 1959.) Sect i 0.!!__?25 <1 at er Sec 189 and now Sec 176). Stamp tax on sales, agreements to se 11, 111emoranda of sales, deliveries or transfer of bonds, due-bills, certificates of obligation, or shares or certificates of stock. "Q.!L~_ _s_a],_es, or agreements to sell_, O't" memot'anda or sales, or delive't"ies, or tt'ansfer of bonds, due- bills, certificates of obligation, or shares or certificates of stock of any association, company ot' corporation, orl tran~fer of su~h securities by assignment in blank, or by delivet'y, or by ~Q.aper _, 571

DECISION CTA CASE NO. 42S6 -~ - Q.r____~gr'-~..1!1-'n_t, or memorandum or other ~vid~nctts of transfer or sale of whether entitling the holder in any man ner to the benefit of such bonds, due - bills, certificates of obligation ot~ stock, ot~ to secure the future payment o f money, or for the future transfer of any bond, due- bill, certificates of obli gati on ot~ s t o c k , -,; h ~r ~---��-~!1 a 11 be co .11.~ c.t-~.9-�-----~� t g_oc;.~.,tm , n t ~ry s iO\!!.P_j;._\_~__9 f f i f_t;_y~nt.a 't.9.Ji 9 n each -,; wq__t} u n 9_t~ e_c;L....Q e_? O_h_Q__! f t~ a c;j;...i..9...!l~..l. P..~l'~t__tb.g.r~.Q.f, of the par value of such bond, due-bill, certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock ot~ secut~ities from one person to another, t~ eg at~ dless of whether or not a certificate of stock or obligation is issued, indot~sed, ot~ delivered in pursuance of such sale or tran~fer1 and provided, furth er , That in the case of stock without par value the _, amount of the documentary stamp tax herein prescribed shall be eq ui valent to twenty- five per centum of the d ocumentary ~ tamp tax paid upon the origin a l issue of ~aid stock. <Under scor ing �up pl ied.) ~t~Gt i.O...tLJ~2~ <I at er Sec. 193 and n o w S ec. 180). S t am p t M gn pt~ omissory n o te s, bills of excha n e, d r afts , ertificates of depos it , debt inst r u ment s u se d for deposit substitutes, and o thet~s not payable on sight or demand. - "On the bi 11 of . exchan ge (between points within the Philippine s >, dt~ afts, certificates of depo ~it , Q._g..R:L__ in ~!; rum~_nt IJ.~_f!..f;;t__f_o r __ d~..P..9.Ji.i..L_J> u q s t i t l..t t ~, o t~ o t~ d e t~ s for the payment of any sum of money otherwise than at sight or on demand, or on all pt~ om i ssory notes , whether negotiable or non-negotiable, except bank notes issued for circulation, a nd on each renewal of any such note, t_here sh~ , be g o llect e_d__~__�;!!;lcl..tll ent ary s t a.!Jtl;).. {;ax of t.\ittnt y ~_g.!JHVOS on eac]1__i; - .9 hundred P...� $.. o ~.._ g_t:___f .r e..!';..t...Lq_n&_Qar t_ t h ELJ? of, of t h e 572

DECISION -� CTR CASE NO. 4256 - 6- face value of any such or exchange, draft, certificate of depo si t, debt instr�.tment, or note. <As ame n ded by PDs No. 1457 and 1959. > <U n det~scm~ing !P.t p p 1 i e d � ) As earlier stated petitioner r e lies heavily on th e assumption that treasury bills or Central Bank b i ll s are instruments falling und e r Section 2 29 afo r equoted which pursuant to Rev e nue Memo r andum Circular 13- 87, the correspondin g docu ments of conveyance are not subject to do c umentary stamp t a x. An examination of said sectio n will show that it covers the fqllowing instt~ument s : <1> bills of ex c hange, (2) drafts, (3) cet~ tific a tes of deposit, ( 4 ) promissory notes whether negotiable or not, and (5) debt instrument used for deposi t substitutes. A "promissory note" is an unconditiona l pr omise in writing made by one per son to another� 5 igned by the 11aker, engaging to p a y on demand, o l"' a t a fixed or determinable futu r e time, a s um certa in in 111oney to order ot~ beare t~ <Sec. 184, Act No. 2031-> A "bill of ex c hange" is an '"tl unco n di t ional o d r i n wri ting '~""ltl~ s e d by one p er�son to anothet"" , signed by the pet"" son giving it, requiring the person to whom it is addressed to pay on demand at a fixed or determinab l e future time, a s �.tm certain in money to Ot""der or to beat' et' <Sec. _, 573

DECISION CTA CASE NO. 4256 - 7- 126, Act No. 2 031). R "d ra ft" is a c ommon t et~ m fo r al l bills of exchange and they are used sy nonymot.tsly <9 C.J. 40-41, cited in the book of p. 396~ A " cet~ tificate of deposi t " is a wt~itten acknowledgment by a bank of the rece ipt of money on deposi t which the bank pt~ omises to pay to the depositor, bearer or to some other person or order. <R e: Olson's Estate, 206 Iowa, 7 06 , 219 N. W. , 40 cited in Agbayani, 9...f!_5_jJ~. p. 441> . La stl y, debt _, instrt.tment used for deposit subst itut e. "debt instrument" i 's se 1 f-explana t or y and eas i 1 y t.tn d e rst o o d ' wh i 1 e the t e t~ m " de p o s i t subs t i t u t e " i s defined under Section 2 0<y> of t he Tax Code, as follows= Sectio n � Q (y) "Depo 1 substitutes " ~.b. ~_l.!__.___.!!L~~n...___ __n____f.\ ~-'--_!1 ~-~�~~- f q ,.~ m o f g_Q.t a i nj._ftlt__f_~ru:;L__.f..t.::._c~ ���-�JJ~_gJJ_~_:u,_G._' 0 t h e r than deposit, tht" ough the iss uance, endorsement, or acceptance of debt instruments fo r the borrower ' s own account, for the p1..n�" pose of re 1 ending or pt.trchas i ng of t"ece i vabl e s a nd othet" obligations, or financing the ir own needs or the need s of theit" agent Ot" dealet". These in struments may include b ut may not b e limited to banket"' s acc eptances, promissory notes, repurchase agreement, c ertifica te of assignment or part i c i pat ion a:D._9_ _~LI!!..i..t~..._r __i.n~!;_ru.!!!._en~.2. ~.!.t.!J___~~.~ O.!Jt'_Lf___~-~-!I!~Y-!?..~ u "t!_h o ~-!_?gp_.Qy_t h.~ G..!J.!.~ t'~..L-~j\ n !:LJ?...f.__:t.l}~__p_h_L;U..P..R i lJ._g..s for b ~.Dl:L~ ~.J'_I c;I__!)_9_1J..::J;~~.:D...!:<_._f.J..D..~_D_c;~J-~ 1 __!..D...t...e r m_.~ c::L~ a r :L~~----9...!: 57 4

_, DECISION CTA CASE NO. 4256 - 8- py_j~_t:LfL_P.. ~_!;;_~~r..~.J;..i._~-L~..D..9.___1;.25..�..I:!.S\_~.g_~_s..:;_9_!!!..!!1.J..2..~..!...Q-'!l Q_f.________th_~_____..Ph i_!.j...J;u;:!_!.!.t~2_ _f_or __�..Q_f!!J!!._g.r:!;;_j._.:.~.l. ,_ !...!L!;.I_t,\ s t t-" i~l.s..___f. _i 'l~.�~___�_t;!.!!!._P ~..D.j_~_!L._S\_~.Q____Q_ih_~r: DJtn-f_~- n~ncj_~_t____G_QJ!!..Qani_~.-2.� Pt~o vi d ed, how&v&r, That only debt instrument issued for inter-bank call loans to cover deficiency in reserves includ i ng those between or among banks and quasi-banks shall not be considered as deposit substitute debt in s trument." <Underscoring supplied.) A "deposit subtitute" was thought of by the banking institutions as well a by othet~ non- financial institutions as an altet~na tive fot~m of obtaining funds ft'om the public. Alternative in the sense that the tt'a d it i onal or common way of obtaining funds from the public is through the is!Hiance of a certificate of depo s it evidencing savings or time deposit. This is clear ft~ C\ :1! the abo v e-q �.Jot ed definition. Likewise apparen fro� the above provision of law is that thP instru ment covering "deposit substitutes" � .::'Ir e issued by private entities such as banks, non - bank financial intermediaries, commercial, industt'ial, finance companies and other non-financial companies upon aut horization by the Centt'al Bank of the Philippines Ot" the Securities and Exchange Commission, as the case may be. No where does it say or even imply that the above instruments will cover evidence of indebtedness iss ued _, 575

DE C I S I O N CTA CASE NO. 4256 - 9- Natio nal Go v e r nment or by the Cent ra l Ba nk s u c h as treas ury bills or Centra l Ba nk bill s . The ult i ma te is s ue fot~ t~ esolu ti on is whethet~ or not treasury bills or CB bill s f al l under any o f th e aforementioned instrum ents . To resolve the issue we have t o determ i ne the na t ur e of treasury o r CB bill s . Tr eas ury b i ll s are evidence of indebtedness i s sued by the National Government und e r authority o f Republ i c Act No. 2 45, _, as a mended. They at~ e offe r ed for s ale e ither at auction on co mpetitive or no n-compet i tive ba s i s and at f ixed d i s c ount or interest rate. a dit~ ect, unconditional a nd genet~ a l oblig a tion of t h e National Gover nment <Section 1, R. A. 245). "Ce n tr al Bank bills" is sim i lar to tt~ easury bills exce pt th a t it i s iss u ed plw s uant t o Rep ub lic AI:" 265 , as a111ended, o t het~ wi se known as th e Cent t~ al Ban k Act. CB bills are als o e �-1 i d e�nce of inde bte d ne sB i s u d by the Ce ntral Ba nk a gai n st its intern a t i on 1 re ~rve Ot>"' other gov e t~ nment it has acqui r ed, or may be issued with out rel at ion to specific types o f as s ets of the bank. <Section 98, R. A. 265) Tre a sury bills arid CB bills are the two most pop u lar government s e c �..tr i ties being traded in th e open market 576

DECISION CTA CASE NO. 425~ - 10 - op~rati on of the C~ntral Bank. From the above concepts of t reasury bills and CB bills, it may not be concluded that they fall under the tet~ m pt'o missot~y notes, bill of exchange, d r a f t , c e r t i f i cat e of d e p o s i t nor d e b t i n s t t' u men t s used for deposit substitutes as defined above. Ho~1ever, i t is wot~thy to note that t'espondent in BIR Ruling No. 036-88 dated February 10, 1988, address ed to the Chief, Banks , Financing & Insurance Division, has issued an opinion that since treasury bills are considered as deposit subst itutes, they are subject to d oc umentary stamp tax under Section 229 of the NI RC. The Com mi~5ioner of Internal Revenue, Bienvenido A. Tan, Jr., based his opinion on Revenue Regulation No. 1 7 - 84, en t it l e d " Income Tax at i on of In t e t~ est Det" ived from Bank Deposit Substitutes". Section 2Ch> of which regulation inc ludes within the scope of the definition deposit substitutes, as follows: (h) De posit substitute shall mean XXX XXX XXX (iii) In the case of other non-financial companies, including the National and local government and its in!Jtr�Jmentalities, all borrowings through the issuance of debt instrument s denoted as treasury bonds, treasury bills, treaG�Jry note& and similar instr�..tments". Again, �..1nder Section 2(h) (b) of said 577

_, DECISION CTA CASE NO. 4256 - 11 - regulation, the following bot~t~owi ngs shall be considered as deposit substitutes� xxxx )()()( )()()( "(b) All borrowings of the National and local government and its in5trumentalities including the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury banda, bills, notes, certificates of indebtedne55 and similar instru ment�"� These BIR opinion and regulation served as the basis for the answer on question number one under Reven�Je Memorandum Cit~cular No. 13- 87 t~elied upon by the petitioner in its petition for review, when it states as follows: "Since NIRC Section 225 <now numbered 189) applies only to documents of conveyance covering instruments stated in NIRC Sections 223 and 224, it follows that documents of conveyance covering in5tr�JmentB stated in NIRC Section 229 are not s�Jb,ject to DST". Accordingly, petitioner alleged that the sale of gov e rnment securities like CB bills and T-bills covered by a confirmation �sale is not subject to DST under Section 189 of the Tax Code since government securities fall within the put~view of instruments stated in NIRC Section 229. However, we disagree with the stand of the petitioner and the pt~evious Commissioner of Internal Revenue in this case. This Court believes _, 578

DECISION CTA CASE NO. 42S6 - 12 - that government sec Lwi ties such a s tt�~ea sut~ y bi 11 s and CB bi 11 s fa 11 under Section 223 , now Section 174 of the Tax Code. Indub i tably, th ey are in the cate gory of "cet~ tificates of ind e btedne ss " and, therefore, theit~ sale or tt~ ansfer is subject to do c �..t mentary stamp tax put~ suant to t he afot~ equoted Secti on 225, now Section 176 of the Tax Code. In addition, it should be noted that the afor ementioned ins t t~ um ent s are to in g"n~ra l as " s ecurities". This te rm, by definition _, of 1a w, "means shares of st ock in corporation and r i ~h ts to subscribe for or to sec Ln~e such shares. The term includes bonds, debent ut~e s, notes, ot~ with coupons ot~ fot~m". <Underscoring fot~ emphasis, Sec . 20(t) NI RC>. Whi le Section 176 uses the tet~ m "cet'tificate of obligation", Section 174 uses the term "cet't i ficat e of indebtedness" and Section 20 of the same Tax Code uses "evidence of indebtedn e ss", this Cour t bP.l ieves that they bear the same meaning but are only being used interchange a bly by the law. The Revised Documentary Stamp Tax Regulation 579

,I DECISION CTA CASE NO. 4256 - 13 - p r omu lgated by the Depat't me nt of Finance on Septem ber 16 , 1924 <XXII 0. G. 11 2 , p. 2335)' provides a very stable and acceptable definition of a "certificate of indebtedness". The " i n r. l�.1de~ only instt'uments havin g the ch a racter of investment securities a s distinguished from instruments evidencing debt s arising in transactions between individual s " (Se c tion 9 >� The basic f e at ut'es of a t t'easut'Y bi 11, rept'oduced be 1ow, wi 11 show that it has the gen ~ra l character . of investment secur itie s : TERMS: 63, 91, 182 and 364 day s PRICE: Issued on a discoun t basis under competitive and n on-competi tive bidding and payable at maturity at face va lue. INTEREST RATE: Detet' mined . by the t' e s �Jlts of the weekly auctions which ~re reflective of market r e te. DENOMINATIONs P10,000, P50, 000 , P1 000,000, P500, 000, P1,000,000, P5,000,000, Pto,ooo,ooo. SECURITY OF ISSUE: Dit' ect, un c onditional and general obligations of the National Government. FORM: Bearer REDEMPTION: Redeemable at maturity at par value. OTHER UTILITIES: May be accepted as collateral in tt'ansact ions with the ,! government. <Pri mer On The Auctio n System For Treasury Bills And Oth e t' Govet' nment 580

_, DECISION CTA CASE NO. 4256 - 14 S ecuriti es , published by the Government Securities Department, Central Bank of the Philippines.) Th is should be distinguished from ordinary debt i n s t r �..t men t s a rising from tt~ ans ac tion s between individuals such as promissory n otes, bills of exchange, drafts, of depo s its and d e posit 5Ubs titutes. believe the inclusion b y the BIR of gov ernment borr owinR& in the defini ti on of "deposit ~P..tb s tit�..ttes" is without legal basis and contt~at~y to Republic Act Nos. 245 and 265 classify t r e a s�..try bills and CB bills t~ espect i ve 1 y as evidence of indebtedness or of inde btedness. Mot' eover, the defini t ion of "deposit su b s tit�..ttes" cleat' ly does not inc l ude within its d e f in it i on b o t~r owings m~ sec u t~ it i e s i s sued by the g overnment. The definition which i s similar to the d e f i nition of "deposit substitut e" under th e Central Bank Act, although not limited ~ o t he in 'l> t r�.tm ent s enumerated, should be confi ned to i n !.ltr�..tment s authorized by the Cent r al Bank of the P hilippines for banks and non - b a nk finan G' 1C\l in te rmediaries, or by the Secm~it i es and Exchan g e Commission of the Philippines industrial, finance companies a nd other non ..:.. 58�1

_, DECISION CTA CASE NO. 4256 - 1~ fin t'\n c ial companies. Appat~ ent 1 y, the obvious intention of the law is to co ver only debt in st r �.1m ent s i s su e d by the p r i v at e s e ct or s . Treas ury bill s and CB bills are i ssued by t h e go vernment for its o wn a c c o u nt and not fot~ bank s a n d non - bank financial instt~umenta l itie s nor fot~ t h e a ccount of other companies. F urthermore, i f the lawmaket~ h a d int e nded to i n c l u de c ~ rtificates of indebtedne s s within the d efin ition of "deposit substitutes", it should not have been specified and tt~ eated sepa t~ ately under Sect ion 174. Also the intention o f the law to tre~t obligations issued by the government ap a rt �from "deposit subst-itute" can be f ou nd in Section 28(b ) (4). For while int e t~est s deposit s ubsti tute a r e be i ng tax ed pursuant to S ection 24 ( e ) o f the Tax Code, i ntere s t on gov e rnment secJ..tt"'i ties are ex c lu ded f t~ om i n come pur s uant to Section 28Cb> <4 >. In other words , intet~ ests on govet~ nm e nt s ec ut~ itie s , unlike i nt erests on deposit s ubstitutes, a r e exem pted from tax t o the extent pt~ ov ided fo r in the Act .a�...1t h o ri zing the issuance of s a id govet~nment secur.i ties. It so happened that in the instant ca~n , Republic Act Nos. 245 & 265 fai 1 to exempt 582

DECISION CTA CASE NO. 4256 - 16 - i n ter est on bills an d CB bills, res pe c tively f r om taxation . Howeve t~ , in the cases as when bonds and securitie s are in t ended for sale i n the i nt et~ nat ion a 1 PD 81 pt~ovides exe mption of income derived therefrom by recipient. Th e inco11e ft~ om bond s and other in st t~uments which t h e Export Processing Zone Autho r ity <EPZR> is a ut h orized to issue are likewise ex e mpted from tax p urs uant to PD 66. In other words, while taxation of "deposit substitute" is go v et~ ned by the p r ovisions of the National Intet~ nal Re v enue Code, taxa tion of govet~ nment secm~ i t i e s a t~ e govet~ ned by s p ec ial laws authorizing their issua nce. Thus, the i n te ntion of the lawmal-<er to tt~ e a t "evidence of _, in d e btedne s s" or secut~ i ties i ss ued by t he government separately is very apparent. In view of all the foregoing, we believe t re.;unt r y bills and Cent ra l Bank bill.s s hould be c l ass ified as "certificate of ind e btedness" under Section 223 (now S ection 174> of th e Tax Code and i t s sale or transfer subject to do c umentar y stamps ta x put'suant to Section 225 (now Section 176) of t h e Tax Code falling undet~ the tet~m "cet~tificate of o bl igation". WHEREFORE, this Court finds the pay�ent of 583

DECISION CTA CASE NO. 4256 - 17 - doct.t111entary sta111ps tax by petition er in order and consequently the clai� for refund is denied. Accordingly, the instant petition for review is h ere by dis�issed without pronounceMent as to costs. SO ORDERED. Q..:4Q.. ~ ERNESTO D. ACOSTA As!1.ocit!lte Jl\dge I CONCURs CE RT I F I CAT I 0 N I hereby certify that thi s deci si on was r e~ched after dl\e consultation bet we en the member s of the Cout' t of Tax App eals i n accot' dance with Sect ion 13, Article VIII of t he Constitution. ~-~Q.~ ERNESTO D. ACOSTA Pre ~ idi nR J�.tdge Court of Tax Appeals 584