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CIR v. PETRON CORPORATION

FACTS:

Petron Corporation (Petron) is a corporation engaged in the production of petroleum products and is a Board of Investment (BOI) registered enterprise. From 1995 to 1998, Petron utilized Tax Credit Certificates (TCCs) issued by the Department of Finance's One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF Center) to pay its excise tax liabilities. The transfers and assignments of the TCCs were approved by the DOF Center and continuously approved by the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR). However, in 2002, the Commissioner of Internal Revenue (CIR) issued an Assessment against Petron claiming that the TCCs used by Petron had been fraudulently issued and transferred and were subsequently canceled by the DOF. The CIR imposed deficiency excise taxes, surcharges, and interests on Petron. Petron filed a protest, but the CIR served a Warrant of Distraint and/or Levy before acting on the protest. Petron then filed a petition before the Court of Tax Appeals (CTA) seeking to nullify the Warrant of Distraint and/or Levy.

During the proceedings, it was discovered that the TCCs used by Petron were allegedly fraudulently obtained and transferred. The DOF conducted a post-audit and found that the TCCs were fraudulently obtained and transferred to Petron. Consequently, the DOF canceled the TCCs and the Tax Debit Memos (TDMs) issued against the TCCs, deeming the excise taxes unpaid. Petron was given an opportunity to submit documents to prove that the TCCs were obtained as payment for petroleum products, failure to which the transfers would be canceled. The government relied on the presumption of regularity in canceling the TCCs.

The CIR imposed surcharges and interest on Petron for filing fraudulent excise tax returns using the fraudulently obtained and transferred TCCs. The prescriptive period to collect the taxes is ten years from the discovery of the fraud. The case before the Court of Appeals involves the invalid transfers of the TCCs to Petron, while the case at bar involves the fraudulent procurement and transfer of the TCCs.

During the proceedings, the CIR filed an Urgent Motion to Reopen the Case, seeking to present additional evidence to prove the fraudulent issuance and transfer of the TCCs. The motion was granted and subpoenas were issued. Petron filed a motion for reconsideration but was denied. Petron also filed an urgent motion to revert the case to the first division, which was denied. The court later resolved the CIR's formal offer of evidence and granted their motion to amend it. The CIR filed an omnibus motion for the court to take judicial notice of the liability clause in the TCCs, which was partially granted. The court eventually ruled, ordering Petron to pay the CIR the reduced amount of deficiency excise taxes for the taxable years 1995 to 1998, with additional surcharges and interest.

Petron appealed the decision to the Court of Tax Appeals (CTA) En Banc, arguing that it should not be held liable for the deficiency excise taxes. The CTA En Banc reversed the decision of the CTA's Second Division, absolving Petron from any deficiency excise tax liability. The CTA En Banc found that Petron had no participation in or knowledge of the fraudulent issuance and transfer of the TCCs. The CTA En Banc ruled that the CIR's assessment had no legal basis and that Petron was an innocent transferee of the TCCs.

The Commissioner of Internal Revenue (CIR) appealed the decision of the CTA En Banc to the Supreme Court.

ISSUES:

  1. Whether Petron is a qualified transferee of the Tax Credit Certificates (TCCs)

  2. Whether there was fraudulent procurement and transfer of the TCCs to Petron

  3. Whether Petron participated in the fraudulent issuance and transfer of the Tax Credit Certificates (TCCs).

  4. Whether Petron and the transferor companies are solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfer of the TCCs.

  5. Whether a transferee in good faith and for value of a Tax Credit Certificate (TCC) is legally required to pay again the tax covered by the TCC that has been declared null and void.

  6. Whether the post-audit report has the effect of a suspensive condition that would determine the validity of the TCCs.

  7. Whether or not the Tax Credit Certificates (TCCs) are subject to post-audit that may invalidate them.

  8. Whether or not Petron is an innocent transferee for value of the TCCs.

  9. Whether or not estoppel applies to the government in this case.

  10. Whether or not the imposition of a 25% surcharge and 20% interest on Petron's excise tax liabilities is justified.

RULING:

  1. The Court affirms the ruling of the CTA En Banc that Petron is a transferee in good faith and for value of the TCCs.

  2. The Court denies the petition of the CIR, finding no substantial evidence to support the allegation of fraudulent transfer of the TCCs to Petron.

  3. The Court held that Petron did not participate in the alleged fraudulent acts involved in the transfer and utilization of the subject TCCs. The joint stipulation entered into by the parties before the Court of Tax Appeals (CTA) Second Division absolved Petron from any participation in the fraud. The admission made by the parties in the stipulation of facts is treated as a judicial admission and requires no further proof. The Court cannot disregard the admission and allow the CIR to change its stand on the matter.

  4. The Court ruled that Petron and the transferor companies are not solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfer of the TCCs. The Liability Clause in the TCCs only provides for solidary liability between the transferor and transferee for acts or violations relating to the transfer itself, not for the validity of the TCCs or any fraud in their procurement. The Court followed its previous ruling in Shell which clarified the scope of the solidary liability mentioned in the TCCs.

  5. A transferee in good faith and for value of a TCC is not legally required to pay again the tax covered by the TCC that has been declared null and void. Solidary liability, if any, only applies to the sale of the TCC by the original grantee. The transferee should not be unjustly prejudiced by the fraud committed by the transferor in procuring or issuing the TCC.

  6. The post-audit report does not have the effect of a suspensive condition that would determine the validity of the TCCs. TCCs are valid and effective from their issuance and are not subject to a post-audit for their validity. The effectivity of the TCC should not depend on the results of the post-audit findings.

  7. The TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance.

  8. Petron is an innocent transferee for value of the TCCs and is not liable for any fraudulent transfer or utilization.

  9. Estoppel does not apply to the government, except when it would work injustice against an innocent party. In this case, Petron is not estopped from relying on the TCCs as payment for its excise tax liabilities.

  10. The imposition of a 25% surcharge and 20% interest on Petron's excise tax liabilities is not justified, as the TCCs were validly used as payment and the tax returns filed by Petron were not considered fraudulent.

PRINCIPLES:

  • Tax credits are granted to entities registered with the Bureau of Investment (BOI) and are given for taxes and duties paid on raw materials used for the manufacture of their export products.

  • Tax Credit Certificates (TCCs) are transferable under conditions determined by the Board after consultation with the Department of Finance.

  • TCCs must be utilized within five years from the date of issue and must be revalidated thereafter or be considered invalid.

  • TCCs undergo a stringent process of verification by various specialized government agencies before acceptance as payment of an assignee's tax liability.

  • A transferee of TCCs must be a qualified transferee and acquire the TCCs in good faith and for value.

  • Judicial admission requires no further proof and cannot be easily set aside, unless it was made through palpable mistake or no such admission was made.

  • The scope of judicial review under Rule 45 of the Rules of Court is confined only to errors of law and does not extend to questions of fact.

  • The sufficiency of evidence is a question of fact, which is not within the scope of judicial review in Rule 45.

  • The Liability Clause in the TCCs only provides for solidary liability between the transferor and transferee for acts or violations relating to the transfer itself, not for the validity of the TCCs or any fraud in their procurement.

  • A transferee in good faith and for value of a TCC is not liable to pay again the tax covered by the TCC that has been declared null and void, unless the transferee is party to the fraud or has knowledge of its fraudulent issuance.

  • TCCs are valid and effective from their issuance and are not subject to a post-audit as a suspensive condition for their validity.

  • The effectivity and validity of a TCC to pay or settle tax liabilities do not depend on the outcome of a post-audit.

  • If TCCs are subject to post-audit as a suspensive condition, the purpose of TCCs would be defeated as there would be no guarantee that the TCCs would be honored by the government as payment for taxes.

  • Taxes are the nation's lifeblood and estoppel does not apply to the government in taxation matters. However, an exception applies when it would work injustice against an innocent party. (Doctrine of non-applicability of estoppel in taxation)

  • Transferee/assignee of TCCs may be held liable if proven to have participated in or had knowledge of any fraudulent transfer or issuance. (Doctrine of transferee/assignee liability)

  • The government should not be prejudiced by the neglect or omission of government employees entrusted with the collection of taxes. (Principle of non-prejudice to the government in tax collection)

  • Tax assessments and penalties must be based on valid grounds and should not be imposed in the absence of a legal basis. (Doctrine of lawful assessment and imposition of penalties)