G.R. No.

166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by
HSBC through instructions given through electronic messages using SWIFT.

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.

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax
(DST).
The BIR Commissioner Rualo, issued BIR Ruling No. 132-99 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 since it is not the transaction contemplated under Section 181 of the 1997 Tax Code.
From this ruling, HSBC filed administrative claims for the refund of the amount allegedly representing
erroneously paid DST to the BIR.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA.
The CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax
Code do not apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients. It
ruled that the act of debiting the account is not subject to the documentary stamp tax under Section 181. Neither
is the transaction subject to the documentary stamp tax under Section 180 of the same Code. These electronic
message instructions cannot be considered negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred.
The Court of Appeals reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s
investor-clients are subject to DST.
Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its
acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed before the
[CTA], were essentially orders to pay the purchases of securities made by its client-investors and the said
tax was levied against the acceptances and payments by [HSBC] of the subject electronic messages/orders
for payment.
Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for
payment of money but on the acceptance or payment of the said bill or order. The acceptance of a bill or
order is the signification by the drawee of its assent to the order of the drawer to pay a given sum of money
while payment implies not only the assent to the said order of the drawer and a recognition of the drawer’s
obligation to pay such aforesaid sum, but also a compliance with such obligation.
What is vital to the valid imposition of the [DST] under Section 181 is the existence of the
requirement of acceptance or payment by the drawee.

The Court finds for HSBC.

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." A bill of exchange is one of two general forms of
negotiable instruments under the Negotiable Instruments Law.

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.

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.

DST as an excise tax on the privilege of the drawee to accept or pay a bill of exchange or order for the
payment of money, which has been drawn abroad but payable in the Philippines, and on the corresponding
privilege of the drawer to have acceptance of or payment for the bill of exchange or order for the payment of
money which it has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange. Acceptance of a bill of exchange has a very definite meaning
in law. In particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing
and signed by the drawee. It must not express that the drawee will perform his promise by

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.

There had been no acceptance of a bill of exchange or order for the payment of money on the part of
HSBC. To reiterate, there was no bill of exchange or order for the payment drawn abroad and made payable here
in the Philippines. Thus, there was no acceptance as the electronic messages did not constitute the written and
signed manifestation of HSBC to a drawer's order to pay money. As HSBC could not have been an acceptor, then
it could not have made any payment of a bill of exchange or order for the payment of money drawn abroad but
payable here in the Philippines. In other words, HSBC could not have been held liable for DST under Section 230
of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing,
issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus, HSBC erroneously
paid DST on the said electronic messages for which it is entitled to a tax refund.