Others

Transfers in good faith and for value of TCCs. 

First Issue: Assessment of excise tax deficiencies

[Petitioner] PSPC contends that respondent had no basis in issuing the November 15, 1999 assessment as PSPC had no pending unpaid excise tax liabilities.  PSPC argues that under the IRR of EO 226, it is allowed to use TCCs transferred from other BOI-registered entities.  On one hand, relative to the validity of the transferred TCCs, PSPC asserts that the TCCs are not subject to a suspensive condition; that the post-audit of a transferred TCC refers only to computational discrepancy; that the solidary liability of the transferor and transferee refers to computational discrepancy resulting from the transfer and not from the issuance of the TCC; that a post-audit cannot affect the validity and effectivity of a TCC after it has been utilized by the transferee; and that the BIR duly acknowledged the use of the subject TCCs, accepting them as payment for the excise tax liabilities of PSPC. On the other hand, PSPC maintains that if there was indeed fraud in the issuance of the subject TCCs, of which it had no knowledge nor participation, the Center’s remedy is to go after the transferor for the value of the TCCs the Center may have erroneously issued.

PSPC likewise assails the BIR assessment on prescription for having been issued beyond the three-year prescriptive period under Sec. 203 of the National Internal Revenue Code (NIRC); and neither can the BIR use the 10-year prescriptive period under Sec. 222(a) of the NIRC, as PSPC has neither failed to file a return nor filed a false or fraudulent return with intent to evade taxes.

Respondent, on the other hand, counters that petitioner is liable for the tax liabilities adjudged by the CTA En Banc since PSPC, as transferee of the subject TCCs, is bound by the liability clause found at the dorsal side of the TCCs which subjects the genuineness, validity, and value of the TCCs to the outcome of the post-audit to be conducted by the Center.  He relies on the CTA En Banc‘s finding of the presence of a suspensive condition in the issuance of the TCCs.  Thus, according to him, with the finding by the Center that the TCCs were fraudulently procured the subsequent cancellation of the TCCs resulted in the non-payment by PSPC of its excise tax liabilities equivalent to the value of the canceled TCCs.

Respondent likewise posits that the Center erred in approving the transfer and issuance of the Tax Debit Memoranda (TDM), and of the TDM and Authority To Accept Payment of Excise Taxes (ATAPETs) issued by the BIR in accepting the utilization by PSPC of the subject TCCs, as payments for excise taxes cannot prejudice the BIR from assessing the tax deficiencies of PSPC resulting from the non-payment of the deficiencies after due cancellation by the Center of the subject TCCs and corresponding TDM.

Respondent concludes that due to the fraudulent procurement of the subject TCCs, his right to assess has not yet prescribed.  He relies on the finding of the Center that the fraud was discovered only after the post-audit was conducted; hence, Sec. 222(a) of the NIRC applies, reckoned from October 24, 1999 or the date of the post-audit report.  In fine, he points that what is at issue is the resulting non-payment of PSPC’s excise tax liabilities from the cancellation of subject TCCs and not the amount of deficiency taxes due from PSPC, as what was properly assessed on November 15, 1999 was the amount of tax declared and found in PSPC’s excise tax returns covered by the subject TCCs.

We find for PSPC.

The CTA En Banc upheld respondent’s theory by holding that the Center has the authority to do a post-audit on the TCCs it issued; the TCCs are subject to the results of the post-audit since their issuance is subject to a suspensive condition; the transferees of the TCCs are solidarily liable with the transferors on the result of the post-audit; and the cancellation of the subject TCCs resulted in PSPC having to bear the loss anchored on its solidary liability with the transferor of the subject TCCs.

We can neither sustain respondent’s theory nor that of the CTA En Banc.

First, in overturning the August 2, 2004 Decision of the CTA Division, the CTA En Banc applied Article 1181 of the Civil Code in this manner:

To completely understand the matter presented before Us, it is worth emphasizing that the statement on the subject certificate stating that it is issued subject to post-audit is in the nature of a suspensive condition under Article 1181 of the Civil Code, which is quoted hereunder for ready reference, to wit:

`In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.’

The above-quoted article speaks of obligations. `These conditions affect obligations in diametrically opposed ways.  If the suspensive condition happens, the obligation arises; in other words, if the condition does not happen, the obligation does not come into existence.  On the other hand, the resolutory condition extinguishes rights and obligations already existing; in other words, the obligations and rights already exist, but under the threat of extinction upon the happening of the resolutory condition’.  (8 Manresa 130-131, cited on page 140, Civil Code of the Philippines, Tolentino, 1962 ed., Vol. IV).

In adopting the foregoing provision of law, this Court rules that the issuance of the tax credit certificate is subject to the condition that a post-audit will subsequently be conducted in order to determine if the holder is indeed qualified for its issuance.  As stated earlier, the holder takes the same subject to the outcome of the post-audit.  Thus, unless and until there is a final determination of the holder’s right to the issuance of the certificate, there exists no obligation on the part of the DOF or the BIR to recognize the rights of then holder or transferee. x x x

x x x x

The validity and propriety of the TCC to effectively constitute payment of taxes to the government are still subject to the outcome of the post-audit.  In other words, when the issuing authority (DOF) finds, as in the case at bar, circumstances which may warrant the cancellation of the certificate, the holder is inevitably bound by the outcome by the virtue of the express provisions of the TCCs.^[27]

The CTA En Banc is incorrect.

Art.1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition.  However, Art. 1181 does not apply to the present case since the parties did NOT agree to a suspensive condition.  Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the Civil Code.  Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106(c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others.  Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs.  Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.

The CTA En Banc‘s holding of the presence of a suspensive condition is untenable as the subject TCCs duly issued by the Center are immediately effective and valid.  The suspensive condition as ratiocinated by the CTA En Banc is one where the transfer contract was duly effected on the day it was executed between the transferee and the transferor but the TCC cannot be enforced until after the post-audit has been conducted.  In short, under the ruling of the CTA En Banc, even if the TCC has been issued, the real and true application of the tax credit happens only after the post-audit confirms the TCC’s validity and not before the confirmation; thus, the TCC can still be canceled even if it has already been ostensibly applied to specific internal revenue tax liabilities.

We are not convinced.

We cannot subscribe to the CTA En Banc‘s holding that the suspensive condition suspends the effectivity of the TCCs as payment until after the post-audit.  This strains the very nature of a TCC.

A tax credit is not specifically defined in our Tax Code, but Art. 21 of EO 226 defines a tax credit as “any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board (of Investments), if so delegated by the Secretary of Finance.”  Tax credits were granted under EO 226 as incentives to encourage investments in certain businesses.  A tax credit generally refers to an amount that may be “subtracted directly from one’s total tax liability.”  It is therefore an “allowance against the tax itself” or “a deduction from what is owed” by a taxpayer to the government.  In RR 5-2000, a tax credit is defined as “the amount due to a taxpayer resulting from an overpayment of a tax liability or erroneous payment of a tax due.”

A TCC is

a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations.

From the above definitions, it is clear that a TCC is an undertaking by the government through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an overpayment of income taxes, a direct benefit granted by law or other sources and instances granted by law such as on specific unused input taxes and excise taxes on certain goods.  As such, tax credit is transferable in accordance with pertinent laws, rules, and regulations.

Therefore, the TCCs are immediately valid and effective after their issuance.  As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and Instructions found at the back of each TCC, which provide:

1.  This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations.

x x x x

4.  To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit portion at the back of the certificate and affix his signature on the column provided. (Emphasis supplied.)

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit.  In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit.  Does the payment made become effective if no post-audit is conducted?  Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period?  Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its effectivity.  Our system of laws and procedures abhors ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as payment for taxes.  No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance.  As such, in the present case, if the TCCs have already been applied as partial payment for the tax liability of PSPC, a post-audit of the TCCs cannot simply annul them and the tax payment made through said TCCs.  Payment has already been made and is as valid and effective as the issued TCCs.  The subsequent post-audit cannot void the TCCs and allow the respondent to declare that utilizing canceled TCCs results in nonpayment on the part of PSPC. As will be discussed, respondent and the Center expressly recognize the TCCs as valid payment of PSPC’s tax liability.

Second, the only conditions the TCCs are subjected to are those found on its face.  And these are:

1. 1. Post-audit and subsequent adjustment in the event of computational discrepancy;
   2. A reduction for any outstanding account/obligation of herein claimant with the BIR and/or BOC; and
   3. Revalidation with the Center in case the TCC is not utilized or applied within one (1) year from date of issuance/date of last utilization.

The above conditions clearly show that the post-audit contemplated in the TCCs does not pertain to their genuineness or validity, but on computational discrepancies that may have resulted from the transfer and utilization of the TCC.

This is shown by a close reading of the first and second conditions above; the third condition is self explanatory.  Since a tax credit partakes of what is owed by the State to a taxpayer, if the taxpayer has an outstanding liability with the BIR or the BOC, the money value of the tax credit covered by the TCC is primarily applied to such internal revenue liabilities of the holder as provided under condition number two.  Elsewise put, the TCC issued to a claimant is applied first and foremost to any outstanding liability the claimant may have with the government.  Thus, it may happen that upon post-audit, a TCC of a taxpayer may be reduced for whatever liability the taxpayer may have with the BIR which remains unpaid due to inadvertence or computational errors, and such reduction necessarily affects the balance of the monetary value of the tax credit of the TCC.

For example, Company A has been granted a TCC in the amount of PhP 500,000 through its export transactions, but it has an outstanding excise tax liability of PhP 250,000 which due to inadvertence was erroneously assessed and paid at PhP 225,000.  On post-audit, with the finding of a deficiency of PhP 25,000, the utilization of the TCC is accordingly corrected and the tax credit remaining in the TCC correspondingly reduced by PhP 25,000.  This is a concrete example of a computational discrepancy which comes to light after a post-audit is conducted on the utilization of the TCC.  The same holds true for a transferee’s use of the TCC in paying its outstanding internal revenue tax liabilities.

Other examples of computational errors would include the utilization of a single TCC to settle several internal revenue tax liabilities of the taxpayer or transferee, where errors committed in the reduction of the credit tax running balance are discovered in the post-audit resulting in the adjustment of the TCC utilization and remaining tax credit balance.

Third, the post-audit the Center conducted on the transferred TCCs, delving into their issuance and validity on alleged violations by PSPC of the August 29, 1989 MOA between the DOF and BOI, is completely misplaced.  As may be recalled, the Center required PSPC to submit copies of pertinent sales invoices and delivery receipts covering sale transactions of PSPC products to the TCC assignors/transferors purportedly in connection with an ongoing post audit.  As correctly protested by PSPC but which was completely ignored by the Center, PSPC is not required by law to be a capital equipment provider or a supplier of raw material and/or component supplier to the transferors.  What the law requires is that the transferee be a BOI-registered company similar to the BOI-registered transferors.

The IRR of EO 226, which incorporated the October 5, 1982 MOA between the MOF and BOI, pertinently provides for the guidelines concerning the transferability of TCCs:

[T]he MOF and the BOI, through their respective representatives, have agreed on the following guidelines to govern the transferability of tax credit certificates:

1) All tax credit certificates issued to BOI-registered enterprises under P.D. 1789 may be transferred under conditions provided herein;

2) The transferee should be a BOI-registered firm;

3) The transferee may apply such tax credit certificates for payment of taxes, duties, charges or fees directly due to the national government for as long as it enjoys incentives under P.D. 1789.  (Emphasis supplied.)

The above requirement has not been amended or repealed during the unfolding of the instant controversy.  Thus, it is clear from the above proviso that it is only required that a TCC transferee be BOI-registered.  In requiring PSPC to submit sales documents for its purported post-audit of the TCCs, the Center gravely abused its discretion as these are not required of the transferee PSPC by law and by the rules.

While the October 5, 1982 MOA appears to have been amended by the August 29, 1989 MOA between the DOF and BOI, such may not operate to prejudice transferees like PSPC.  For one, the August 29, 1989 MOA remains only an internal agreement as it has neither been elevated to the level of nor incorporated as an amendment in the IRR of EO 226.  As aptly put by the CTA Division:

If the 1989 MOA has validly amended the 1982 MOA, it would have been incorporated either expressly or by reference in Rule VII of the Implementing Rules and Regulations (IRRs) of E.O. 226.  To date, said Rule VII has not been repealed, amended or otherwise modified.  It is noteworthy that the 1999 edition of the official publication by the BOI of E.O. 226 and its IRRs (Exhibit R) which is the latest version, as amended, has not mentioned expressly or by reference [sic] 1989 MOA.  The MOA mentioned therein is still the 1982 MOA.

The 1982 MOA, although executed as a mere agreement between the DOF and the BOI was elevated to the status of a rule and regulation applicable to the general public by reason of its having been expressly incorporated in Rule VII of the IRRs.   On the other hand, the 1989 MOA which purportedly amended the 1982 MOA, remained a mere agreement between the DOF and the BOI because, unlike the 1982 MOA, it was never incorporated either expressly or by reference to any amendment or revision of the said IRRs.  Thus, it cannot be the basis of any invalidation of the transfers of TCCs to petitioner nor of any other sanction against petitioner.

For another, even if the August 29, 1989 MOA has indeed amended the IRR, which it has not, still, it is ineffective and cannot prejudice third parties for lack of publication as mandatorily required under Chapter 2 of Book VII, EO 292, otherwise known as the Administrative Code of 1987, which pertinently provides:

Section 3.  Filing.—(1) Every agency shall file with the University of the Philippines Law Center three (3) certified copies of every rule adopted by it. Rules in force on the date of effectivity of this Code which are not filed within three (3) months from the date shall not thereafter be the basis of any sanction against any party or person.

(2)  The records officer of the agency, or his equivalent functionary, shall carry out the requirements of this section under pain of disciplinary action.

(3)  A permanent register of all rules shall be kept by the issuing agency and shall be open to public inspection.

Section 4.  Effectivity.—In addition to other rule-making requirement provided by law not inconsistent with this Book, each rule shall become effective fifteen (15) days from the date of filing as above provided unless a different date is fixed by law, or specified in the rule in cases of imminent danger to public health, safety and welfare, the existence of which must be expressed in a statement accompanying the rule.  The agency shall take appropriate measures to make emergency rules known to persons who may be affected by them.

Section 5. x x x x

(2)  Every rule establishing an offense or defining an act which pursuant to law, is punishable as a crime or subject to a penalty shall in all cases be published in full text.

It is clear that the Center or DOF cannot compel PSPC to submit sales documents for the purported post-audit, as PSPC has duly complied with the requirements of the law and rules to be a qualified transferee of the subject TCCs.

Fourth, we likewise fail to see the liability clause at the dorsal portion of the TCCs to be a suspensive condition relative to the result of the post-audit.  Said liability clause indicates:

LIABILITY CLAUSE

Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE.  (Emphasis supplied.)

The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee.  There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee.  Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee.  Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter’s responsibility and liability.  The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center.   It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one’s property without due process of law.  Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center’s representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities.  Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law.

In the instant case, a close review of the factual milieu and the records reveals that PSPC is a transferee in good faith and for value.  No evidence was adduced that PSPC participated in any way in the issuance of the subject TCCs to the corporations who in turn conveyed the same to PSPC.  It has likewise been shown that PSPC was not involved in the processing for the approval of the transfers of the subject TCCs from the various BOI-registered transferors.

Respondent, through the Center, made much of the alleged non-payment through non-delivery by PSPC of the IFOs it purportedly sold to the transferors covered by supply agreements which were allegedly the basis of the Center for the approval of the transfers.  Respondent points to the requirement under the August 29, 1989 MOA between the DOF and BOI, specifying the requirement that “[t]he transferee should be a BOI-registered firm which is a domestic capital equipment supplier, or a raw material and/or component supplier of the transferor.”

As discussed above, the above amendment to the October 5, 1982 MOA between BOI and MOF cannot prejudice any transferee, like PSPC, as it was neither incorporated nor elevated to the IRR of EO 226, and for lack of due publication.  The pro-forma supply agreements allegedly executed by PSPC and the transferors covering the sale of IFOs to the transferors have been specifically denied by PSPC.  Moreover, the above-quoted requirement is not required under the IRR of EO 226.  Therefore, it is incumbent for respondent to present said supply agreements to prove participation by PSPC in the approval of the transfers of the subject TCCs.  Respondent failed to do this.

PSPC claims to be a transferee in good faith of the subject TCCs.  It believed that its tax obligations for 1992 and 1994 to 1997 had in fact been paid when it applied the subject TCCs, considering that all the necessary authorizations and approvals attendant to the transfer and utilization of the TCCs were present.  It is undisputed that the transfers of the TCCs from the original holders to PSPC were duly approved by the Center, which is composed of a number of government agencies, including the BIR.  Such approval was annotated on the reverse side of the TCCs, and the Center even issued TDM which is proof of its approval for PSPC to apply the TCCs as payment for the tax liabilities.  The BIR issued its own TDM, also signifying approval of the TCCs as payment for PSPC’s tax liabilities.  The BIR also issued ATAPETs covering the aforementioned BIR-issued TDM, further proving its acceptance of the TCCs as valid tax payments, which formed part of PSPC’s total tax payments along with checks duly acknowledged and received by BIR’s authorized agent banks.

Several approvals were secured by PSPC before it utilized the transferred TCCs, and it relied on the verification of the various government agencies concerned of the genuineness and authenticity of the TCCs as well as the validity of their issuances.  Furthermore, the parties stipulated in open court that the BIR-issued ATAPETs for the taxes covered by the subject TCCs confirm the correctness of the amount of excise taxes paid by PSPC during the tax years in question.

Thus, it is clear that PSPC is a transferee in good faith and for value of the subject TCCs and may not be prejudiced with a re-assessment of excise tax liabilities it has already settled when due with the use of the subject TCCs.  Logically, therefore, the excise tax returns filed by PSPC duly covered by the TDM and ATAPETs issued by the BIR confirming the full payment and satisfaction of the excise tax liabilities of PSPC, have not been fraudulently filed.  Consequently, as PSPC is a transferee in good faith and for value, Sec. 222(a) of the NIRC does not apply in the instant case as PSPC has neither been shown nor proven to have committed any fraudulent act in the transfer and utilization of the subject TCCs.  With more reason, therefore, that the three-year prescriptive period for assessment under Art. 203 of the NIRC has already set in and bars respondent from assessing anew PSPC for the excise taxes already paid in 1992 and 1994 to 1997.  Besides, even if the period for assessment has not prescribed, still, there is no valid ground for the assessment as the excise tax liabilities of PSPC have been duly settled and paid.

Fifth, PSPC cannot be blamed for relying on the Center’s approval for the transfers of the subject TCCs and the Center’s acceptance of the TCCs for the payment of its excise tax liabilities.  Likewise, PSPC cannot be faulted in relying on the BIR’s acceptance of the subject TCCs as payment for its excise tax liabilities.  This reliance is supported by the fact that the subject TCCs have passed through stringent reviews starting from the claims of the transferors, their issuance by the Center, the Center’s approval for their transfer to PSPC, the Center’s acceptance of the TCCs to pay PSPC’s excise tax liabilities through the issuance of the Center’s TDM, and finally the acceptance by the BIR of the subject TCCs as payment through the issuance of its own TDM and ATAPETs.

Therefore, PSPC cannot be prejudiced by the Center’s turnaround in assailing the validity of the subject TCCs which it issued in due course.

Sixth, we are of the view that the subject TCCs cannot be canceled by the Center as these had already been canceled after their application to PSPC’s excise tax liabilities.  PSPC contends they are already functus officio, not quite in the sense of being no longer effective, but in the sense that they have been used up.  When the subject TCCs were accepted by the BIR through the latter’s issuance of TDM and the ATAPETs, the subject TCCs were duly canceled.

The tax credit of a taxpayer evidenced by a TCC is used up or, in accounting parlance, debited when applied to the taxpayer’s internal revenue tax liability, and the TCC canceled after the tax credit it represented is fully debited or used up.  A credit is a payable or a liability.  A tax credit, therefore, is a liability of the government evidenced by a TCC.  Thus, the tax credit of a taxpayer evidenced by a TCC is debited by the BIR through a TDM, not only evidencing the payment of the tax by the taxpayer, but likewise deducting or debiting the existing tax credit with the amount of the tax paid.

For example, a transferee or the tax claimant has a TCC of PhP 1 million, which was used to pay income tax liability of PhP 500,000, documentary stamp tax liability of PhP 100,000, and value-added tax liability of PhP 350,000, for an aggregate internal revenue tax liability of PhP 950,000.  After the payments through the PhP 1 million TCC have been approved and accepted by the BIR through the issuance of corresponding TDM, the TCC money value is reduced to only PhP 50,000, that is, a credit balance of PhP 50,000.  In this sense, the tax credit of the TCC has been canceled or used up in the amount of PhP 950,000.  Now, let us say the transferee or taxpayer has excise tax liability of PhP 250,000, s/he only has the remaining PhP 50,000 tax credit in the TCC to pay part of said excise tax.  When the transferee or taxpayer applies such payment, the TCC is canceled as the money value of the tax credit it represented has been fully debited or used up.  In short, there is no more tax credit available for the taxpayer to settle his/her other tax liabilities.

In the instant case, with due application, approval, and acceptance of the payment by PSPC of the subject TCCs for its then outstanding excise tax liabilities in 1992 and 1994 to 1997, the subject TCCs have been canceled as the money value of the tax credits these represented have been used up.  Therefore, the DOF through the Center may not now cancel the subject TCCs as these have already been canceled and used up after their acceptance as payment for PSPC’s excise tax liabilities.  What has been used up, debited, and canceled cannot anymore be declared to be void, ineffective, and canceled anew.

Besides, it is indubitable that with the issuance of the corresponding TDM, not only is the TCC canceled when fully utilized, but the payment is also final subject only to a post-audit on computational errors.  Under RR 5-2000, a TDM is

a certification, duly issued by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the taxpayer named therein has duly paid his internal revenue tax liability in the form of and through the use of a Tax Credit Certificate, duly issued and existing in accordance with the provisions of these Regulations.  The Tax Debit Memo shall serve as the official receipt from the BIR evidencing a taxpayer’s payment or satisfaction of his tax obligation.  The amount shown therein shall be charged against and deducted from the credit balance of the aforesaid Tax Credit Certificate.

Thus, with the due issuance of TDM by the Center and TDM by the BIR, the payments made by PSPC with the use of the subject TCCs have been effected and consummated as the TDMs serve as the official receipts evidencing PSPC’s payment or satisfaction of its tax obligation.  Moreover, the BIR not only issued the corresponding TDM, but it also issued ATAPETs which doubly show the payment of the subject excise taxes of PSPC.

Based on the above discussion, we hold that respondent erroneously and without factual and legal basis levied the assessment.  Consequently, the CTA En Banc erred in sustaining respondent’s assessment.

Second Issue:   Cancellation of TCCs

PSPC argues that the CTA En Banc erred in upholding the cancellation by the Center of the subject TCCs it used in paying some of its excise tax liabilities as the subject TCCs were genuine and authentic, having been subjected to thorough and stringent procedures, and approvals by the Center.  Moreover, PSPC posits that both the CTA’s Division and En Banc duly found that PSPC had neither knowledge, involvement, nor participation in the alleged fraudulent issuance of the subject TCCs, and, thus, as a transferee in good faith and for value, it cannot be held solidarily liable for any fraud attendant to the issuance of the subject TCCs.  PSPC further asserts that the Center has no authority to cancel the subject TCCs as such authority is lodged exclusively with the BOI.  Lastly, PSPC said that the Center’s Excom Resolution No. 03-05-99 which the Center relied upon as basis for the cancellation is defective, ineffective, and cannot prejudice third parties for lack of publication.

As we have explained above, the subject TCCs after being fully utilized in the settlement of PSPC’s excise tax liabilities have been canceled, and thus cannot be canceled anymore.  For being immediately effective and valid when issued, the subject TCCs have been duly utilized by transferee PSPC which is a transferee in good faith and for value.

On the issue of the fraudulent procurement of the TCCs, it has been asseverated that fraud was committed by the TCC claimants who were the transferors of the subject TCCs.  We see no need to rule on this issue in view of our finding that the real issue in this petition does not dwell on the validity of the TCCs procured by the transferor from the Center but on whether fraud or breach of law attended the transfer of said TCCs by the transferor to the transferee.

The finding of the CTA En Banc that there was fraud in the procurement of the subject TCCs is, therefore, irrelevant and immaterial to the instant petition.  Moreover, there are pending criminal cases arising from the alleged fraud.  We leave the matter to the anti-graft court especially considering the failure of the affiants to the affidavits to appear, making these hearsay evidence.

We note in passing that PSPC and its officers were not involved in any fraudulent act that may have been undertaken by the transferors of subject TCCs, supported by the finding of the Ombudsman Special Prosecutor Leonardo P. Tamayo that Pacifico R. Cruz, PSPC General Manager of the Treasury and Taxation Department, who was earlier indicted as accused in OMB-0-99-2012 to 2034 for violation of Sec. 3(e) and (j) of RA 3019, as amended, otherwise known as the “Anti-Graft and Corrupt Practices Act,” for allegedly conspiring with other accused in defrauding and causing undue injury to the government, did not in any way participate in alleged fraudulent activities relative to the transfer and use of the subject TCCs.

In a Memorandum addressed to then Ombudsman Aniano A. Desierto, the Special Prosecutor Leonardo P. Tamayo recommended dropping Pacifico Cruz as accused in Criminal Case Nos. 25940-25962 entitled People of the  Philippines v. Antonio P. Belicena, et al., pending before the Sandiganbayan Fifth Division for lack of probable cause.  Special Prosecutor Tamayo found that Cruz’s involvement in the transfers of the subject TCCs came after the applications for the transfers had been duly processed and approved; and that Cruz could not have been part of the conspiracy as he cannot be presumed to have knowledge of the irregularity, because the 1989 MOA, which prescribed the additional requirement that the transferee of a TCC should be a supplier of the transferor, was not yet published and made known to private parties at the time the subject TCCs were transferred to PSPC.  The Memorandum of Special Prosecutor Tamayo was duly approved by then Ombudsman Desierto.  Consequently, on May 31, 2000, the Sandiganbayan Fifth Division, hearing Criminal Case Nos. 25940-25962, dropped Cruz as accused.

But even assuming that fraud attended the procurement of the subject TCCs, it cannot prejudice PSPC’s rights as earlier explained since PSPC has not been shown or proven to have participated in the perpetration of the fraudulent acts, nor is it shown that PSPC committed fraud in the transfer and utilization of the subject TCCs.

On the issue of the authority to cancel duly issued TCCs, we agree with respondent that the Center has concurrent authority with the BIR and BOC to cancel the TCCs it issued.  The Center was created under Administrative Order No. (AO) 266 in relation to EO 226.  A scrutiny of said executive issuances clearly shows that the Center was granted the authority to issue TCCs pursuant to its mandate under AO 266.  Sec. 5 of AO 266 provides:

SECTION 5. Issuance of Tax Credit Certificates and/or Duty Drawback.—The Secretary of Finance shall designate his representatives who shall, upon the recommendation of the CENTER, issue tax credit certificates within thirty (30) working days from acceptance of applications for the enjoyment thereof.  (Emphasis supplied.)

On the other hand, it is undisputed that the BIR under the NIRC and related statutes has the authority to both issue and cancel TCCs it has issued and even those issued by the Center, either upon full utilization in the settlement of internal revenue tax liabilities or upon conversion into a tax refund of unutilized TCCs in specific cases under the conditions provided.  AO 266 however is silent on whether or not the Center has authority to cancel a TCC it itself issued. Sec. 3 of AO 266 reveals:

SECTION 3.Powers, Duties and Functions.—The Center shall have the following powers, duties and functions:

a. To promulgate the necessary rules and regulations and/or guidelines for the effective implementation of this administrative order;

x x x x

g. To enforce compliance with tax credit/duty drawback policy and procedural guidelines;

x x x x

l.  To perform such other functions/duties as may be necessary or incidental in the furtherance of the purpose for which it has been established.  (Emphasis supplied.)

Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give ample authority to the Center to cancel the TCCs it issued.  Evidently, the Center cannot carry out its mandate if it cannot cancel the TCCs it may have erroneously issued or those that were fraudulently issued.   It is axiomatic that when the law and its implementing rules are silent on the matter of cancellation while granting explicit authority to issue, an inherent and incidental power resides on the issuing authority to cancel that which was issued.  A caveat however is required in that while the Center has authority to do so, it must bear in mind the nature of the TCC’s immediate effectiveness and validity for which cancellation may only be exercised before a transferred TCC has been fully utilized or canceled by the BIR after due application of the available tax credit to the internal revenue tax liabilities of an innocent transferee for value, unless of course the claimant or transferee was involved in the perpetration of the fraud in the TCC’s issuance, transfer, or utilization.  The utilization of the TCC will not shield a guilty party from the consequences of the fraud committed.

While we agree with respondent that the State in the performance of governmental function is not estopped by the neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be applied to work injustice against an innocent party.  In the case at bar, PSPC’s rights as an innocent transferee for value must be protected.  Therefore, the remedy for respondent is to go after the claimant companies who allegedly perpetrated the fraud.   This is now the subject of a criminal prosecution before the Sandiganbayan docketed as Criminal Case Nos. 25940-25962 for violation of RA 3019.

On the issue of the publication of the Center’s Excom Resolution No. 03-05-99 providing for the “Guidelines and Procedures for the Cancellation, Recall and Recovery of Fraudulently Issued Tax Credit Certificates,” we find that the resolution is invalid and unenforceable.  It authorizes the cancellation of TCCs and TDM which are found to have been granted without legal basis or based on fraudulent documents.   The cancellation of the TCCs and TDM is covered by a penal provision of the assailed resolution.  Such being the case, it should have been published and filed with the National Administrative Register of the U.P. Law Center in accordance with Secs. 3, 4, and 5, Chapter 2 of Book VII, EO 292 or the Administrative Code of 1987.

We explained in People v. Que Po Lay [94 Phil. 640 (1954)] that a rule which carries a penal sanction will bind the public if the public is officially and specifically informed of the contents and penalties prescribed for the breach of the rule.  Since Excom Resolution No. 03-05-99 was  neither  registered  with the U.P. Law Center nor published, it is ineffective and unenforceable.  Even if the resolution need not be published, the punishment for any alleged fraudulent act in the procurement of the TCCs must not be visited on PSPC, an innocent transferee for value, which has not been shown to have participated in the fraud.  Respondent must go after the perpetrators of the fraud.

~~~Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue (G.R. No. 172598, 21 March 2007, 2nd Div., J. Velasco, Jr.)

*******

As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and the use thereof in payment of tax liabilities and duties are not matters of first impression for this Court.  Taking into consideration the definition and nature of tax credits and TCCs, this Court’s Second Division definitively ruled in the aforesaid Pilipinas Shell case that the post audit is not a suspensive condition for the validity of TCCs, thus:

Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition.  However, Art. 1181 does not apply to the present case since the parties did NOT agree to a suspensive condition.  Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the Civil Code.  Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs.  Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.

x x x x

xxx (T)he TCCs are immediately valid and effective after their issuance. As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and instructions found at the back of each TCC, which provide:

1.  This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations.

x x x x

4.  To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit at the back of the certificate and affix his signature on the column provided.”

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit.  In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit.  Does the payment made become effective if no post-audit is conducted?  Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period?  Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its effectivity.  Our system of laws and procedures abhors ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as payment for taxes. No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance.  As such, in the present case, if the TCCs have already been applied as partial payment for the tax liability of PSPC, a post-audit of the TCCs cannot simply annul them and the tax payment made through said TCCs. Payment has already been made and is as valid and effective as the issued TCCs.  The subsequent post-audit cannot void the TCCs and allow the respondent to declare that utilizing canceled TCCs results in nonpayment on the part of PSPC x x x.”

Considered in the light of the foregoing pronouncements, Petron correctly argues that the CTA En Banc reversibly erred in holding that the result of the post-audit conducted by the Center partook the nature of a suspensive condition for the validity of the subject TCCs and the use thereof as payment of its tax liabilities or duties.   Limited only to computational discrepancies arising from the use or transfer of TCCs, the post-audit conducted by the Center would, if at all, only give rise to an adjustment of the monetary value of the TCCs subjected thereto.  Issued pursuant to Article 39 (k) of EO No. 226 and subject to the aforequoted Guidelines and Instructions printed at the back thereof, the subject TCCs were, consequently, valid upon their issuance in favor of the original grantees which had the right to use them in payment of their tax liabilities and/or transfer them in favor of assignees like Petron which could, in turn, utilize them as payment of its own tax liabilities.

Not being privy to the issuance of the subject TCCs and having already used them in paying its own tax liabilities, Petron also correctly points out that it cannot be prejudiced by the fraud which supposedly attended the issuance of the same.  More so, when it is borne in mind that, as ground for the cancellation of said TCCs, fraud was not adequately established by respondent with clear and convincing evidence showing that the grantees had not, indeed, manufactured and exported at the volumes which served as bases for the grant of the subject TCCs.  Rather than presenting oral and documentary evidence to prove said material fact, the record shows that respondent simply relied on the findings and conclusions the Center cited in support of the cancellation of the TCCs as well as those embodied in the Report of the Senate Committee on Ways and Means and Committee on Accountability of Public Officers and Investigation which jointly delved into the irregularities reported to have attended the Center’s issuance of TCCs in favor of corporations in the textile industry, including petitioner’s assignors.

While the CTA is not governed strictly by technical rules of evidence on the principle that rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, respondent’s presentation of evidence to prove the fraud which attended the issuance of the subject TCCs is not a mere procedural technicality which may be disregarded considering that it is the very basis for the claim that Petron’s payment of its excise tax liabilities had been avoided.  It cannot be over-emphasized that fraud is a question of fact which cannot be presumed and must be proven by clear and convincing evidence by the party alleging the same.  Without even presenting the documents which served as bases for the issuance of the subject TCCs from 1994 to 1997, respondent miserably failed in discharging his evidentiary burden with the presentation of the Center’s cancellation memoranda to which were simply annexed some of the grantees’ original registration documents and their Financial Statements for an average of two years.

On the other hand, the transferability of the TCCs issued in favor of the original grantees is primarily governed by Article 21 of EO 226 which provides that, “the tax credit certificates issued by the Board (of Investments) pursuant to laws repealed by this Code but without in any way diminishing the scope of negotiability under their laws of issue are transferable under such conditions as may be determined by the Board after consultation with the Department of Finance.”  In turn, the Implementing Rules and Regulations (IRR) of EO 226 incorporated the October 5, 1982 Memorandum of Agreement (MOA) between the Ministry of Finance (MOF) and the BOI, which pertinently provides the following guidelines for the transfer of said TCCs, to wit:

1) All tax credit certificates issued to BOI-registered enterprises under P.D. 1789 may be transferred under conditions provided herein;

2) The transferee should be a BOI-registered firm;

3) The transferee may apply such tax credit certificates for payment of taxes, duties, charges or fees directly due to the national government for as long as it enjoys incentives under P.D. 1789.

As a BOI-registered enterprise under Certificates of Registration No. 89-1037 and D95-136, Petron is undoubtedly a qualified transferee of the TCCs originally issued in favor of its assignors. In finding that the assignments of the TCCs in favor of Petron were likewise fraudulent, however, the CTA En Banc ruled that the aforesaid October 5, 1982 MOA between the MOF and the BOI was amended by the said agencies’ August 29, 1989 MOA which additionally required that the TCC-assignee should be a “domestic capital equipment supplier or a raw material and/or component supplier of the transferor.”  Underscoring the fact that the assignments were approved upon the representation that the TCCs were to be used as payment for oil products purchased from Petron, the CTA En Bancfound that the grantees’ Financial Statements indicated that they could not have consumed fuels at the levels represented to the Center and that Petron had not, in fact, delivered petroleum products in consideration of the assignment of the TCCs.

As held in the Pilipinas Shell case, however, said August 29, 1989 MOA between the MOF and the BOI cannot prejudice transferees of TCCs like petitioner.  Aside from not having been elevated to the level of or incorporated as an amendment in the IRR of EO 226, the same MOA was found ineffective for non-compliance with the publication requirement under Chapter 2, Book VII of EO 292, otherwise known as the Administrative Code of 1987.  For the validity of the transfer of the TCCs by the grantees, it is, consequently, enough that Petron is a BOI registered-enterprise, as provided under said agencies’ October 5, 1982 MOA.  Although not required by law to be a capital equipment provider or a supplier of raw material and/or component supplier to the transferors, the record, even then, shows that Petron issued credit notes to the grantees and, as a result, delivered petroleum products in favor of the latter and/or its assignees in the aggregate amount of P284,390,845.00.  In the absence of showing of any legal prohibition thereon, we find that Petron cannot be faulted for honoring the grantees’ further assignment of said credit notes in favor of third parties.

For a party charged with the burden of proving the same, respondent did not even come close to establishing the fraud which purportedly attended both the issuance of the subject TCCs and the transfer thereof in favor of Petron.  That respondent’s reliance of the Center’s cancellation memoranda was misplaced and misguided is evident from the following admissions in the parties’ June 22, 2001 Joint Stipulation of Facts and Issues, to wit:

3. That the available records at the DOF Center upon which the findings and conclusions of the Cancellation Memorandum (Exhibit “2”, “3”, “4”, “5”, “6”, “7” and “8”) were based had not been explained nor confirmed by the issuer, signatory or parties to the said records;

4. That respondent’s witness, Beverly M. Taneza has no actual knowledge that Petron actually delivered fuel and other petroleum products in fulfillment of, and in accordance with, its agreement or instructions of the assignors, namely, Diamond Knitting, Alliance Thread, Filstar Textile, Fiber Tech., Jantex Phils. and Master Colour which assigned their TCCs to Petron in consideration or payment of the delivery and supply of fuel and other petroleum products;

5. That the statement in the `Recommendation’ on the Cancellation Memorandum (Exhibit “2”, “3”, “4”, “5”, “6”, “7” and “8”) that the TCC grantees Diamond Knitting, Alliance Thread, Filstar Textile, Fiber Tech., Jantex Phils. and Master Colour have concurred in their findings on the issuance and transfer of the TCCs to the oil companies is based on the Affidavits of the General Managers of the said TCC grantees marked as Exhibit `2-G’ (Virgilio Pinon of Alliance Thread), `3-F’ (Reynato G. Andaya of Diamond Knitting), `5-G’ (Carmencita C. Camara of Fiber Tech.), `6-G’ (Rodel P. Rodriguez of Filstar Textile), `7-G’ (Angel T. Chua of Jantex Phils.) and `8-G’ (Margaret A. De Luna of Master Colour).

In finding that the assignments of the TCCs in favor of Petron were fraudulent, we find that the CTA En Banc reversibly erred in relying on the abovementioned affidavits executed by the grantees’ former general managers/officers who, after disavowing knowledge of the assignment of the subject TCCs and Petron’s delivery of bunker fuel oil in consideration thereof, requested the cancellation of the TCCs.  Without said erstwhile general managers/officers being presented on the witness stand to affirm the truth and veracity of their statements, the affidavits they executed are, however, correctly impugned by Petitioner as hearsay for lack of opportunity to cross-examine said affiants.  Almost always incomplete and often inaccurate, sometimes from partial suggestion, or for want of suggestion and inquiries, the infirmity of affidavits as species of evidence is a matter of judicial experience and  are thus considered inferior to the testimony given in open court.  Unless the affiant is placed on the witness stand to testify thereon, the rule is settled that affidavits are inadmissible as evidence under the hearsay rule.

Having proven the valuable consideration for the grantees’ transfer of the TCCs in its favor, it also bears pointing out that Petron has more than amply proved its good faith by complying with the procedures laid down for the transfer and use thereof.  With its approval of the Deeds of Assignment executed by the grantees, the Center unequivocally affirmed not only the validity of the TCCs but also the transfer thereof in favor of Petron to whom it issued the requisite DOF-TDMs.  On the other hand, upon surrender of the Deeds of Assignment, the TCCs and the DOF-TDMs, the BIR Collection Program Division issued the corresponding ATAPETs which, together with said documents, were further submitted to the BIR Head Office.  It was only after further authentication and verification of the documents thus submitted that Petron was eventually issued BIR TDMs which bore the signature of the BIR Assistant Commissioner of Collection Service and signified acceptance of the TCCs as payment of the excise taxes due from the former.

Under RR 5-2000, a TDM or a Tax Debit Memo “shall serve as the official receipt from the BIR evidencing a taxpayer’s payment or satisfaction of his tax obligation.”  Until the Center’s cancellation of the TCCs assigned in its favor, Petron was, in fact, never questioned nor assessed for deficiency or delinquency in the payment of its excise taxes thru the use of the same TCCs.  Even prescinding from the CTA July 23, 1999 decision in C.T.A. Case No. 5657 which remains on appeal before the CA, we find that Petron had every right to rely on the validity of the subject TCCs, the Center’s approval of the deeds of assignment the grantees executed over the same and the BIR’s acceptance of its use thereof in payment of its excise taxes.  While the Government cannot, concededly, be estopped from collecting taxes by the mistake, negligence, or omission of its agents,  the Court’s ruling in the Pilipinas Shell case is to the effect that an assignee’s status as a transferee in good faith and for value provides ample protection from the adverse findings subsequently made by the Center.

In urging the affirmance of the assailed decision, respondent calls our attention to the pronouncement in the case of Proton Pilipinas Corporation vs. Republic of the Philippines that the resultant non-payment of customs duties and taxes by reason of the cancellation of the TCCs for having been found as fake and spurious is the obligation of the taxpayer.  Rather than the legal implications and consequences of the cancellation of TCCs, however, the Proton Pilipinas case dealt with procedural matters such as the effect of the Sandiganbayan’s jurisdiction over the criminal case involving the issuance of the TCCs to the collection case instituted by the government before the Regional Trial Court (RTC), the existence of litis pendentia as a consequence of the pendency of the criminal and civil cases filed under the circumstances and the prejudicial question arising therefrom.  Sharing the same factual and legal milieu as the case at bench, more in point is the Pilipinas Shell case which ruled that the rights of a transferee in good faith cannot be prejudiced by the Center’s turnaround from its previous approval of the assignments of the TCCs.

Once a case has been decided one way, the rule is settled that any other case involving exactly the same point at issue should be decided in the same manner under the principle stare decisis et non quieta movere.  Fealty to the same principle impels us to discount merit from respondent’s reliance on the Liability Clause at the dorsal portion of the TCCs which provides that both the transferor and the transferee shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of the TCC.  Expounding on the practical and legal significance of said Liability Clause in the Pilipinas Shell case, this Court ruled as follows:

The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee.  There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee.  Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee.  Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter’s responsibility and liability.  The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center.  It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one’s property without due process of law.  Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center’s representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities.  Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law.

In addition to its lack of participation in the procurement of the subject TCCs as admitted in the parties’ March 29, 2001 Joint Stipulation of Facts and Issues, Petron was not shown to have had a hand in or knowledge of the fraud which purportedly attended the issuance of the same TCCs.  Qualified to be a transferee as a BOI-registered enterprise under October 5, 1982 MOA between the MOF and the BOI, Petron went through the multi-tiered prescribed procedures for the transfer of said TCCs and use thereof in payment of its tax obligations.  Relying on the validity of the TCCs, the Center’s approval of the transfer thereof and the BIR’s acceptance of the same as payment for its excise tax obligations, Petron issued credit notes by way of consideration for the TCCs and delivered petroleum products in the total sum of P284,390,845.00 in favor of the grantees and/or their assignees.  As a transferee in good faith and for value, Petron cannot, therefore, be said to have incurred any liability insofar as the transfers of the subject TCCs are concerned.

~~~Petron Corporation vs. Commissioner of Internal Revenue (G.R. No. 180385, 28 July 2010, 1st Div., J. Perez)

*******

The CIR claims that Petron was not an innocent transferee for value, because the TCCs assigned to respondent were void.  Petitioner based its allegations on the post-audit report of the DOF, which declared that the subject TCCs were obtained through fraud and, thus, had no monetary value.  The CIR adds that the TCCs were subject to a post-audit by the Center to complete the payment of the excise tax liability to which they were applied.  Petitioner further contends that the Liability Clause of the TCCs makes the transferee or assignee solidarily liable with the original grantee for any fraudulent act pertinent to their procurement and transfer.  The CIR assails the contrary ruling of the CTA En Banc, which confined the solidary liability only to the original grantee of the TCCs. Thus, petitioner believes that the correct interpretation of the Liability Clause in the TCCs makes Petron and the transferor companies or the original grantee solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of the TCCs. 

We are not persuaded by the CIR’s position on this matter.

The Liability Clause of the TCCs reads:

Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE.

The scope of this solidary liability, as stated in the TCCs, was clarified by this Court in Shell, as follows:

The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee.  There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee.  Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee.  Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter’s responsibility and liability.  The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center.  It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one’s property without due process of law.  Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center’s representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law. (Emphasis supplied.)

We also find that the post-audit report, on which the CIR based its allegations, does not have the effect of a suspensive condition that would determine the validity of the TCCs.

We held in Petron v. CIR (Petron), which is on all fours with the instant case, that TCCs are valid and effective from their issuance and are not subject to a post-audit as a suspensive condition for their validity.  Our ruling in Petron finds guidance from our earlier ruling in Shell, which categorically states that a TCC is valid and effective upon its issuance and is not subject to a post-audit.  The implication on the instant case of the said earlier ruling is that Petron has the right to rely on the validity and effectivity of the TCCs that were assigned to it.  In finally determining their effectivity in the settlement of respondent’s excise tax liabilities, the validity of those TCCs should not depend on the results of the DOF’s post-audit findings.  We held thus in Petron:

As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and the use thereof in payment of tax liabilities and duties are not matters of first impression for this Court.  Taking into consideration the definition and nature of tax credits and TCCs, this Court’s Second Division definitively ruled in the aforesaid Pilipinas Shell case that the post audit is not a suspensive condition for the validity of TCCs, thus:

Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition.  However, Art. 1181 does not apply to the present case since the parties did NOT agree to a suspensive condition.  Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the Civil Code.  Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs.  Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.

xxx      xxx      xxx

. . . (T)he TCCs are immediately valid and effective after their issuance.  As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and instructions found at the back of each TCC, which provide:

1.  This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations.

xxx      xxx      xxx

4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit at the back of the certificate and affix his signature on the column provided.”

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit.  In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit.  Does the payment made become effective if no post-audit is conducted?  Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period?  Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its effectivity.  Our system of laws and procedures abhors ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as payment for taxes.  No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance.

In addition, Shell and Petron recognized an exception that holds the transferee/assignee liable if proven to have been a party to the fraud or to have had knowledge of the fraudulent issuance of the subject TCCs.  As earlier mentioned, the parties entered into a joint stipulation of facts stating that Petron did not participate in the procurement or issuance of those TCCs.  Thus, we affirm the CTA En Banc’s ruling that respondent was an innocent transferee for value thereof.

~~~Commissioner of Internal Revenue vs. Petron Corporation (G.R. No. 185568, 21 March 2012, 2nd Div., J. Sereno)

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