METROPOLITAN BANK AND TRUST CO., PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Metropolitan Bank and Trust versus Commissioner of Internal Revenue

The Case

This is a petition for review on certiorari brought by Metropolitan Bank and Trust Company, known as Metrobank, against the Commissioner of Internal Revenue. Metrobank asks the Supreme Court to reverse the Court of Tax Appeals en banc and to strike down a deficiency documentary stamp tax assessment for the taxable year 1999, amounting to hundreds of millions of pesos, levied on its Universal Savings Account, or UNISA. The case matters because it fixes, for bar purposes, the tax treatment of special savings products evidenced by passbooks: whether a passbook account that pays a premium rate only when a minimum balance is kept for a holding period is, in substance, a certificate of deposit drawing interest subject to documentary stamp tax even before the law was amended.

Procedural History

The Commissioner, through the Assistant Commissioner of the Large Taxpayers Service, issued a Pre-Assessment Notice and then a Formal Letter of Demand with Assessment No. DST-2-99-000022, charging Metrobank deficiency documentary stamp tax on its UNISA for 1999, plus surcharge, interest, and compromise penalty. Metrobank protested, and the Commissioner denied the protest in a Decision dated 2 March 2004. Metrobank then filed a Petition for Review with the Court of Tax Appeals, which was raffled to the Second Division. The Second Division dismissed the petition for lack of merit and affirmed the Commissioner's decision with modification, cancelling only the compromise penalty of 25,000 pesos for want of mutual agreement, and ordering Metrobank to pay the deficiency tax with surcharge and interest, plus delinquency interest. Metrobank's motion for reconsideration was denied. Metrobank elevated the matter to the Court of Tax Appeals en banc, which affirmed the Second Division and dismissed the petition, holding that the decisive issue had already been resolved in favor of the Government in the Banco de Oro case and the International Exchange Bank case. The en banc denied reconsideration, and Metrobank came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Metrobank is a domestic corporation and a duly licensed banking institution. It offered the public a product called the Universal Savings Account. A depositor who can maintain a substantial average daily balance is entitled to a higher interest rate than on a regular savings account. When the account is opened, Metrobank issues a passbook. The depositor may withdraw at any time, but to enjoy the preferential rate the depositor must keep the stated minimum deposit balance for the specified holding period; otherwise the account reverts to a regular savings account.

Pursuant to a Letter of Authority, the Bureau of Internal Revenue investigated Metrobank for its tax liabilities for 1999, including documentary stamp tax. On 30 September 2002 the Bureau issued a Pre-Assessment Notice assessing deficiency documentary stamp tax on the UNISA based on Section 180 of the National Internal Revenue Code, which with surcharge and interest totalled 473,207,457 pesos and 97 centavos. Metrobank protested.

On 7 January 2003 the Bureau issued the formal assessment and demand for 477,588,959 pesos and 62 centavos, including surcharge, interest, and a compromise penalty. Metrobank protested again, but the Commissioner denied the protest on 2 March 2004 and ordered payment. The tax court litigation followed, with the tax court sustaining the assessment except for the compromise penalty.

Issues

• Whether or not the UNISA of Metrobank was subject to documentary stamp tax in 1999 under Section 180 of the National Internal Revenue Code prior to its amendment by Republic Act No. 9243.
• Whether or not the ruling in the Banco de Oro case, invoked by the tax court en banc, binds Metrobank despite Metrobank's claim that it was mere obiter dictum.

Applicable Provisions

Section 180 of the National Internal Revenue Code, prior to its amendment by Republic Act No. 9243, provides:

SEC. 180. Stamp Tax on all Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand. - On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: x x x

This is the provision under which the Commissioner assessed the UNISA, and its phrase "certificates of deposits drawing interest" is the language the Court construes.

Section 179 of the National Internal Revenue Code, as renumbered and amended by Republic Act No. 9243, provides:

SEC. 179. Stamp Tax on All Debt Instruments. - On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan.

For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation.

Metrobank invokes this amendment to argue that only after 2004 did its UNISA become taxable, a contention the Court rejects.

Ruling

On the first issue, the Court ruled against Metrobank. The pivotal question had already been settled in the Banco de Oro case and the International Exchange Bank case, which involved special savings accounts closely similar to the UNISA. A certificate of deposit requires no specific form; what controls is the nature conveyed by the passbook, not its label, because substance prevails over form. The Court adopted its definition from the Far East Bank and Trust Company case:

A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created.

The Court also held that negotiability is immaterial for documentary stamp tax purposes, and that a regular savings passbook withdrawable at any time is not taxable, unlike a deposit payable on a fixed maturity date. Because the UNISA pays a premium rate only when the balance is held for the required period, it shares the essential features of a time deposit and is taxable. The 2004 amendment did not create the tax; it was meant to eliminate the scheme of cloaking time deposits as regular savings deposits through passbooks.

On the second issue, the Court held that the Banco de Oro ruling was not obiter dictum. The Court decided that case on both procedural and substantive grounds, and where a case presents several points, each one actually decided becomes authoritative precedent.

Doctrine

A certificate of deposit, for purposes of documentary stamp tax, is any written acknowledgment by a bank of the receipt of money on deposit, promising to pay the depositor, to the depositor's order, or to another person's order. No particular form or label is required; substance controls. A passbook evidencing a special savings account that earns a premium rate only when a minimum balance is maintained for a holding period is a certificate of deposit drawing interest under Section 180, and is subject to documentary stamp tax. Negotiability is irrelevant to the imposition. The 2004 amendment by Republic Act No. 9243 did not exempt such accounts before its effectivity; it merely removed the ambiguity exploited to cloak time deposits as ordinary savings. Finally, every point actually decided in a case is binding precedent, not dictum.

Disposition

The Supreme Court denied Metrobank's petition and affirmed the Court of Tax Appeals en banc, sustaining the deficiency documentary stamp tax assessment on the UNISA for 1999.

Remember This

Memorize this line: substance over form governs documentary stamp tax, so a passbook special savings account with a holding period and premium interest is a certificate of deposit drawing interest under Section 180. Examiners use this case to test the tax treatment of bank deposit products and the rule that every point actually decided is authoritative precedent, not obiter dictum.