THIRD DIVISION
G.R. No. 125851 July 11, 2006
ALLIED BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, G.G. SPORTSWEAR MANUFACTURING CORPORATION, NARI GIDWANI, SPOUSES LETICIA AND LEON DE VILLA AND ALCRON INTERNATIONAL LTD., respondents.
D E C I S I O N
QUISUMBING, J.:
This petition for review on certiorari assails (a) the July 31, 1996 Decision1 of the Court of Appeals, ordering respondent G.G. Sportswear Manufacturing Corp. to reimburse petitioner US $20,085; and exonerating the guarantors from liability; and (b) the January 17, 1997 Resolution2 denying the motion for reconsideration.
The facts are undisputed.
On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchased Export Bill No. BDO-81-002 in the amount of US $20,085.00 from respondent G.G. Sportswear Mfg. Corporation (GGS). The bill, drawn under a letter of credit No. BB640549 covered Men's Valvoline Training Suit that was in transit to West Germany (Uniger via Rotterdam) under Cont. #73/S0299. The export bill was issued by Chekiang First Bank Ltd., Hongkong. With the purchase of the bill, ALLIED credited GGS the peso equivalent of the aforementioned bill amounting to P151,474.52 and the receipt of which was acknowledged by the latter in its letter dated June 22, 1981.
On the same date, respondents Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective Letters of Guaranty, holding themselves liable on the export bill if it should be dishonored or retired by the drawee for any reason.
Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing Guaranty/Comprehensive Surety (surety, for brevity), guaranteeing payment of any and all such credit accommodations which ALLIED may extend to GGS. When ALLIED negotiated the export bill to Chekiang, payment was refused due to some material discrepancies in the documents submitted by GGS relative to the exportation covered by the letter of credit. Consequently, ALLIED demanded payment from all the respondents based on the Letters of Guaranty and Surety executed in favor of ALLIED. However, respondents refused to pay, prompting ALLIED to file an action for a sum of money.
In their joint answer, respondents GGS and Nari Gidwani admitted the due execution of the export bill and the Letters of Guaranty in favor of ALLIED, but claimed that they signed blank forms of the Letters of Guaranty and the Surety, and the blanks were only filled up by ALLIED after they had affixed their signatures. They also added that the documents did not cover the transaction involving the subject export bill.
On the other hand, the respondents, spouses de Villa, claimed that they were not aware of the existence of the export bill; they signed blank forms of the surety; and averred that the guaranty was not meant to secure the export bill.
Respondent Alcron, for its part, alleged that as a foreign corporation doing business in the Philippines, its branch in the Philippines is merely a liaison office confined to the following duties and responsibilities, to wit: acting as a message center between its office in Hongkong and its clients in the Philippines; conducting credit investigations on Filipino clients; and providing its office in Hongkong with shipping arrangements and other details in connection with its office in Hongkong. Respondent Alcron further alleged that neither its liaison office in the Philippines nor its then representative, Hans-Joachim Schloer, had the authority to issue Letters of Guaranty for and in behalf of local entities and persons. It also invoked laches against petitioner ALLIED.
GGS and Nari Gidwani filed a Motion for Summary Judgment on the ground that since the plaintiff admitted not having protested the dishonor of the export bill, it thereby discharged GGS from liability. But the trial court denied the motion. After the presentation of evidence by the petitioner, only the spouses de Villa
presented their evidence. The other respondents did not. The trial court dismissed the complaint.
On appeal, the Court of Appeals modified the ruling of the trial court holding respondent GGS liable to reimburse petitioner ALLIED the peso equivalent of the export bill, but it exonerated the guarantors from their liabilities under the Letters of Guaranty. The CA decision reads as follows:
For the foregoing considerations, appellee GGS is obliged to reimburse appellant Allied Bank the amount ofP151,474.52 which was the equivalent of GGS's contracted obligation of US$20,085.00. The lower court however correctly exonerated the guarantors from their liability under their Letters of Guaranty. A guaranty is an accessory contract. What the guarantors guaranteed in the instant case was the bill which had been discharged. Consequently, the guarantors should be correspondingly released.
WHEREFORE, judgment is hereby rendered ordering defendant-appellee G.G. Sportswear Mfg.
Corporation to pay appellant the sum of P151,474.52 with interest thereon at the legal rate from the filing of the complaint, and the costs.
SO ORDERED.3
The petitioner filed a Motion for Reconsideration, but to no avail. Hence, this appeal, raising a single issue: WHETHER OR NOT RESPONDENTS NARI, DE VILLA AND ALCRON ARE LIABLE UNDER THE LETTERS OF GUARANTY AND THE CONTINUING GUARANTY/ COMPREHENSIVE SURETY NOTWITHSTANDING THE FACT THAT NO PROTEST WAS MADE AFTER THE BILL, A FOREIGN BILL OF EXCHANGE, WAS DISHONORED.4
The main issue raised before us is: Can respondents, in their capacity as guarantors and surety, be held jointly and severally liable under the Letters of Guaranty and Continuing Guaranty/Comprehensive Surety, in the absence of protest on the bill in accordance with Section 152 of the Negotiable Instruments Law?5
The petitioner contends that part of the Court of Appeals' decision exonerating respondents Nari Gidwani, Alcron International Ltd., and spouses Leon and Leticia de Villa as guarantors and/or sureties. Respondents rely on Section 152 of the Negotiable Instruments Law to support their contention.
Our review of the records shows that what transpired in this case is a discounting arrangement of the subject export bill, between petitioner ALLIED and respondent GGS. Previously, we ruled that in a letter of credit transaction, once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods.6 However, in most cases, instead of going to the issuing bank to claim payment, the buyer (or the beneficiary of the draft) may approach another bank, termed the negotiating bank, to have the draft discounted.7 While the negotiating bank owes no contractual duty toward the beneficiary of the draft to discount or purchase it, it may still do so. Nothing can prevent the negotiating bank from requiring additional requirements, like contracts of guaranty and surety, in consideration of the discounting arrangement.
In this case, respondent GGS, as the beneficiary of the export bill, instead of going to Chekiang First Bank Ltd. (issuing bank), went to petitioner ALLIED, to have the export bill purchased or discounted. Before ALLIED agreed to purchase the subject export bill, it required respondents Nari Gidwani and Alcron to execute Letters of Guaranty, holding them liable on demand,in case the subject export bill was dishonored or retired for any reason.8
Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villa executed Continuing Guaranty/Comprehensive Surety, holding themselves jointly and severally liable on any and all credit accommodations, instruments, loans, advances, credits and/or other obligation that may be granted by the petitioner ALLIED to respondent GGS.9 The surety also contained a clause whereby said sureties waive protest and notice of dishonor of any and all such instruments, loans, advances, credits and/or obligations.10 These letters of guaranty and surety are now the basis of the petitioner's action.
At this juncture, we must stress that obligations arising from contracts have the force of law between the parties and should be complied with in good faith.11 Nothing can stop the parties from establishing stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.12
Here, Art. 2047 of the New Civil Code is pertinent. Art. 2047 states,
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
In this case, the Letters of Guaranty and Surety clearly show that respondents undertook and bound themselves as guarantors and surety to pay the full amount of the export bill.
Respondents claim that the petitioner did not protest13 upon dishonor of the export bill by Chekiang First Bank, Ltd. According to respondents, since there was no protest made upon dishonor of the export bill, all of them, as indorsers were discharged under Section 152 of the Negotiable Instruments Law.
Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by respondents, is not pertinent to this case. There are well-defined distinctions between the contract of an indorser and that of a guarantor/surety of a commercial paper, which is what is involved in this case. The contract of indorsement is primarily that of transfer, while the contract of guaranty is that of personal security.14 The liability of a guarantor/surety is broader than that of an indorser. Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time, he will be discharged from liability thereon.15 On the other hand, except where required by the provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety's liability.16 He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.17 Therefore, no protest on the export bill is necessary to charge all the respondents jointly and severally liable with G.G. Sportswear since the respondents held themselves liable upon demand in case the instrument was dishonored and on the surety, they even waived notice of dishonor as stipulated in their Letters of Guarantee.
As to respondent Alcron, it is bound by the Letter of Guaranty executed by its representative Hans-Joachim Schloer. As to the other respondents, not to be overlooked is the fact that, the "Suretyship Agreement" they executed, expressly contemplated a solidary obligation, providing as it did that "… the sureties hereby guarantee jointly and severally the punctual payment of any and all such credit accommodations, instruments, loans, … which is/are now or may hereafter become due or owing … by the borrower".18 It is a cardinal rule that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control.19 In the present case, there can be no mistaking about respondents' intent, as sureties, to be jointly and severally obligated with respondent G.G. Sportswear.
Respondents also aver that, (1) they only signed said documents in blank; (2) they were never made aware that said documents will cover the payment of the export bill; and (3) laches have set in.
Respondents' stance lacks merit. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his concerns. Hence, the natural presumption is that one does not sign a document without first informing himself of its contents and consequences. Said presumption acquires greater force in the case at bar where not only one document but several documents were executed at different times and at different places by the herein respondent guarantors and sureties.20
In this case, having affixed their consenting signatures in several documents executed at different times, it is safe to presume that they had full knowledge of its terms and conditions, hence, they are precluded from asserting ignorance of the legal effects of the undertaking they assumed thereunder. It is also presumed that private transactions have been fair and regular21 and that he who alleges has the burden of proving his allegation with the requisite quantum of evidence.22 But here the records of this case do not support their claims.
of the court and since laches is an equitable doctrine, its application is controlled by equitable considerations.23Respondents, however, failed to show that the collection suit against them as sureties was inequitable. Remedies in equity address only situations tainted with inequity, not those expressly governed by statutes.24
After considering the facts of this case vis-à-vis the pertinent laws, we are constrained to rule for the petitioner.
WHEREFORE, the instant petition is GRANTED.The assailed Decision of the Court of Appeals is
herebyMODIFIED, and we hold that respondent Alcron International Ltd. is subsidiarily liable, while respondents Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and severally liable together with G.G. Sportswear, to pay petitioner Bank the sum of P151,474.52 with interest at the legal rate from the filing of the complaint, and the costs.
SO ORDERED.
SECOND DIVISION
G.R. No. 148211 July 25, 2006 SINCERE Z. VILLANUEVA, petitioner,
vs.
MARLYN P. NITE,* respondent.
D E C I S I O N
CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that the Court of Appeals (CA) erred in annulling and setting aside the Regional Trial Court (RTC) decision on the ground of extrinsic fraud.
The facts follow.1
Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan, respondent issued petitioner an Asian Bank Corporation (ABC) check (Check No. AYA 020195) in the amount of P325,500 dated February 8, 1994. The date was later changed to June 8, 1994 with the consent and concurrence of petitioner.
The check was, however, dishonored due to a material alteration when petitioner deposited the check on due date. On August 24, 1994, respondent, through her representative Emily P. Abojada, remitted P235,000 to petitioner as partial payment of the loan. The balance of P174, 000 was due on or before December 8, 1994.
On August 24, 1994, however, petitioner filed an action for a sum of money and damages (Civil Case No. Q-94-21495) against ABC for the full amount of the dishonored check. And in a decision dated May 23, 1997, the RTC of Quezon City, Branch 101 ruled in his favor.2 When respondent went to ABC Salcedo Village Branch on June 30, 1997 to withdraw money from her account, she was unable to do so because the trial court had ordered ABC to pay petitioner the value of respondent’s ABC check.
On August 25, 1997, ABC remitted to the sheriff a manager’s check amounting to P325,500 drawn on respondent’s account. The check was duly received by petitioner on the same date.
Respondent then filed a petition in the CA seeking to annul and set aside the trial court’s decision ordering ABC to pay petitioner the value of the ABC check.3 The CA ruled:
WHEREFORE, premises considered, the petition is GRANTED and the Decision dated May 23,
1997 of the public respondent is hereby ANNULLED and SET ASIDE for extrinsic fraud. [Petitioner] Villanueva is hereby ordered to pay [Nite] —
1) the sum of [P146,500] as actual damages plus interest at 12% per annum from August 25, 1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and 4) the sum of [P50,000] as attorney’s fees and cost of suit.
SO ORDERED.4
Thus, this petition. We find for respondent.
Annulment of judgment is a remedy in law independent of the case where the judgment sought to be annulled is promulgated. It can be filed by one who was not a party to the case in which the assailed judgment was rendered.Section 1 of Rule 47 provides:
Section 1. Coverage. – This Rule shall govern the annulment by the Court of Appeals of judgments or final orders and resolutions in civil actions of Regional Trial Courts for which the ordinary remedies of new trial, appeal, petition for relief or other appropriate remedies are no longer available through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule 47. The ordinary remedies of new trial, appeal and petition for relief were not available to her for the simple reason that she was not made a party to the suit against ABC. Thus, she was neither able to participate in the original proceedings nor resort to the other remedies because the case was filed when she was abroad.
Annulment of judgment may be based only on extrinsic fraud and lack of jurisdiction.5 Extrinsic or collateral fraud pertains to such fraud which prevents the aggrieved party from having a trial or presenting his case to the court, or is used to procure the judgment without fair submission of the controversy.6 This refers to acts intended to keep the unsuccessful party away from the courts as when there is a false promise of compromise or when one is kept in ignorance of the suit.7
We uphold the appellate court’s finding of extrinsic fraud:
Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing that the balance of P174,000.00 shall be paid on or before December 8, 1994, [Sincere] filed his complaint against [ABC] for the full amount of the dishonored check in the sum of P320,500.00 without impleading petitioner. The apparent haste by which [Sincere] filed his complaint and his failure to implead [Marlyn] clearly shows his intent to prevent [Marlyn] from opposing his action.
[A]t the time news about [Marlyn] having left the country was widespread, appearing even in print media as early as May 1994, [Marlyn] paid [Sincere] the amount of P235,000.00 as partial payment on [August 18, 1994], through a representative.
Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994, Sincere] instituted an action for collection with damages for the whole amount of the issued check.
[Sincere] does not deny knowledge of such payment neither of the fact that he concurred in settling the balance of P174,000.00 on December 8, 1994.
[His] actuation and pronouncement shows not only bad faith on his part but also of his fraudulent intention to completely exclude [Marlyn] from the proceedings in the court a quo. By doing what he did he prevented the [trial court] from fully appreciating the particulars of the case.8
In any event, the RTC decision may be annulled for lack of jurisdiction over the person of respondent. The pertinent provisions of the Negotiable Instruments Law are enlightening:
SEC. 185. Check, defined. – A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.9 (emphasis ours)
SEC. 189. When check operates as an assignment. – A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or certifies the check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot, in view of the cited sections, sue the bank. The payee should instead sue the drawer who might in turn sue the
bank. Section 189 is sound law based on logic and established legal principles: no privity of contract exists between the drawee-bank and the payee. Indeed, in this case, there was no such privity of contract between ABC and petitioner.
Petitioner should not have sued ABC. Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.10 None of the foregoing exceptions to the relativity of contracts applies in this case.
The contract of loan was between petitioner and respondent. No collection suit could prosper without respondent who was an indispensable party. Rule 3, Sec. 7 of the Rules of Court states:
Sec. 7. Compulsory joinder of indispensable parties. – Parties in interest without whom no final
determination can be had of an action shall be joined either as plaintiffs or defendants.
(emphasis ours)
An indispensable party is one whose interest in the controversy is such that a final decree will necessarily affect his rights. The court cannot proceed without his presence.11 If an indispensable party is not impleaded, any judgment is ineffective.12 On this, Aracelona v. Court of Appeals13 declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest without whom there can be no final determination of an action. As such, they must be joined either as plaintiffs or as defendants. The general rule with reference to the making of parties in a civil action requires, of course, the joinder of all necessary parties where possible, and the joinder of all indispensable parties under any and all conditions, their presence being sine qua non for the exercise of judicial power. It is precisely "when an indispensable party is not before the court (that) the action should be dismissed." The absence of an indispensable party renders all subsequent actions of the court null and void for want of authority to act, not only as to the absent parties but even as to those present.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in CA-G.R. SP No.
44971 isAFFIRMED in toto. Costs against petitioner.
SO ORDERED.
FIRST DIVISION
G.R. No. 137002 July 27, 2006
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Court, as amended, seeking to set aside a Decision1 of the Court of Appeals dated 14 August 2004 ordering the petitioner to pay respondent Commissioner of Internal Revenue (CIR) deficiency documentary stamp tax of P690,030 for the year 1986, inclusive of surcharge and compromise penalty, plus 20% annual interest until fully paid. The Court of Appeals in its assailed Decision affirmed the Decision2 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 Central Bank of the Philippines (now Bangko Sentral ng Pilipinas) U.S. dollars for P1,608,541,900.00. BPI instructed, by cable, its correspondent bank in New York to transfer U.S. dollars deposited in BPI's account therein to the Federal Reserve Bank in New York for credit to the Central Bank's account therein. Thereafter, the Federal Reserve Bank sent to the Central Bank confirmation that such funds had been credited to its account and the Central Bank promptly transferred to the petitioner's account in the
Philippines the corresponding amount in Philippine pesos.3
During the period starting 11 June 1985 until 9 March 1987, the Central Bank enjoyed tax exemption privileges pursuant to Resolution No. 35-85 dated 3 May 1985 of the Fiscal Incentive Review Board. However, in 1985, Presidential Decree No. 1994 -- An Act Further Amending Certain Provisions of the National Internal Revenue Code was enacted. This law amended Section 222 (now 173) of the National Internal Revenue Code (NIRC), by adding the foregoing:
[W]henever 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.
In 1988, respondent CIR ordered an investigation to be made on BPI's sale of foreign currency. As a result thereof, the CIR issued a pre-assessment notice informing BPI that in accordance with Section 195 (now Section 182)4 of the NIRC, BPI was liable for documentary stamp tax at the rate of P0.30 per P200.00 on all foreign exchange sold to the Central Bank. Total tax liability was assessed at P3,016,316.06, which consists of a documentary stamp tax liability 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 pre-assessment notice. Nevertheless, the CIR issued Assessment No. FAS-5-86-88-003022, dated 30 September 1988, which BPI received on 11 October 1988. BPI formally protested the assessment, but the protest was denied. On 10 July 1990, BPI received the final notice and demand for payment of its 1986 assessment for deficiency documentary stamp tax in the amount of P3,016,316.06. Consequently, a petition for review was filed with the CTA on 9 August 1990.6
On 31 May 1994, the CTA rendered the Decision holding BPI liable for documentary stamp tax in connection with the sale of foreign exchange to the Central Bank from the period 29 July 1986 to 8 October 1986 only, thus substantially reducing the CIR's original assessment. The dispositive portion of the said Decision reads:
WHEREFORE, premises considered, petitioner is hereby ordered to pay respondent Commissioner of Internal Revenue, the amount of P690,030 inclusive of surcharge and compromise penalty, plus 20% annual interest until fully paid pursuant to Section 249 (cc) (sic) (3) of the Tax Code.7
The CTA ruled that BPI's instructions to its correspondent bank in the U.S. to pay to the Federal Reserve Bank in New York, for the account of the Central Bank, a sum of money falls squarely within the scope of Section 51 of The Revised Documentary Stamp Tax Regulations (Regulations No. 26), dated 26 March 1924, the implementing rules to the earlier provisions on documentary stamp tax, which provides that: 8
What may be regarded as telegraphic transfer. — a local bank cables to a certain bank in a foreign country with which bank said local bank has a credit, and directs that foreign bank to pay to another bank or person in the same locality a certain sum of money, the document for and in respect such transaction will be regarded as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code.
Nevertheless, the CTA also noted that although Presidential Decree No. 1994, the law which passes the liability on to the non-exempt party, was published in the Official Gazette issue of 2 December 1985, the same was released to the public only on 18 June 1986, as certified by the National Printing Office. Therefore, Presidential Decree No. 1994 took effect only in July 1986 or 15 days after the issue of Official Gazette where the law was actually published, that is, circulated to the public. As a result of the delay, BPI's transactions prior to the effectivity of Presidential Decree No. 1994 were not subject to documentary stamp tax. Hence, the CTA reduced the assessment from P3,016,316.06 to P690,030.00, plus 20% annual interest until fully paid pursuant to Section 249(c) of the NIRC.9
Both parties filed their respective Motions for Reconsideration, which the CTA denied in a Resolution dated 26 September 1994. BPI filed a Petition for Review with the Court of Appeals on 11 November 1994. On 14 August 1998, the Court of Appeals affirmed the Decision of the CTA. The Court of Appeals ruled that the documentary stamp tax imposed under Section 195 (now Section 182) is not limited only to foreign bills of exchange and letters of credit but also includes the orders made by telegraph or by any other means for the payment of money made by any person drawn in but payable out of the Philippines. The Court of Appeals also maintained that telegraphic transfers, such as the one BPI sent to its correspondent bank in the U.S., are proper subjects for the imposition of documentary stamp tax under Section 195 (now Section
182) and Section 51 of Revenue Regulation No. 26. The Court of Appeals likewise affirmed the CTA's Decision imposing a 20% delinquency on the reduced assessment, in accordance with Section 24(c)(3) of the NIRC and the case of Philippine Refining Company v. Court of Appeals.10
Petitioner filed a Partial Motion for Reconsideration on 9 September 1998, which the Court of Appeals denied on 29 December 1998.11
Hence this petition, wherein the petitioner raised the following issues: I
WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING THAT SALES OF FOREIGN EXCHANGE (SPOT CASH), AS DISTINGUISHED FROM SALES OF FOREIGN BILLS OF EXCHANGE, ARE SUBJECT TO DOCUMENTARY STAMP TAX UNDER SECTION 182 OF THE TAX CODE
II
WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN AFFIRMING THE IMPOSITION OF A DELINQUENCY INTEREST OF 20% ON THE REVISED DEFICIENCY STAMP ASSESSMENT DESPITE A REDUCTION THEREOF BY THE COUR T OF TAX APPEALS WHICH ERRED IN ITS ORIGINAL ASSESSMENT.12
The first issue raised by the petitioner is whether BPI is liable for documentary stamp taxes in connection with its sale of foreign exchange to the Central Bank in 1986 under Section 195 (now Section 182) of the NIRC, quoted hereunder:
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, by telegraph or otherwise, for the payment of money issued by express or steamship companies or by any person or persons) drawn in but payable out of the Philippines in a set of three or more according to the custom of merchants and bankers, 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 such bill of exchange or letter of credit, or the Philippine equivalent of such face value, if expressed in foreign country.
To determine what is being taxed under this section, a discussion on the nature of the acts covered by Section 195 (now Section 182) of the NIRC is indispensable. This section imposes a documentary stamp tax on (1) foreign bills of exchange, (2) letters of credit, and (3) orders, by telegraph or otherwise, for the payment of money issued by express or steamship companies or by any person or persons. This enumeration is further limited by the qualification that they should be drawn in the Philippines and payable outside of the Philippines.
A definition of a "bill of exchange" is provided by Section 39 of Regulations No. 26, the rules governing documentary taxes promulgated by the Bureau of Internal Revenue (BIR) in 1924:
Sec. 39. Definition of "bill of exchange". The term bill of exchange denotes checks, drafts, and all 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 stated date.
Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates that it is an "order for the payment of money" and specifies the particular requisites that make it negotiable.
Sec. 126. Bill of exchange defined. – 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 fixed or determinable future time a sum certain in money to order or to bearer.
Section 129 of the same law classifies bills of exchange as inland and foreign, the distinction is laid down by where the bills are drawn and paid. Thus, a "foreign bill of exchange" may be drawn outside the Philippines, payable outside the Philippines, or both drawn and payable outside of the Philippines.
Sec. 129. Inland and foreign bills of exchange. -- An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill.
x x x
The Code of Commerce loosely defines a "letter of credit" and provides for its essential conditions, thus: Art. 567. Letters of credit are those issued by one merchant to another or for the purpose of attending to a commercial transaction.
Art 568. The essential conditions of letters of credit shall be:
1. To be issued in favor of a definite person and not to order.
2. To be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly.
A more explicit definition of a letter of credit can be found in the commentaries:
A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person making the advancement, or accept the bills drawn upon himself for the like amount.13
A bill of exchange and a letter of credit may differ as to their negotiability, and as to who owns the funds used for the payment at the time payment is made. However, in both bills of exchange and letters of credit, a person orders another to pay money to a third person.
The phrase "orders, by telegraph or otherwise, for the payment of money" used in reference to documentary stamp taxes may be found in an earlier documentary tax provision, Section 1449(i) of the Administrative Code of 1917, which was substantially reproduced in Section 195 (now Section 182) of the NIRC. Regulations No. 26, which provided the rules and guidelines for the documentary stamp tax imposed under the Administrative Code of 1917, contains an explanation for the phrase "orders, by telegraph or otherwise, for the payment of money":
What may be regarded as telegraphic transfer. — a local bank cables to a certain bank in a foreign country with which bank said local bank has a credit, and directs that foreign bank to pay to another bank or person in the same locality a certain sum of money, the document for and in respect such transaction will be regarded as a telegraphic transfer, taxable under the provisions of Section 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 of money, which is to be credited to the account of the Central Bank. These are the same acts described under Section 51 of Regulations No. 26, interpreting the documentary stamp tax provision in the Administrative Code of 1917, which is substantially identical to Section 195 (now Section 182) of the NIRC. These acts performed by BPI incidental to its sale of foreign exchange to the Central Bank are included among those taxed under Section 195 (now Section 182) of the NIRC.
BPI alleges that the assailed decision must be reversed since the sale between BPI and the Central Bank of foreign exchange, as distinguished from foreign bills of exchange, is not subject to the documentary stamp taxes prescribed in Section 195 (now Section 182) of the NIRC. This argument leaves much to be desired. In this case, it is not the sale of foreign exchange per se that is being taxed under Section 195 of the NIRC. This section refers to a documentary stamp tax, which is an excise upon the facilities used in the transaction of the business separate and apart from the business itself.14 It is not a tax upon the business itself which is so transacted, but it is a duty upon the facilities made use of and actually employed in the transaction of the business, and separate and apart from the business itself.15
Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of credit, and orders of payment for money, drawn in Philippines, but payable outside the Philippines. From this enumeration, two common elements need to be present: (1) drawing the instrument or ordering a drawee, within the Philippines; and (2) ordering that drawee to pay another person a specified amount of money outside the Philippines. What is being taxed is the facility that allows a party to draw the draft or make the order to pay within the Philippines and have the payment made in another country.
A perusal of the facts contained in the record in this case shows that BPI, while in the Philippines, ordered its correspondent bank by cable to make a payment, and that payment is to be made to the Federal Reserve Bank in New York. Thus, BPI made use of the aforementioned facility. As a result, BPI need not
have sent a representative to New York, nor did the Federal Reserve Bank have to go to the Philippines to collect the funds which were to be credited to the Central Bank's account with them. The transaction was made at the shortest time possible and at the greatest convenience to the parties. The tax was laid upon this privilege or facility used by the parties in their transactions, transactions which they may effect through our courts, and which are regulated and protected by our government.
BPI further alleges that since the funds transferred to the Federal Reserve Bank were taken from BPI's account with the correspondent bank, this is not the transaction contemplated under Section 51 of Regulations No. 26. BPI argues that Section 51 of Regulations No. 26, in using the phrase "with which local bank has credit," involves transactions wherein the drawee bank pays with its own funds and excludes from the coverage of the law situations wherein the funds paid out by the correspondent bank are owned by the drawer. In the case of Republic of the Philippines v. Philippine National Bank,16 the Court equated "credit" with the term "deposits," and identified the depositor as the creditor and the bank as the debtor.
And as correctly stated by the trial court, the term "credit" in its usual meaning is a sum credited on the books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment. It is the correlative to debt or indebtedness, and that which is due to any person, as distinguished from that which he owes. The same is true with the term "deposits" in banks where the relationship created between the depositor and the bank is that of creditor and debtor.
By this definition of "credit," BPI's deposit account with its correspondent bank is much the same as the "credit" referred to in Section 51 of Regulations No. 26. Thus, the fact that the funds transferred to the Central Bank's account with the Federal Reserve Bank are from BPI's deposit account with the correspondent bank can only underline that the present case is the same situation described under Section 51 of Regulations No. 26.
Moreover, the fact that the funds belong to BPI and were not advanced by the correspondent bank will not remove the transaction from the coverage of Section 195 (now Section 182) of the NIRC. There are transactions covered by this section wherein funds belonging to the drawer are used for payment. A bill of exchange, when drawn in the Philippines but payable in another country, would surely be covered by this section. And in the case of a bill of exchange, the funds may belong to the drawer and need not be advanced by the drawee, as in the case of a check or a draft. In the description of a draft provided hereunder, the drawee is in possession of funds belonging to the drawer of the bill:
A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from each other. It is an order made by one person, say the buyer of goods, addressed to a person having in his possession funds of such buyer ordering the addressee to pay the purchase price to the seller of the goods. Where the order is made by one bank to another, it is referred to as a bank draft.17
BPI argues that the foreign exchange sold was deposited and transferred within the U.S. and is therefore outside Philippine territory. This argument is unsubstantial. The documentary stamp tax is not imposed on the sale of foreign exchange, rather it is an excise tax on the privilege or facility which the parties used in their transaction. In the case of Allied Thread Co., Inc. v. City Mayor of Manila,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, and hence is in the nature of an excise tax.
The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the excise, nor upon the physical location of the property and in connection with the act or occupation taxed, but depends upon the place in
which the act is performed or occupation engaged in (Emphasis supplied).
In this case, the act of BPI instructing the correspondent bank to transfer the funds to the Federal Reserve Bank was performed in the Philippines. Therefore, the excise tax may be levied by the Philippine government. Section 195 (now Section 182) of the NIRC would be rendered invalid if the fact that the payment was made outside of the country can be used as a basis for nonpayment of the tax.
The second issue is whether the delinquency interest of 20% per annum, as provided under Section 249(c) (3) of the NIRC, is applicable in this case.
In the case of Philippine Refining Company v. Court of Appeals,19 this Court categorically ruled that even if an assessment was later reduced by the courts, a delinquency interest should still be imposed from the time demand was made by the CIR.
As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the subject of the demand letter of respondent Commissioner dated April 11, 1989, should have been paid within thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the delinquency penalties of 25% surcharge and interest of 20% accrued from April 11, 1989. The fact that petitioner appealed the assessment to the CTA and that the same was modified does not relieve petitioner of the penalties incident to delinquency. The reduced amount of P237,381.25 is but a part of the original assessment of P1,892,584.00.
This doctrine is consistent with the earlier decisions of this Court justifying the imposition of additional charges and interests incident to delinquency by explaining that the nature of additional charges is compensatory and not a penalty.
The above legal provision makes no distinctions nor does it establish exceptions. It directs the collection of the surcharge and interest at the stated rate upon any sum or sums due and unpaid after the dates prescribed in subsections (b), (c), and (d) of the Act for the payment of the amounts due. The provision therefore is mandatory in case of delinquency. This is justified because the intention of the law is precisely to discourage delay in the payment of taxes due to the State and, in this sense, the surcharge and interest charged are not penal but compensatory in nature – they are compensation to the State for the delay in payment, or for the concomitant use of the funds by the taxpayer beyond the date he is supposed to have paid them 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 the government to collect interest from a taxpayer who, by the government's error, received a refund which was not due him.
Even though [the] taxpayer here did not request the refund made to him, and the situation is entirely due to an error on the part of the government, taxpayer and not the government has had the use of the money during the period involved and it is not unjustly penalizing taxpayer to require him to pay compensation for this use of money.
Based on established doctrine, these charges incident to delinquency are compensatory in nature and are imposed for the taxpayers' use of the funds at the time when the State should have control of said funds. Collecting such charges is mandatory. Therefore, the Decision of the Court of Appeals imposing a 20% delinquency interest over the assessment reduced by the CTA was justified and in accordance with Section 249(c)(3) of the NIRC.
WHEREFORE, premises considered, this Court DENIES this petition and AFFIRMS the Decision of the
Court of Appeals in CA-G.R. SP No. 57362 dated 14 August 1998, ordering that petitioner Bank of the Philippine Islands to pay Respondent Commissioner of Internal Revenue the deficiency documentary stamp tax in the amount ofP690,030.00 inclusive of surcharge and compromise penalty, plus 20% annual interest from 7 June 1990 until fully paid. Costs against the petitioner.
SO ORDERED.
