J.A.B. Bulao & Associates

CASE 2012-0054: COMMISSIONER OF INTERNAL REVENUE VS. PILIPINAS SHELL PETROLEUM CORPORATION (G.R. NO. 188497, APRIL 25, 2012, VILLARAMA, JR., J.) SUBJECT/S: WHAT IS EXCISE TAX; WHAT IS INDIRECT TAX?  DIFFERENCE BETWEEN TAX LIABILITY AND TAX BURDEN; WHEN TAX EXEMPTION IS ALLOWED; STRICT INTERPRETATION OF TAX EXEMPTION AGAINST THE TAXPAYER. (BRIEF TITLE: CIR VS. PILIPINAS SHELL)

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DISPOSITIVE:

WHEREFORE, the petition for review on certiorari is GRANTED.  The Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE.   The claims for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.

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SUBJECTS/DOCTRINES/DIGEST:

WHO SHALL CLAIM REFUND OF EXCISE TAXES ON PETROLEUM PRODUCTS SOLD TO INTERNATIONAL CARRIERS?

BASED ON PREVIOUS CASES THE STATUTORY TAXPAYER, THE LOCAL MANUFACTURER OF THE PETROLEUM PRODUCTS WHO IS DIRECTLY LIABLE FOR THE PAYMENT OF EXCISE TAX ON THE SAID GOODS, IS THE PROPER PARTY TO SEEK A TAX REFUND.

(NOTE: THE ISSUE RAISED IN THIS CASE IS DIFFERENT: WHETHER PILIPINAS SHELL CAN CLAIM TAX REFUNDS FOR EXCISE TAXES THEY PAY WHICH WERE NOT PASSED ON TO INTERNATIONAL CARRIERS WHO ARE EXEMPT FROM EXCISE TAXES. THE PRICE OF OIL TO THESE INTERNATIONAL CARRIERS DO NOT INCLUDE EXCISE TAXES.)

In the previous cases^[1][15]  decided by this Court involving excise taxes on petroleum products sold to international carriers, what was only resolved is the question of who is the proper party to claim the refund of excise taxes paid on petroleum products if such tax was either paid by the international carriers themselves or incorporated into the selling price of the petroleum products sold to them.  We have ruled in the said cases that the statutory taxpayer, the local manufacturer of the petroleum products who is directly liable for the payment of excise tax on the said goods, is the proper party to seek a tax refund. Thus, a foreign airline company who purchased locally manufactured petroleum products for use in its international flights, as well as a foreign oil company who likewise bought petroleum products from local manufacturers and later sold these to international carriers, have no legal personality to file a claim for tax refund or credit of excise taxes previously paid by the local manufacturers even if the latter passed on to the said buyers the tax burden in the form of additional amount in the price.

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WHAT ARE EXCISE TAXES?

TAXES APPLICABLE TO CERTAIN GOODS PRODUCED IN THE PHILIPPINES AND TO CERTAIN GOODS IMPORTED INTO THE PHILIPPINES. THESE TAXES ARE IN ADDITION TO VAT.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported into the Philippines. These taxes are imposed in addition to the value-added tax (VAT).^[2][16]

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SEC 148 OF NIRC PROVIDES THAT EXCISE TAXES ATTACH TO PETROLEUM PRODUCTS AS SOON AS THEY ARE IN EXISTENCE. SECTION 135 PROVIDES THAT INTERNATIONAL CARRIERS ARE EXEMPT FROM PAYMENT OF EXCISE TAXES ON PETROLEUM PRODUCTS. PILIPINAS SHELL PAID EXCISE TAXES ON PETROLEUM PRODUCTS SOLD  TO INTERNATIONAL CARRIERS. THE EXCISE TAXES ON THESE PRODUCTS WERE NOT PASSED ON TO INTERNATIONAL CARRIERS DUE TO SUCH EXEMPTION.  IS PILIPINAS SHELL ENTITLED TO TAX REFUND?

NO. A TAX EXEMPTION BEING ENJOYED BY THE BUYER CANNOT BE THE BASIS OF A CLAIM FOR TAX EXEMPTION BY THE MANUFACTURER OR SELLER OF THE GOODS FOR ANY TAX DUE TO IT AS THE MANUFACTURER OR SELLER.

As to petroleum products, Sec. 148 provides that excise taxes attach to the following refined and manufactured mineral oils and motor fuels as soon as they are in existence as such:

(a)    Lubricating oils and greases;

(b)    Processed gas;

(c)    Waxes and petrolatum;

(d)    Denatured alcohol to be used for motive power;

(e)    Naphtha, regular gasoline and other similar products of distillation;

(f)     Leaded premium gasoline;

(g)    Aviation turbo jet fuel;

(h)    Kerosene;

(i)     Diesel fuel oil, and similar fuel oils having more or less the same generating power;

(j)     Liquefied petroleum gas;

(k)    Asphalts; and

(l)     Bunker fuel oil and similar fuel oils having more or less the same generating capacity.  

Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and indigenous petroleum are required to be paid before their removal from the place of production.^[3][17]  However, Sec. 135 provides:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to the following are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and

(c)  Entities which are by law exempt from direct and indirect taxes.

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        In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue^[4][22] this Court held that petitioner manufacturer who sold its oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim exemption from the payment of sales tax simply because its buyer NPC is exempt from taxation.  The Court explained that the percentage tax on sales of merchandise imposed by the Tax Code is due from the manufacturer and not from the buyer.

        Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on grounds that what was involved in the latter is a tax on the transaction (sales) and not excise tax which is a tax on the goods themselves, and that the exemption sought therein was anchored merely on the tax-exempt status of the buyer and not a specific provision of law exempting the goods sold from the excise tax.  But as already stated, the language of Sec. 135 indicates that the tax exemption mentioned therein is conferred on specified buyers or consumers of the excisable articles or goods (petroleum products).  Unlike Sec. 134 which explicitly exempted the article or goods itself  (domestic denatured alcohol) without due regard to the tax status of the buyer or purchaser, Sec. 135 exempts from excise tax petroleum products which were sold to international carriers and other tax-exempt agencies and entities. 

Considering that the excise taxes attaches to petroleum products “as soon as they are in existence as such,”^[5][23]  there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then of respondent’s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135 (a) for their purchases of locally manufactured petroleum products.  Pursuant to our ruling in Philippine Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller.   The excise tax imposed on petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers.

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BUT EXCISE TAXES ARE BASICALLY AN INDIRECT TAX WHICH MEANS THAT THESE CAN BE PASSED ON TO THE BUYER. IN OTHER WORDS, THE SELLER RECOVERS WHAT IT PAYS FOR EXCISE TAXES. WHY COULD PILIPINAS SHELL NOT RECOVER THE EXCISE TAXES IT PAID FOR THE PETROLEUM PRODUCTS SOLD TO INTERNATIONAL CARRIERS?

BECAUSE WHAT PILIPINAS SHELL CAN PASS TO ITS BUYER  IS ONLY THE TAX BURDEN NOT THE TAX LIABILITY. PILIPINAS SHELL HAS THE TAX LIABILITY. SINCE INTERNATIONAL CARRIERS ARE EXEMPT FROM EXCISE TAX SUCH BURDEN CANNOT BE PASSED TO THEM.

In Maceda v. Macaraig, Jr.,^[6][24] the Court specifically mentioned excise tax as an example of an indirect tax where the tax burden can be shifted to the buyer:

          On the other hand, “indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else”. For example, the excise and ad valorem taxes that the oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the “cash” and/or “selling price.”

        An excise tax is basically an indirect tax.  Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.  Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.  When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.^[7][25]

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax exemptions privileges being enjoyed by NPC under existing laws, the tax burden may not be shifted to it by the oil companies who shall pay for fuel oil taxes on oil they supplied to NPC.  Thus:

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC.  By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold.  Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation.  This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did not enjoy exemption from indirect taxes.   This means also, on the other hand, that the NPC may refuse to pay that part of the “normal” purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR.  If NPC nonetheless purchases such oil from the oil companies – because to do so may be more convenient and ultimately less  costly for NPC than NPC itself importing and hauling and storing the oil from overseas – NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.^[8][26]  (Emphasis supplied.)

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Contrary to respondent’s assertion that the above amendment to the former provision of the 1977 Tax Code supports its position that it was not liable for excise tax on the petroleum products sold to international carriers, we find that no such inference can be drawn from the words used in the amended provision or its introductory part.  Founded on the principles of international comity and reciprocity, P.D. No. 1359 granted exemption from payment of excise tax but only to foreign international carriers who are allowed to purchase petroleum products free of specific tax provided the country of said carrier also grants tax exemption to Philippine carriers.   Both the earlier amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers.

        Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and  absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden  of the excise tax to the international carriers who buys petroleum products from the local manufacturers.  Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers.  Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.

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BUT CAN PILIPINAS SHELL NOT INVOKE THE PRINCIPLE OF EQUITY?

NO. THE TAX REFUND IT SEEKS IS IN THE NATURE OF TAX EXEMPTION. IT CANNOT BE PRESUMED NOR ALLOWED SOLELY ON GROUND OF EQUITY. IT MUST BE JUSTIFIED BY WORDS TOO PLAIN TO BE MISTAKEN AND TOO CATEGORICAL TO BE MISINTERPRETED. TAX EXEMPTION SHOULD BE GRANTED ONLY BY A CLEAR AND UNEQUIVOCAL PROVISION OF LAW ON THE BASIS OF LANGUAGE TOO PLAIN TO BE MISTAKEN.

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WHY SHOULD TAX EXEMPTIONS BE STRICTLY CONSTRUED AGAINST THE TAX PAYER?

BECAUSE TAXES ARE THE LIFEBLOOD OF THE GOVERNMENT.

Time and again, we have held that tax refunds are in the nature of tax exemptions which result to loss of revenue for the government. Upon the person claiming an exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted,^[9][29] it is never presumed^[10][30] nor be allowed solely on the ground of equity.^[11][31]  These exemptions, therefore, must not rest on vague, uncertain or indefinite inference, but should be granted only by a clear and unequivocal provision of law on the basis of language too plain to be mistaken. Such exemptions must be strictly construed against the taxpayer, as taxes are the lifeblood of the government.^[12][32]

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FIRST DIVISION

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DECISION

VILLARAMA, JR., J.:

        Petitioner Commissioner of Internal Revenue appeals the Decision^[13][1] dated March 25, 2009 and Resolution^[14][2] dated June 24, 2009 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 415.  The CTA dismissed the petition for review filed by petitioner assailing the CTA First Division’s Decision^[15][3] dated April 25, 2008 and Resolution^[16][4] dated July 10, 2008 which ordered petitioner to refund the excise taxes paid by respondent Pilipinas Shell Petroleum Corporation on petroleum products it sold to international carriers.

        The facts are not disputed.

        Respondent is engaged in the business of processing, treating and refining petroleum for the purpose of producing marketable products and the subsequent sale thereof.^[17][5]

        On July 18, 2002, respondent filed with the Large Taxpayers Audit & Investigation Division II of the Bureau of Internal Revenue (BIR) a formal claim for refund or tax credit in the total amount of P28,064,925.15, representing excise taxes it allegedly paid on sales and deliveries of gas and fuel oils to various international carriers during the period October to December 2001.  Subsequently, on October 21, 2002, a similar claim for refund or tax credit was filed by respondent with the BIR covering the period January to March 2002 in the amount of P41,614,827.99.  Again, on July 3, 2003, respondent filed another formal claim for refund or tax credit in the amount of P30,652,890.55 covering deliveries from April to June 2002.^[18][6]  

        Since no action was taken by the petitioner on its claims, respondent filed petitions for review before the CTA on September 19, 2003 and December 23, 2003, docketed as CTA Case Nos. 6775 and 6839, respectively. 

        In its decision on the consolidated cases, the CTA’s First Division ruled that respondent is entitled to the refund of excise taxes in the reduced amount of P95,014,283.00.  The CTA First Division relied on a previous ruling rendered by the CTA En Banc in the case of “Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue”^[19][7] where the CTA also granted respondent’s claim for refund on the basis of excise tax exemption for petroleum products sold to international carriers of foreign registry for their use or consumption outside the Philippines.  Petitioner’s motion for reconsideration was denied by the CTA First Division.

        Petitioner elevated the case to the CTA En Banc which upheld the ruling of the First Division.  The CTA pointed out the specific exemption mentioned under Section 135 of the National Internal Revenue Code of 1997 (NIRC) of petroleum products sold to international carriers such as respondent’s clients.  It said that this Court’s ruling in Maceda v. Macaraig, Jr.^[20][8] is inapplicable because said case only put to rest the issue of whether or not the National Power Corporation (NPC) is subject to tax considering that NPC is a tax-exempt entity mentioned in Sec. 135 (c) of the NIRC (1997), whereas the present case involves the tax exemption of the sale of petroleum under Sec. 135 (a) of the same Code.  Further, the CTA said that the ruling in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue^[21][9] likewise finds no application because the party asking for the refund in said case was the seller-producer based on the exemption granted under the law to the tax-exempt buyers, NPC and Voice of America (VOA), whereas in this case it is the article or product which is exempt from tax and not the international carrier. 

        Petitioner filed a motion for reconsideration which the CTA likewise denied.

        Hence, this petition anchored on the following grounds:

I

SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE EXPRESSLY SUBJECTS THE PETROLEUM PRODUCTS TO AN EXCISE TAX BEFORE THEY ARE REMOVED FROM THE PLACE OF PRODUCTION.

II

THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS TAX CREDIT OR TAX REFUND OF THE EXCISE TAXES PAID REFERS TO THOSE CASES WHERE GOODS LOCALLY PRODUCED OR MANUFACTURED ARE ACTUALLY EXPORTED WHICH IS NOT SO IN THIS CASE.

III

THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG, JR. AND PHILIPPINE ACETYLENE CO. VS. CIR ARE APPLICABLE TO THIS CASE.^[22][10]

        The Solicitor General argues that the obvious intent of the law is to grant excise tax exemption to international carriers and exempt entities as buyers of petroleum products and not to the manufacturers or producers of said goods.  Since the excise taxes are collected from manufacturers or producers before removal of the domestic products from the place of production, respondent paid the subject excise taxes as manufacturer or producer of the petroleum products pursuant to Sec. 148 of the NIRC.  Thus, regardless of who the buyer/purchaser is, the excise tax on petroleum products attached to the said goods before their sale or delivery to international carriers, as in fact respondent averred that it paid the excise tax on its petroleum products when it “withdrew petroleum products from its place of production for eventual sale and delivery to various international carriers as well as to other customers.”^[23][11]  Sec. 135 (a) and (c) granting exemption from the payment of excise tax on petroleum products can only be interpreted to mean that the respondent cannot pass on to international carriers and exempt agencies the excise taxes it paid as a manufacturer or producer.

        As to whether respondent has the right to file a claim for refund or tax credit for the excise taxes it paid for the petroleum products sold to international carriers, the Solicitor General contends that Sec. 130 (D) is explicit on the circumstances under which a taxpayer may claim for a refund of excise taxes paid on manufactured products, which express enumeration did not include those excise taxes paid on petroleum products which were eventually sold to international carriers (expressio unius est exclusio alterius). Further, the Solicitor General asserts that contrary to the conclusion made by the CTA, the principles laid down by this Court in  Maceda v. Macaraig, Jr.^[24][12] and Philippine Acetylene Co. v. Commissioner of Internal Revenue^[25][13] are applicable to this case.  Respondent must shoulder the excise taxes it previously paid on petroleum products which it later sold to international carriers because it cannot pass on the tax burden to the said international carriers which have been granted exemption under Sec. 135 (a) of the NIRC.  Considering that respondent failed to prove an express grant of a right to a tax refund, such claim cannot be implied; hence, it must be denied.   

        On the other hand, respondent maintains that since petroleum products sold to qualified international carriers are exempt from excise tax, no taxes should be imposed on the article, to which goods the tax attaches, whether in the hands of the said international carriers or the petroleum manufacturer or producer.  As these excise taxes have been erroneously paid taxes, they can be recovered under Sec. 229 of the NIRC.  Respondent contends that contrary to petitioner’s assertion, Sections 204 and 229 authorizes respondent to maintain a suit or proceeding to recover such erroneously paid taxes on the petroleum products sold to tax-exempt international carriers.

        As to the jurisprudence cited by the petitioner, respondent argues that they are not applicable to the case at bar.  It points out that Maceda v. Macaraig, Jr. is an adjudication on the issue of tax exemption of NPC from direct and indirect taxes given the passage of various laws relating thereto.  What was put in issue in said case was NPC’s right to claim for refund of indirect taxes.  Here, respondent’s claim for refund is not anchored on the exemption of the buyer from direct and indirect taxes but on the tax exemption of the goods themselves under Sec. 135.  Respondent further stressed that in Maceda v. Macaraig, Jr., this Court recognized that if NPC purchases oil from oil companies, NPC is entitled to claim reimbursement from the BIR for that part of the purchase price that represents excise taxes paid by the oil company to the BIR.  Philippine Acetylene Co. v. CIR, on the other hand, involved sales tax, which is a tax on the transaction, which this Court held as due from the seller even if such tax cannot be passed on to the buyers who are tax-exempt entities.  In this case, the excise tax is a tax on the goods themselves.  While indeed it is the manufacturer who has the duty to pay the said tax, by specific provision of law, Sec. 135, the goods are stripped of such tax under the circumstances provided therein.  Philippine Acetylene Co., Inc. v. CIR was thus not anchored on an exempting provision of law but merely on the argument that the tax burden cannot be passed on to someone.  

Respondent further contends that requiring it to shoulder the burden of excise taxes on petroleum products sold to international carriers would effectively defeat the principle of international comity upon which the grant of tax exemption on aviation fuel used in international flights was founded.  If the excise taxes paid by respondent are not allowed to be refunded or credited based on the exemption provided in Sec. 135 (a), respondent avers that the manufacturers or oil companies would then be constrained to shift the tax burden to international carriers in the form of addition to the selling price. 

Respondent cites as an analogous case Commissioner of International Revenue v. Tours Specialists, Inc.^[26][14] which involved the inclusion of hotel room charges remitted by partner foreign tour agents in respondent TSI’s gross receipts for purposes of computing the 3% contractor’s tax.  TSI opposed the deficiency assessment invoking, among others, Presidential Decree No. 31, which exempts foreign tourists from paying hotel room tax.  This Court upheld the CTA in ruling that while CIR may claim that the 3% contractor’s tax is imposed upon a different incidence, i.e., the gross receipts of the tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges.  One way or the other, said the CTA, it would not have the effect of promoting tourism in thePhilippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists.

The instant petition squarely raised the issue of whether respondent as manufacturer or producer of petroleum products is exempt from the payment of excise tax on such petroleum products it sold to international carriers. 

In the previous cases^[27][15]  decided by this Court involving excise taxes on petroleum products sold to international carriers, what was only resolved is the question of who is the proper party to claim the refund of excise taxes paid on petroleum products if such tax was either paid by the international carriers themselves or incorporated into the selling price of the petroleum products sold to them.  We have ruled in the said cases that the statutory taxpayer, the local manufacturer of the petroleum products who is directly liable for the payment of excise tax on the said goods, is the proper party to seek a tax refund. Thus, a foreign airline company who purchased locally manufactured petroleum products for use in its international flights, as well as a foreign oil company who likewise bought petroleum products from local manufacturers and later sold these to international carriers, have no legal personality to file a claim for tax refund or credit of excise taxes previously paid by the local manufacturers even if the latter passed on to the said buyers the tax burden in the form of additional amount in the price.

Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported into the Philippines. These taxes are imposed in addition to the value-added tax (VAT).^[28][16]

As to petroleum products, Sec. 148 provides that excise taxes attach to the following refined and manufactured mineral oils and motor fuels as soon as they are in existence as such:

(a)    Lubricating oils and greases;

(b)    Processed gas;

(c)    Waxes and petrolatum;

(d)    Denatured alcohol to be used for motive power;

(e)    Naphtha, regular gasoline and other similar products of distillation;

(f)     Leaded premium gasoline;

(g)    Aviation turbo jet fuel;

(h)    Kerosene;

(i)     Diesel fuel oil, and similar fuel oils having more or less the same generating power;

(j)     Liquefied petroleum gas;

(k)    Asphalts; and

(l)     Bunker fuel oil and similar fuel oils having more or less the same generating capacity.  

Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and indigenous petroleum are required to be paid before their removal from the place of production.^[29][17]  However, Sec. 135 provides:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to the following are exempt from excise tax:

(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and

(c)  Entities which are by law exempt from direct and indirect taxes.

        Respondent claims it is entitled to a tax refund because those petroleum products it sold to international carriers are not subject to excise tax, hence the excise taxes it paid upon withdrawal of those products were erroneously or illegally collected and should not have been paid in the first place.  Since the excise tax exemption attached to the petroleum products themselves, the manufacturer or producer is under no duty to pay the excise tax thereon.

        We disagree.

        Under Chapter II “Exemption or Conditional Tax-Free Removal of Certain Goods” of Title VI, Sections 133, 137, 138, 139 and 140 cover conditional tax-free removal of specified goods or articles, whereas Sections 134 and 135 provide for tax exemptions.  While the exemption found in Sec. 134 makes reference to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax status of the buyer of the said goods, Sec. 135 deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or consumer.  Respondent’s failure to make this important distinction apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) “attaches to the goods themselves” such that the excise tax should not have been paid in the first place.

On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-96^[30][18] (“Excise Taxation of Petroleum Products”) which provides:

SEC. 4. Time and Manner of Payment of Excise Tax on Petroleum Products, Non-Metallic Minerals and Indigenous Petroleum –

I.  Petroleum Products

                   x x x x

a)           On locally manufactured petroleum products

      The specific tax on petroleum products locally manufactured or produced in the Philippinesshall be paid by the manufacturer, producer, owner or person having possession of the same, and such tax shall be paid within fifteen (15) days from date of removal from the place of production. (Underscoring supplied.)              

Thus, if an airline company purchased jet fuel from an unregistered supplier who could not present proof of payment of specific tax, the company is liable to pay the specific tax on the date of purchase.^[31][19]  Since the excise tax must be paid upon withdrawal from the place of production, respondent cannot anchor its claim for refund on the theory that the excise taxes due thereon should not have been collected or paid in the first place.

        Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected.  An “erroneous or illegal tax” is defined as one levied without statutory authority, or upon property not subject to taxation or by some officer having no authority to levy the tax, or one which is some other similar respect is illegal.^[32][20]

        Respondent’s locally manufactured petroleum products are clearly subject to excise tax under Sec. 148.  Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of erroneous or excess payment of tax. Respondent’s claim is premised on what it determined as a tax exemption “attaching to the goods themselves,” which must be based on a statute granting tax exemption, or “the result of legislative grace.” Such a claim is to be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant must show that he clearly falls under the exempting statute.^[33][21]

The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on international carriers who purchased the same for their use or consumption outside thePhilippines.  The only condition set by law is for these petroleum products to be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

        On January 22, 2008, or five years after the sale by respondent of the subject petroleum products, then Secretary of Finance Margarito B. Teves  issued Revenue Regulations No. 3-2008  “Amending Certain Provisions of Existing Revenue Regulations on the Granting of Outright Excise Tax Exemption on Removal of Excisable Articles Intended for Export or Sale/Delivery to International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product Replenishment.”   Said issuance recognized the “tax relief to which the taxpayers are entitled” by availing of  the following remedies: (a) a claim for excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a product replenishment.

SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF EXCISABLE ARTICLES FOR EXPORT OR SALE/DELIVERY TO INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT ENTITIES/AGENCIES. – Subject to the subsequent filing of a claim for excise tax credit/refund or product replenishment, all manufacturers of articles subject to excise tax under Title VI of the NIRC of 1997, as amended, shall pay the excise tax that is otherwise due on every removal thereof from the place of production that is intended for exportation or sale/delivery to international carriers or to tax-exempt entities/agencies: Provided, That in case the said articles are likewise being sold in the domestic market, the applicable excise tax rate shall be the same as the excise tax rate imposed on the domestically sold articles.

In the absence of a similar article that is being sold in the domestic market, the  applicable excise tax shall be computed based on the value appearing in the manufacturer’s sworn statement converted to Philippine currency, as may be applicable.

x x x x (Emphasis supplied.)

          In this case, however, the Solicitor General has adopted a position contrary to existing BIR regulations and rulings recognizing the right of oil companies to seek a refund of excise taxes paid on petroleum products they sold to international carriers.  It is argued that there is nothing in Sec. 135 (a) which explicitly grants exemption from the payment of excise tax in favor of oil companies selling their petroleum products to international carriers and that the only claim for refund of excise taxes authorized by the NIRC is the payment of excise tax on exported goods, as explicitly provided in Sec. 130 (D), Chapter I under the same Title VI:

(D)  Credit for Excise Tax on Goods Actually Exported.  —  When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise  tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are actually exported.

        According to the Solicitor General, Sec. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation, may only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to international carriers by incorporating previously paid excise taxes into the selling price.  In other words, respondent cannot shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the added cost of the excise tax.

        We agree with the Solicitor General.

        In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue^[34][22] this Court held that petitioner manufacturer who sold its oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim exemption from the payment of sales tax simply because its buyer NPC is exempt from taxation.  The Court explained that the percentage tax on sales of merchandise imposed by the Tax Code is due from the manufacturer and not from the buyer.

        Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on grounds that what was involved in the latter is a tax on the transaction (sales) and not excise tax which is a tax on the goods themselves, and that the exemption sought therein was anchored merely on the tax-exempt status of the buyer and not a specific provision of law exempting the goods sold from the excise tax.  But as already stated, the language of Sec. 135 indicates that the tax exemption mentioned therein is conferred on specified buyers or consumers of the excisable articles or goods (petroleum products).  Unlike Sec. 134 which explicitly exempted the article or goods itself  (domestic denatured alcohol) without due regard to the tax status of the buyer or purchaser, Sec. 135 exempts from excise tax petroleum products which were sold to international carriers and other tax-exempt agencies and entities. 

Considering that the excise taxes attaches to petroleum products “as soon as they are in existence as such,”^[35][23]  there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then of respondent’s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135 (a) for their purchases of locally manufactured petroleum products.  Pursuant to our ruling in Philippine Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller.   The excise tax imposed on petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers.

In Maceda v. Macaraig, Jr.,^[36][24] the Court specifically mentioned excise tax as an example of an indirect tax where the tax burden can be shifted to the buyer:

          On the other hand, “indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else”. For example, the excise and ad valorem taxes that the oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the “cash” and/or “selling price.”

        An excise tax is basically an indirect tax.  Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.  Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.  When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.^[37][25]

Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax exemptions privileges being enjoyed by NPC under existing laws, the tax burden may not be shifted to it by the oil companies who shall pay for fuel oil taxes on oil they supplied to NPC.  Thus:

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC.  By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold.  Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation.  This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did not enjoy exemption from indirect taxes.   This means also, on the other hand, that the NPC may refuse to pay that part of the “normal” purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR.  If NPC nonetheless purchases such oil from the oil companies – because to do so may be more convenient and ultimately less  costly for NPC than NPC itself importing and hauling and storing the oil from overseas – NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.^[38][26]  (Emphasis supplied.)

        In the case of international air carriers, the tax exemption granted under Sec. 135 (a) is based on “a long-standing international consensus that fuel used for international air services should be tax-exempt.”  The provisions of the 1944 Convention of International Civil Aviation or the “Chicago Convention”,  which form binding international law, requires the contracting parties not to charge duty on aviation fuel already on board any aircraft that has arrived in their territory from another contracting state.  Between individual countries, the exemption of airlines from national taxes and customs duties on a range of aviation-related goods, including parts, stores and fuel is a standard element of the network of bilateral “Air Service Agreements.”^[39][27] Later, a Resolution issued by the International Civil Aviation Organization (ICAO) expanded the provision as to similarly exempt from taxes all kinds of fuel taken on board for consumption by an aircraft from a contracting state in the territory of another contracting State departing for the territory of any other State.^[40][28]  Though initially aimed at establishing uniformity of taxation among parties to the treaty to prevent double taxation, the tax exemption now generally applies to fuel used in international travel by both domestic and foreign carriers.

        On April 21, 1978, then President Ferdinand E. Marcos issued Presidential Decree (P.D.) No. 1359:

PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977.

WHEREAS, under the present law oil products sold to international carriers are subject to the specific tax;

WHEREAS, some countries allow the sale of petroleum products to Philippine Carriers without payment of taxes thereon;

WHEREAS, to foster goodwill and better relationship with foreign countries, there is a need to grant similar tax exemption in favor of foreign international carriers;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by the Constitution, do hereby order and decree the following:

Section 1. Section 134 of the National Internal Revenue Code of 1977 is hereby amended to read as follows:

“Sec. 134. Articles subject to specific tax. Specific internal revenue taxes apply to things manufactured or produced in the Philippines for domestic sale or consumption and to things imported, but not to anything produced or manufactured here which shall be removed for exportation and is actually exported without returning to the Philippines, whether so exported in its original state or as an ingredient or part of any manufactured article or product.

“HOWEVER, PETROLEUM PRODUCTS SOLD TO AN INTERNATIONAL CARRIER FOR ITS USE OR CONSUMPTION OUTSIDE OF THEPHILIPPINESSHALL NOT BE SUBJECT TO SPECIFIC TAX, PROVIDED, THAT THE COUNTRY OF SAID CARRIER EXEMPTS FROM TAX PETROLEUM PRODUCTS SOLD TO PHILIPPINE CARRIERS.

“In case of importations the internal revenue tax shall be in addition to the customs duties, if any.”

Section 2. This Decree shall take effect immediately.

Contrary to respondent’s assertion that the above amendment to the former provision of the 1977 Tax Code supports its position that it was not liable for excise tax on the petroleum products sold to international carriers, we find that no such inference can be drawn from the words used in the amended provision or its introductory part.  Founded on the principles of international comity and reciprocity, P.D. No. 1359 granted exemption from payment of excise tax but only to foreign international carriers who are allowed to purchase petroleum products free of specific tax provided the country of said carrier also grants tax exemption to Philippine carriers.   Both the earlier amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers.

        Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and  absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden  of the excise tax to the international carriers who buys petroleum products from the local manufacturers.  Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers.  Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.

Time and again, we have held that tax refunds are in the nature of tax exemptions which result to loss of revenue for the government. Upon the person claiming an exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted,^[41][29] it is never presumed^[42][30] nor be allowed solely on the ground of equity.^[43][31]  These exemptions, therefore, must not rest on vague, uncertain or indefinite inference, but should be granted only by a clear and unequivocal provision of law on the basis of language too plain to be mistaken. Such exemptions must be strictly construed against the taxpayer, as taxes are the lifeblood of the government.^[44][32]

WHEREFORE, the petition for review on certiorari is GRANTED.  The Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE.   The claims for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.

C E R T I F I C A T I O N

        Pursuant to Section 13, Article VIII of the 1987 Constitution, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CASE 2012-0053:  PHILIPPINE DEPOSIT INSURANCE CORPORATION VS. CITIBANK, N.A. AND BANK OF AMERICA, S.T. & N.A. (G.R. NO. 170290,  APRIL 11, 2012, MENDOZA, J.:) SUBJECT/S: CITIBANK BRANCHES IN RP ARE ONE AND THE SAME WITH CITIBANK USA.; DEPOSITS OF CITIBANK USA IN CITIBANK PHILIPPINES NOT SUBJECT TO INSURANCE BY PDIC. (BRIEF TITLE: PDIC VS. CITBANK ET AL.)

====================

DISPOSITIVE:

        WHEREFORE, the petition is DENIED.  The October 27, 2005 Decision of the Court of Appeals in CA-G.R. CV No. 61316 is AFFIRMED.

====================

SUBJECTS/DOCTRINES/DIGEST:

CITIBANK USA PLACED DEPOSITS AT ITS BRANCH IN CITIBANK IN THE PHILIPPINES. WILL SUCH DEPOSIT AT CITIBANK IN THE PHILIPPINES BE REQUIRED TO BE INSURED AT PDIC?

NO. CITIBANK USA AND CITIBANK IN THE PHILIPPINES IN THE PHILIPPINES ARE ONE ENTITY. SUCH DEPOSITS ARE NOT DEPOSITS OF THIRD PARTIES WITH CITIBANK IN THE PHILIPPINES WHICH MUST BE ENSURED WITH PDIC. AS A CONSEQUENCE THEY ARE NOT SUBJECT TO ASSESSMENT BY PDIC AS TO PAYMENT OF PREMIUM FOR INSURANCE PURPOSE.

XXXXXXXXXXXXXXXXX

A branch has no separate legal personality;

Purpose of the PDIC

          PDIC argues that the head offices of Citibank and BA and their individual foreign branches are separate and independent entities.  It insists that under American jurisprudence, a bank’s head office and its branches have a principal-agent relationship only if they operate in the same jurisdiction.  In the case of foreign branches, however, no such relationship exists because the head office and said foreign branches are deemed to be two distinct entities.^[1][20]  Under Philippine law, specifically, Section 3(b) of R.A. No. 3591, which defines the terms “bank” and “banking institutions,” PDIC contends that the law treats a branch of a foreign bank as a separate and independent banking unit.^[2][21]

          The respondents, on the other hand, initially point out that the factual findings of the RTC and the CA, with regard to the nature of the money placements, the capacity in which the same were received by the respondents and the exclusion of inter-branch deposits from assessment, can no longer be disturbed and should be accorded great weight by this Court.^[3][22]  They also argue that the money placements are not deposits.  They postulate that for a deposit to exist, there must be at least two parties – a depositor and a depository – each with a legal personality distinct from the other.  Because the respondents’ respective head offices and their branches form only a single legal entity, there is no creditor-debtor relationship and the funds placed in the Philippine branch belong to one and the same bank.  A bank cannot have a deposit with itself.^[4][23] 

This Court is of the opinion that the key to the resolution of this controversy is the relationship of the Philippine branches of Citibank and BA to their respective head offices and their other foreign branches.

          The Court begins by examining the manner by which a foreign corporation can establish its presence in the Philippines.  It may choose to incorporate its own subsidiary as a domestic corporation, in which case such subsidiary would have its own separate and independent legal personality to conduct business in the country.  In the alternative, it may create a branch in the Philippines, which would not be a legally independent unit, and simply obtain a license to do business in the Philippines.^[5][24] 

          In the case of Citibank and BA, it is apparent that they both did not incorporate a separate domestic corporation to represent its business interests in thePhilippines.  Their Philippine branches are, as the name implies, merely branches, without a separate legal personality from their parent company, Citibank and BA.  Thus, being one and the same entity, the funds placed by the respondents in their respective branches in thePhilippines should not be treated as deposits made by third parties subject to deposit insurance under the PDIC Charter.

          For lack of judicial precedents on this issue, the Court seeks guidance from American jurisprudence. In the leading case of Sokoloff v. The National City Bank of New York,^[6][25] where the Supreme Court of New York held:

Where a bank maintains branches, each branch becomes a separate business entity with separate books of account.  A depositor in one branch cannot issue checks or drafts upon another branch or demand payment from such other branch, and in many other respects the branches are considered separate corporate entities and as distinct from one another as any other bank.  Nevertheless, when considered with relation to the parent bank they are not independent agencies; they are, what their name imports, merely branches, and are subject to the supervision and control of the parent bank, and are instrumentalities whereby the parent bank carries on its business, and are established for its own particular purposes, and their business conduct and policies are controlled by the parent bank and their property and assets belong to the parent bank, although nominally held in the names of the particular branches.  Ultimate liability for a debt of a branch would rest upon the parent bank. [Emphases supplied]

This ruling was later reiterated in the more recent case of United States v. BCCI Holdings Luxembourg^[7][26] where the United States Court of Appeals, District of Columbia Circuit, emphasized that “while individual bank branches may be treated as independent of one another, each branch, unless separately incorporated, must be viewed as a part of the parent bank rather than as an independent entity.”

          In addition, Philippine banking laws also support the conclusion that the head office of a foreign bank and its branches are considered as one legal entity.  Section 75 of R.A. No. 8791 (The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act Liberalizing the Entry of Foreign Banks) both require the head office of a foreign bank to guarantee the prompt payment of all the liabilities of its Philippine branch, to wit:

Republic Act No. 8791:

Sec. 75. Head Office Guarantee. – In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

Residents and citizens of thePhilippineswho are creditors of a branch in thePhilippinesof foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws.

Republic Act No. 7721:

Sec. 5. Head Office Guarantee. – The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine branches.

Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section 1 of R.A. No. 3591 (The PDIC Charter) which provides:

Section 1.  There is hereby created a Philippine Deposit Insurance Corporation hereinafter referred to as the “Corporation” which shall insure, as herein provided, the deposits of all banks which are entitled to the benefits of insurance under this Act, and which shall have the powers hereinafter granted.

The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits.

R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the establishment of the PDIC:

Section 1. Statement of State Policy and Objectives. – It is hereby declared to be the policy of the State to strengthen the mandatory deposit insurance coverage system to generate, preserve, maintain faith and confidence in the country’s banking system, and protect it from illegal schemes and machinations.

Towards this end, the government must extend all means and mechanisms necessary for the Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and safeguarding the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits, and in helping develop a sound and stable banking system at all times.

The purpose of the PDIC is to protect the depositing public in the event of a bank closure.  It has already been sufficiently established byUSjurisprudence and Philippine statutes that the head office shall answer for the liabilities of its branch.  Now, suppose the Philippine branch of Citibank suddenly closes for some reason.  Citibank N.A. would then be required to answer for the deposit liabilities of CitibankPhilippines.  If the Court were to adopt the posture of PDIC that the head office and the branch are two separate entities and that the funds placed by the head office and its foreign branches with the Philippine branch are considered deposits within the meaning of the PDIC Charter, it would result to the incongruous situation where Citibank, as the head office, would be placed in the ridiculous position of having to reimburse itself, as depositor, for the losses it may incur occasioned by the closure of Citibank Philippines.  Surely our law makers could not have envisioned such a preposterous circumstance when they created PDIC. 

          Finally, the Court agrees with the CA ruling that there is nothing in the definition of a “bank” and a “banking institution” in Section 3(b) of the PDIC Charter^[8][27] which explicitly states that the head office of a foreign bank and its other branches are separate and distinct from their Philippine branches.

          There is no need to complicate the matter when it can be solved by simple logic bolstered by law and jurisprudence.  Based on the foregoing, it is clear that the head office of a bank and its branches are considered as one under the eyes of the law.  While branches are treated as separate business units for commercial and financial reporting purposes, in the end, the head office remains responsible and answerable for the liabilities of its branches which are under its supervision and control.  As such, it is unreasonable for PDIC to require the respondents, Citibank and BA, to insure the money placements made by their home office and other branches.  Deposit insurance is superfluous and entirely unnecessary when, as in this case, the institution holding the funds and the one which made the placements are one and the same legal entity.

Funds not a deposit under the definition

of the PDIC Charter;

Excluded from assessment

PDIC avers that the funds are dollar deposits and not money placements.  Citing R.A. No. 6848, it defines money placement as a deposit which is received with authority to invest.  Because there is no evidence to indicate that the respondents were authorized to invest the subject dollar deposits, it argues that the same cannot be considered money placements.^[9][28]  PDIC then goes on to assert that the funds received by Citibank and BA are deposits, as contemplated by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar deposits were received by Citibank and BA in the course of their banking operations from their respective head office and foreign branches and were recorded in their books as “Account-Head Office/Branches-Time Deposits” pursuant to Central Bank Circular No. 343 which implements R.A. No. 6426; (2) the dollar deposits were credited as dollar time accounts and were covered by Certificates of Dollar Time Deposit which were interest-bearing and payable upon maturity, and (3) the respondents maintain 100% foreign currency cover for their deposit liability arising from the dollar time deposits as required by Section 4 of R.A. No. 6426.^[10][29]

To refute PDIC’s allegations, the respondents explain the inter-branch transactions which necessitate the creation of the accounts or placements subject of this case.  When the Philippine branch needs to procure foreign currencies, it will coordinate with a branch in another country which handles foreign currency purchases.  Both branches have existing accounts with their head office and when a money placement is made in relation to the acquisition of foreign currency from the international market, the amount is credited to the account of the Philippine branch with its head office while the same is debited from the account of the branch which facilitated the purchase.  This is further documented by the issuance of a certificate of time deposit with a stated interest rate and maturity date.  The interest rate represents the cost of obtaining the funds while the maturity date represents the date on which the placement must be returned.  On the maturity date, the amount previously credited to the account of the Philippine branch is debited, together with the cost for obtaining the funds, and credited to the account of the other branch. The respondents insist that the interest rate and maturity date are simply the basis for the debit and credit entries made by the head office in the accounts of its branches to reflect the inter-branch accommodation.^[11][30]  As regards the maintenance of currency cover over the subject money placements, the respondents point out that they maintain foreign currency cover in excess of what is required by law as a matter of prudent banking practice.^[12][31]

PDIC attempts to define money placement in order to impugn the respondents’ claim that the funds received from their head office and other branches are money placements and not deposits, as defined under the PDIC Charter.  In the process, it loses sight of the important issue in this case, which is the determination of whether the funds in question are subject to assessment for deposit insurance as required by the PDIC Charter.  In its struggle to find an adequate definition of “money placement,” PDIC desperately cites R.A. No. 6848, The Charter of the Al-Amanah Islamic Investment Bank of the Philippines.  Reliance on the said law is unfounded because nowhere in the law is the term “money placement” defined.  Additionally, R.A. No. 6848 refers to the establishment of an Islamic bank subject to the rulings of Islamic Shari’a to assist in the development of the Autonomous Region of Muslim Mindanao (ARMM),^[13][32] making it utterly irrelevant to the case at bench.  Since Citibank and BA are neither Islamic banks nor are they located anywhere near the ARMM, then it should be painfully obvious that R.A. No. 6848 cannot aid us in deciding this case.

Furthermore, PDIC heavily relies on the fact that the respondents documented the money placements with certificates of time deposit to simply conclude that the funds involved are deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment for deposit insurance.  It is this kind of reasoning that creates non-existent obscurities in the law and obstructs the prompt resolution of what is essentially a straightforward issue, thereby causing this case to drag on for more than three decades.

Noticeably, PDIC does not dispute the veracity of the internal transactions of the respondents which gave rise to the issuance of the certificates of time deposit for the funds the subject of the present dispute.  Neither does it question the findings of the RTC and the CA that the money placements were made, and were payable, outside of the Philippines, thus, making them fall under the exclusions to deposit liabilities.  PDIC also fails to impugn the truth of the testimony of John David Shaffer, then a Fiscal Agent and Head of the Assessment Section of the FDIC, that inter-branch deposits were excluded from the assessment base.  Therefore, the determination of facts of the lower courts shall be accepted at face value by this Court, following the well-established principle that factual findings of the trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court, and will generally not be reviewed on appeal.^[14][33]

As explained by the respondents, the transfer of funds, which resulted from the inter-branch transactions, took place in the books of account of the respective branches in their head office located in theUnited States.  Hence, because it is payable outside of thePhilippines, it is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:

Sec. 3(f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by its certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of said bank or deposit in another bank, together with such other obligations of a bank as the Board of Directors shall find and shall prescribe by regulations to be deposit liabilities of the Bank; Provided, that any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of the insured deposits; Provided further, that any insured bank which is incorporated under the laws of the Philippines may elect to include for insurance its deposit obligation payable only at such branch. [Emphasis supplied]

          The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC, after which PDIC was modelled, is also persuasive.  Inter-branch deposits refer to funds of one branch deposited in another branch and both branches are part of the same parent company and it is the practice of the FDIC to exclude such inter-branch deposits from a bank’s total deposit liabilities subject to assessment.^[15][34]

          All things considered, the Court finds that the funds in question are not deposits within the definition of the PDIC Charter and are, thus, excluded from assessment.

====================

Republic of the Philippines

Supreme Court

BaguioCity

THIRD DIVISION

x ————————————————————————————— x

D E C I S I O N

MENDOZA, J.:

This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing the October 27, 2005 Decision^[16][1] of the Court of Appeals (CA) in CA-G.R. CV No. 61316, entitled “Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit Insurance Corporation.”

The Facts

Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No. 9302.^[17][2]

Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of America, S.T. & N.A. (BA) is a national banking association, both of which are duly organized and existing under the laws of the United States of America and duly licensed to do business in the Philippines, with offices in Makati City.^[18][3]

In 1977, PDIC conducted an examination of the books of account of Citibank. It discovered that Citibank, in the course of its banking business, from September 30, 1974 to June 30, 1977, received from its head office and other foreign branches a total of P11,923,163,908.00 in dollars, covered by Certificates of Dollar Time Deposit that were interest-bearing with corresponding maturity dates.^[19][4]  These funds, which were lodged in the books of Citibank under the account “Their Account-Head Office/Branches-Foreign Currency,” were not reported to PDIC as deposit liabilities that were subject to assessment for insurance.^[20][5]  As such, in a letter dated March 16, 1978, PDIC assessed Citibank for deficiency in the sum of P1,595,081.96.^[21][6]

Similarly, sometime in 1979, PDIC examined the books of accounts of BA which revealed that from September 30, 1976 to June 30, 1978, BA received from its head office and its other foreign branches a total of P629,311,869.10 in dollars, covered by Certificates of Dollar Time Deposit that were interest-bearing with corresponding maturity dates and lodged in their books under the account “Due to Head Office/Branches.”^[22][7]  Because BA also excluded these from its deposit liabilities, PDIC wrote to BA on October 9, 1979, seeking the remittance of P109,264.83 representing deficiency premium assessments for dollar deposits.^[23][8]

Believing that litigation would inevitably arise from this dispute, Citibank and BA each filed a petition for declaratory relief before the Court of First Instance (now the Regional Trial Court) of Rizal on July 19, 1979and December 11, 1979, respectively.^[24][9]  In their petitions, Citibank and BA sought a declaratory judgment stating that the money placements they received from their head office and other foreign branches were not deposits and did not give rise to insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the PDIC Charter) and, as a consequence, the deficiency assessments made by PDIC were improper and erroneous.^[25][10]  The cases were then consolidated.^[26][11]

On June 29, 1998, the Regional Trial Court, Branch 163, Pasig City (RTC) promulgated its Decision^[27][12] in favor of Citibank and BA, ruling that the subject money placements were not deposits and did not give rise to insurable deposit liabilities, and that the deficiency assessments issued by PDIC were improper and erroneous.  Therefore, Citibank and BA were not liable to pay the same.  The RTC reasoned out that the money placements subject of the petitions were not assessable for insurance purposes under the PDIC Charter because said placements were deposits made outside of the Philippines and, under Section 3.05(b) of the PDIC Rules and Regulations,^[28][13] such deposits are excluded from the computation of deposit liabilities.  Section 3(f) of the PDIC Charter likewise excludes from the definition of the term “deposit” any obligation of a bank payable at the office of the bank located outside the Philippines. The RTC further stated that there was no depositor-depository relationship between the respondents and their head office or other branches.  As a result, such deposits were not included as third-party deposits that must be insured.  Rather, they were considered inter-branch deposits which were excluded from the assessment base, in accordance with the practice of the United States Federal Deposit Insurance Corporation (FDIC) after which PDIC was patterned.

Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in its October 27, 2005Decision. In so ruling, the CA found that the money placements were received as part of the bank’s internal dealings by Citibank and BA as agents of their respective head offices.  This showed that the head office and the Philippine branch were considered as the same entity.  Thus, no bank deposit could have arisen from the transactions between the Philippine branch and the head office because there did not exist two separate contracting parties to act as depositor and depositary.^[29][14] Secondly, the CA called attention to the purpose for the creation of PDIC which was to protect the deposits of depositors in the Philippines and not the deposits of the same bank through its head office or foreign branches.^[30][15]  Thirdly, because there was no law or jurisprudence on the treatment of inter-branch deposits between the Philippine branch of a foreign bank and its head office and other branches for purposes of insurance, the CA was guided by the procedure observed by the FDIC which considered inter-branch deposits as non-assessable.^[31][16] Finally, the CA cited Section 3(f) of R.A. No. 3591, which specifically excludes obligations payable at the office of the bank located outside the Philippines from the definition of a deposit or an insured deposit.  Since the subject money placements were made in the respective head offices of Citibank and BA located outside the Philippines, then such placements could not be subject to assessment under the PDIC Charter.^[32][17]

Hence, this petition.

The Issues

          PDIC raises the issue of whether or not the subject dollar deposits are assessable for insurance purposes under the PDIC Charter with the following assigned errors:

A.

The appellate court erred in ruling that the subject dollar deposits are money placements, thus, they are not subject to the provisions of Republic Act No. 6426 otherwise known as the “Foreign Currency Deposit Act of the Philippines.”

B.

The appellate court erred in ruling that the subject dollar deposits are not covered by the PDIC insurance.^[33][18]

Respondents similarly identify only one issue in this case:

Whether or not the money placements subject matter of these petitions are assessable for insurance purposes under the PDIC Act.^[34][19]

          The sole question to be resolved in this case is whether the funds placed in the Philippine branch by the head office and foreign branches of Citibank and BA are insurable deposits under the PDIC Charter and, as such, are subject to assessment for insurance premiums.

The Court’s Ruling

          The Court rules in the negative.

A branch has no separate legal personality;

Purpose of the PDIC

          PDIC argues that the head offices of Citibank and BA and their individual foreign branches are separate and independent entities.  It insists that under American jurisprudence, a bank’s head office and its branches have a principal-agent relationship only if they operate in the same jurisdiction.  In the case of foreign branches, however, no such relationship exists because the head office and said foreign branches are deemed to be two distinct entities.^[35][20]  Under Philippine law, specifically, Section 3(b) of R.A. No. 3591, which defines the terms “bank” and “banking institutions,” PDIC contends that the law treats a branch of a foreign bank as a separate and independent banking unit.^[36][21]

          The respondents, on the other hand, initially point out that the factual findings of the RTC and the CA, with regard to the nature of the money placements, the capacity in which the same were received by the respondents and the exclusion of inter-branch deposits from assessment, can no longer be disturbed and should be accorded great weight by this Court.^[37][22]  They also argue that the money placements are not deposits.  They postulate that for a deposit to exist, there must be at least two parties – a depositor and a depository – each with a legal personality distinct from the other.  Because the respondents’ respective head offices and their branches form only a single legal entity, there is no creditor-debtor relationship and the funds placed in the Philippine branch belong to one and the same bank.  A bank cannot have a deposit with itself.^[38][23] 

This Court is of the opinion that the key to the resolution of this controversy is the relationship of the Philippine branches of Citibank and BA to their respective head offices and their other foreign branches.

          The Court begins by examining the manner by which a foreign corporation can establish its presence in the Philippines.  It may choose to incorporate its own subsidiary as a domestic corporation, in which case such subsidiary would have its own separate and independent legal personality to conduct business in the country.  In the alternative, it may create a branch in the Philippines, which would not be a legally independent unit, and simply obtain a license to do business in the Philippines.^[39][24] 

          In the case of Citibank and BA, it is apparent that they both did not incorporate a separate domestic corporation to represent its business interests in thePhilippines.  Their Philippine branches are, as the name implies, merely branches, without a separate legal personality from their parent company, Citibank and BA.  Thus, being one and the same entity, the funds placed by the respondents in their respective branches in thePhilippines should not be treated as deposits made by third parties subject to deposit insurance under the PDIC Charter.

          For lack of judicial precedents on this issue, the Court seeks guidance from American jurisprudence. In the leading case of Sokoloff v. The National City Bank of New York,^[40][25] where the Supreme Court of New York held:

Where a bank maintains branches, each branch becomes a separate business entity with separate books of account.  A depositor in one branch cannot issue checks or drafts upon another branch or demand payment from such other branch, and in many other respects the branches are considered separate corporate entities and as distinct from one another as any other bank.  Nevertheless, when considered with relation to the parent bank they are not independent agencies; they are, what their name imports, merely branches, and are subject to the supervision and control of the parent bank, and are instrumentalities whereby the parent bank carries on its business, and are established for its own particular purposes, and their business conduct and policies are controlled by the parent bank and their property and assets belong to the parent bank, although nominally held in the names of the particular branches.  Ultimate liability for a debt of a branch would rest upon the parent bank. [Emphases supplied]

This ruling was later reiterated in the more recent case of United States v. BCCI Holdings Luxembourg^[41][26] where the United States Court of Appeals, District of Columbia Circuit, emphasized that “while individual bank branches may be treated as independent of one another, each branch, unless separately incorporated, must be viewed as a part of the parent bank rather than as an independent entity.”

          In addition, Philippine banking laws also support the conclusion that the head office of a foreign bank and its branches are considered as one legal entity.  Section 75 of R.A. No. 8791 (The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act Liberalizing the Entry of Foreign Banks) both require the head office of a foreign bank to guarantee the prompt payment of all the liabilities of its Philippine branch, to wit:

Republic Act No. 8791:

Sec. 75. Head Office Guarantee. – In order to provide effective protection of the interests of the depositors and other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

Residents and citizens of thePhilippineswho are creditors of a branch in thePhilippinesof foreign bank shall have preferential rights to the assets of such branch in accordance with the existing laws.

Republic Act No. 7721:

Sec. 5. Head Office Guarantee. – The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine branches.

Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section 1 of R.A. No. 3591 (The PDIC Charter) which provides:

Section 1.  There is hereby created a Philippine Deposit Insurance Corporation hereinafter referred to as the “Corporation” which shall insure, as herein provided, the deposits of all banks which are entitled to the benefits of insurance under this Act, and which shall have the powers hereinafter granted.

The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits.

R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the establishment of the PDIC:

Section 1. Statement of State Policy and Objectives. – It is hereby declared to be the policy of the State to strengthen the mandatory deposit insurance coverage system to generate, preserve, maintain faith and confidence in the country’s banking system, and protect it from illegal schemes and machinations.

Towards this end, the government must extend all means and mechanisms necessary for the Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and safeguarding the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits, and in helping develop a sound and stable banking system at all times.

The purpose of the PDIC is to protect the depositing public in the event of a bank closure.  It has already been sufficiently established byUSjurisprudence and Philippine statutes that the head office shall answer for the liabilities of its branch.  Now, suppose the Philippine branch of Citibank suddenly closes for some reason.  Citibank N.A. would then be required to answer for the deposit liabilities of CitibankPhilippines.  If the Court were to adopt the posture of PDIC that the head office and the branch are two separate entities and that the funds placed by the head office and its foreign branches with the Philippine branch are considered deposits within the meaning of the PDIC Charter, it would result to the incongruous situation where Citibank, as the head office, would be placed in the ridiculous position of having to reimburse itself, as depositor, for the losses it may incur occasioned by the closure of Citibank Philippines.  Surely our law makers could not have envisioned such a preposterous circumstance when they created PDIC. 

          Finally, the Court agrees with the CA ruling that there is nothing in the definition of a “bank” and a “banking institution” in Section 3(b) of the PDIC Charter^[42][27] which explicitly states that the head office of a foreign bank and its other branches are separate and distinct from their Philippine branches.

          There is no need to complicate the matter when it can be solved by simple logic bolstered by law and jurisprudence.  Based on the foregoing, it is clear that the head office of a bank and its branches are considered as one under the eyes of the law.  While branches are treated as separate business units for commercial and financial reporting purposes, in the end, the head office remains responsible and answerable for the liabilities of its branches which are under its supervision and control.  As such, it is unreasonable for PDIC to require the respondents, Citibank and BA, to insure the money placements made by their home office and other branches.  Deposit insurance is superfluous and entirely unnecessary when, as in this case, the institution holding the funds and the one which made the placements are one and the same legal entity.

Funds not a deposit under the definition

of the PDIC Charter;

Excluded from assessment

PDIC avers that the funds are dollar deposits and not money placements.  Citing R.A. No. 6848, it defines money placement as a deposit which is received with authority to invest.  Because there is no evidence to indicate that the respondents were authorized to invest the subject dollar deposits, it argues that the same cannot be considered money placements.^[43][28]  PDIC then goes on to assert that the funds received by Citibank and BA are deposits, as contemplated by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar deposits were received by Citibank and BA in the course of their banking operations from their respective head office and foreign branches and were recorded in their books as “Account-Head Office/Branches-Time Deposits” pursuant to Central Bank Circular No. 343 which implements R.A. No. 6426; (2) the dollar deposits were credited as dollar time accounts and were covered by Certificates of Dollar Time Deposit which were interest-bearing and payable upon maturity, and (3) the respondents maintain 100% foreign currency cover for their deposit liability arising from the dollar time deposits as required by Section 4 of R.A. No. 6426.^[44][29]

To refute PDIC’s allegations, the respondents explain the inter-branch transactions which necessitate the creation of the accounts or placements subject of this case.  When the Philippine branch needs to procure foreign currencies, it will coordinate with a branch in another country which handles foreign currency purchases.  Both branches have existing accounts with their head office and when a money placement is made in relation to the acquisition of foreign currency from the international market, the amount is credited to the account of the Philippine branch with its head office while the same is debited from the account of the branch which facilitated the purchase.  This is further documented by the issuance of a certificate of time deposit with a stated interest rate and maturity date.  The interest rate represents the cost of obtaining the funds while the maturity date represents the date on which the placement must be returned.  On the maturity date, the amount previously credited to the account of the Philippine branch is debited, together with the cost for obtaining the funds, and credited to the account of the other branch. The respondents insist that the interest rate and maturity date are simply the basis for the debit and credit entries made by the head office in the accounts of its branches to reflect the inter-branch accommodation.^[45][30]  As regards the maintenance of currency cover over the subject money placements, the respondents point out that they maintain foreign currency cover in excess of what is required by law as a matter of prudent banking practice.^[46][31]

PDIC attempts to define money placement in order to impugn the respondents’ claim that the funds received from their head office and other branches are money placements and not deposits, as defined under the PDIC Charter.  In the process, it loses sight of the important issue in this case, which is the determination of whether the funds in question are subject to assessment for deposit insurance as required by the PDIC Charter.  In its struggle to find an adequate definition of “money placement,” PDIC desperately cites R.A. No. 6848, The Charter of the Al-Amanah Islamic Investment Bank of the Philippines.  Reliance on the said law is unfounded because nowhere in the law is the term “money placement” defined.  Additionally, R.A. No. 6848 refers to the establishment of an Islamic bank subject to the rulings of Islamic Shari’a to assist in the development of the Autonomous Region of Muslim Mindanao (ARMM),^[47][32] making it utterly irrelevant to the case at bench.  Since Citibank and BA are neither Islamic banks nor are they located anywhere near the ARMM, then it should be painfully obvious that R.A. No. 6848 cannot aid us in deciding this case.

Furthermore, PDIC heavily relies on the fact that the respondents documented the money placements with certificates of time deposit to simply conclude that the funds involved are deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment for deposit insurance.  It is this kind of reasoning that creates non-existent obscurities in the law and obstructs the prompt resolution of what is essentially a straightforward issue, thereby causing this case to drag on for more than three decades.

Noticeably, PDIC does not dispute the veracity of the internal transactions of the respondents which gave rise to the issuance of the certificates of time deposit for the funds the subject of the present dispute.  Neither does it question the findings of the RTC and the CA that the money placements were made, and were payable, outside of the Philippines, thus, making them fall under the exclusions to deposit liabilities.  PDIC also fails to impugn the truth of the testimony of John David Shaffer, then a Fiscal Agent and Head of the Assessment Section of the FDIC, that inter-branch deposits were excluded from the assessment base.  Therefore, the determination of facts of the lower courts shall be accepted at face value by this Court, following the well-established principle that factual findings of the trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court, and will generally not be reviewed on appeal.^[48][33]

As explained by the respondents, the transfer of funds, which resulted from the inter-branch transactions, took place in the books of account of the respective branches in their head office located in theUnited States.  Hence, because it is payable outside of thePhilippines, it is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:

Sec. 3(f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by its certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of said bank or deposit in another bank, together with such other obligations of a bank as the Board of Directors shall find and shall prescribe by regulations to be deposit liabilities of the Bank; Provided, that any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of the insured deposits; Provided further, that any insured bank which is incorporated under the laws of the Philippines may elect to include for insurance its deposit obligation payable only at such branch. [Emphasis supplied]

          The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC, after which PDIC was modelled, is also persuasive.  Inter-branch deposits refer to funds of one branch deposited in another branch and both branches are part of the same parent company and it is the practice of the FDIC to exclude such inter-branch deposits from a bank’s total deposit liabilities subject to assessment.^[49][34]

          All things considered, the Court finds that the funds in question are not deposits within the definition of the PDIC Charter and are, thus, excluded from assessment.

          WHEREFORE, the petition is DENIED.  The October 27, 2005 Decision of the Court of Appeals in CA-G.R. CV No. 61316 is AFFIRMED.

                                                          JOSE CATRAL MENDOZA

                                                                   Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice

Chairperson

DIOSDADO M. PERALTA                      ROBERTO A. ABAD

            Associate Justice                                     Associate Justice

BIENVENIDO L. REYES

Associate Justice     

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

          PRESBITERO J. VELASCO, JR.

                         Associate Justice

                                                                 Chairperson, Third Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

                                                                      RENATO C. CORONA

                                                                               Chief Justice