Case Digest: Belman Compania Incorporada vs. Central Bank of the Phils. (GR No. L- 10195, November 29, 1958)

 When are letters of credit consummated?

• Belman Compania Incorporada, having successfully bid to supply the Republic of the Philippines with 1,000 reams of onion skin paper, applied to the Philippine National Bank (PNB) for a $4,300 letter of credit on 21 September 1950.

• PNB, through its correspondent Crocker First National Bank, paid $4,300 to Getz Bros. & Co., the payee.

• Belman Compania Incorporada paid its account to PNB, which assessed and collected a 17% special excise tax (P1,474.70) under Republic Act No. 601.

• Belman Compania Incorporada protested the tax, arguing it was not applicable since the letter of credit was granted before the law's enactment on 28 March 1951.

• Belman Compania Incorporada demanded a refund from PNB, which was refused despite repeated demands.

• Belman Compania Incorporada filed a complaint seeking a court declaration that the tax was illegal and a refund of P1,474.70.

• CFI-Manila: Ordered PNB to refund P1,474.70 plus legal interest from 25 April 1951 and to pay costs.

Foreign exchange is the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another. The appellant claims that the grant or approval on an application for a letter of credit for an amount payable in foreign currency is only an executory contract, in the sense that until payment, return, or settlement of the amount paid and delivered by, or collected from, the bank in foreign currency be made by the debtor, the contract is not executed or consummated. Hence, if on the date of payment by the debtor to the bank of the amount of foreign exchange sold the law imposing the excise tax was already in force, such tax must be collected. On the other hand, the appellee contends that, upon the approval or grant of an application for a letter of credit for an amount payable in foreign currency, the contract is perfected or consummated. Hence, if on the date of such approval or grant the law imposing the excise tax was not yet in existence, such tax can not be assessed and collected. Both contentions cannot be sustained.

An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to draw upon a debtor of another and to negotiate the draft through the agent or correspondent bank or any bank in the country of the creditor, is a consummated contract, when the agent or correspondent bank or any bank in the country of the creditor pays or delivers to the latter the amount in foreign currency, as authorized by the bank in the country of the debtor in compliance with the letter of credit granted by it. 

It is the date of the payment of the amount in foreign currency to the creditor in his country by the agent or correspondent bank of the bank in the country of the debtor that turns from executory to executed or consummated contract. 

It is not the date of payment by the debtor to the bank in his country of the amount of foreign exchange sold that makes the contract executed or consummated, because the bank may grant the debtor extension of time to pay such debt. 

The contention of the appellee that as there was a meeting of the minds and of contracting parties as to price and object of the contract upon the approval or grant of an application for a letter of credit for an amount payable in payable in foreign currency, the contract was a valid and executed contract of sale of foreign exchange. True, there was such a contract in the sense that one party who has performed his part may compel the other to perform his. Still until payment be made in foreign currency of the amount applied for in the letter of credit and approved and granted by the bank, the same is not an executed or consummated contract. The payment of the amount in foreign currency to the creditor by the bank or its agent or correspondent is necessary to consummate the contract. Hence the date of such payment or delivery of the amount in foreign currency to the creditor determines whether such amount of foreign currency is subject to the tax imposed by the Government of the country where such letter of credit was granted.

It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by the appellant must be drawn and presented or negotiated in San Francisco, California, U.S.A., not later than 19 October 1950 (Exhibit H), it may be presumed that the payment of $4,300 in favor of Getz Bros., Inc. in San Francisco, California, U.S.A., for the account of the appellee was paid by the Crocker First National Bank, as agent or correspondent of the Philippine National Bank, on or before 19 October 1950. Such being the case, the excise tax at the rate of 17% on the amount to be paid by the appellant in Philippine currency for the foreign exchange sold is not subject to such tax, because Republic Act No. 601 imposing such tax took effect only on 28 March 1951.4

The judgment appealed from is affirmed, without pronouncement as to costs