CTA Case No. 5657 (Decision)

\ REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PETRON CORPORATION, C.I.A. LASE NO. 5657 Pet 1t i oner', Pl�'omulgated: Vet'SUS - JUL 23 1999 ~, COMI�1ISSIONER OF INTERNAL REVENUE AND THE BIR REGIONAL DIRECTOR OF - - - - - - ~- - X MAKATI, REGION NO. 8, Respondents. x------- DECISION Submitted before Uc for review is the adV!;)t'se decision of Respondent Anton1o I. Regional Director of Revenue Region No. 8 of the Bureau of I nt et'na l ("Bit~", fot' br'ev it y > at Makati City, 1�1ani la, acting on behalf of likewise herein Respondent Commissioner' of Intet'nal Revenue, concE!t'ning the collection of Petitioner's alleged delinquent specific taxes in the aggregate amount of Pi, 107,542,547.08, inclusive of surcharges and Interests, covering the years 1'3'33 t 0 1'3'37. Petitioner' is cot'porat ion Or'gan i zed und et' Philippine laws with principal place of business at 7':":301 Makat i Avenue, IYiakati City. It is a pl�'od ucet' of petroleum products and has been granted Certificates of Registration bearing Nos. 8'3-1037 and DP 95-136 by the Boar'd of Investments ( "BOI" for' shot't) pursuant to the provisions of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987. lhe facts are as hereunder stated.

DECISIDI"'-1 ���- C.T.A. CASE NO. 5657 2 During the years 1993 to 1997, Petitioner supplied and sold bunker oil and other fuel products to various BOI-registered export producers in the processing and manufacturing of their exported products. Payments for aforesaid fuel effected through the transfer and assignment of Tax Cer~tific<i:ites ("TCC" for brevity) duly issued to each of the expor~t producers by the Department of Finance's One Stop Shop Inter-Agency Tax Credit and Duty Drawback :1.992 to 1997, as tax credits on their raw materials, supplies and equipment purchased in accordance with the Omnibus Investments Code. Such transfer and assignment of TCCs' to he1�~ein Petition e1�~ f1�~o m 1993 to 1997 were duly approved by the DOF Center which correspondingly issued DOF Tax Debit i"1emos ( "TDi'~l" far~ shOl�~t) addressed to the Collection Programs Division of the BIR National Office. Petitioner then used the DOF Center approved TCCs' in payment for its excise tax liabilities for the years 1993 to 1':397. Upon its written requests, the Collection Programs Division approved the TCCs' as paymt~nts by issuing TDI'rls signed by the Assistant Commissioner of Collection Service of the BIR. 1998, however~, Petitioner received a collection letter from the BIR Revenue District Office of �

DECISION - C.T.A. CASE NO. 5657 Makati South, Metro Manila, headed by Ruperto Somera, Ph.D., infor~min~l Petitione1�~ that the TCCs' used by i t for~ payments were invalid and in violation of Rule IX of the Rules and Regulations promulgated by the BOI to implement P. D. No. 1789 and B.P. 391, because they were issued in the name of companies other than itself. Consequent 1 y, the district office demanded the payment of delinquent specific taxes, the equivalent of the sum of TCCs which allegedly invalid, in the total amount of P1, 107,542~547.08, inclusive of surcharges and fr.n�� the year~s 19'33 to 19'37. <Annex "C" of Petition) Petitioner protested the demand for payment through letters dated May 14, 19'38, May 21, 1'398 and June 18, 1'398. <Anne><es "G" to "G-2" of Petition) 1 In the fir~st tlo'JO letter~s, i t was ar~gued that unde�r~ Rule IX of the Rules and Regulations issued by the BOI to implement P.D. 1789 and B.P. 391, the TCCs 1 transferred to Petitioner issued for taxes and duties that would have been paid on domestic capital equipment purchased, withholding tax on interest, raw materials used in the manufactured expor~t pr~oduct s; and that being a enterprise, Petitioner was a qualified transferee of the same pursuant to the Memorandum of Agreement between the IYiinistr~y of Finance and the BOI, dated Octobt-?r~ 5, 1982. 1 Letters of Protests were prepared by Petit i one1�~' s legal counsel, the law office of� (.~. 1�1. Sisnn, J1�~. & (-=\ssociates.

m::c IS I ON - C.T.A. CASE l\10. 5657 -� 4 - It was pointed out that the transfer of the TCCs' to another SOl-registered enterprise was authorized by BIR Ruling No. 0094-87-360-87; and that even if the TCCs' were issued pursuant to Executive Order No. 226~ instead of P.D. 1789 as amended by B.P. 391, the same were still transferrable and could be used to pay taxes and duties, cha~~ges and fees due to the National Gover~nment, as explained 1n a letter of endorsement, dated September 29, 1997, of the BOI to Secretary R. de Ocampo of the DOF regarding problems being encountered by Pilipinas Shell Petroleum Corporation in the application of similar TCC payments with the BIR. Another letter of the BOI, dated i't1ay l::':i, 1998? addressed to Atty. Luis Maglaya was also quoted in order to justify Petitioner~s being a qualified transferee of TCCs'. Thus: "2. Hydr~aulic oil and penetr�,ating oil shall be classified as supplies in the same manner as diesel fuel oil and industrial gases have been classified and suppliers of the same should be considered as qualified transferees of tax Cl""'~dits. (under-'sco�r'ing !:iupplied)" The two letters of protest further insisted that under Section 246 of the Tax Code, as amended, on non- retroactivity of rulings, the BIR is proscribed from giving retroactive effect to any reversal of its position if it would cause prejudice to the taxpayer; that no prior assessment notice was sent to the Petitioner in violation of due process; that the BIR, as a subordinate f?)

DECISION ��- C.T.A. CASE NO. 5657 5- agency, cannot overrule the Secretary of DOF, through his re pr~e sent at i v e, Undersecretary Antonio P. Belicena, who issued and authorized the transfer and use of TCCs' in paymen t of taxes; that pursuant to Article 63 of P.D. 1789 as ame nded b y B.P. 391 and Article 79 of Executive all doubt s concerning the benefits and incentives granted enterprises and investors by the Omn i bus Investment Code should be resolved in favor~ of investors and registered enterprises; and that under~ paragraph 4 of Article 7 of Executive Order No. E:26, the BOI is the government body vested with authority to decide controversies between registered e n terprises and investors and government agencies. Finally, i n th e las t letter of protest of June 18, 1999, new arguments were intr~oduced. It was contended that the TCCs' transferred to herein Petitioner were those issued to SOl-registered export Administrative Order No. 266 in relation to Executive that the same were transferable under Ad; icl e 2i of said Executive Order and Rule VII of its implementing rules; that only the proper tax without inter~est should be "assessed" becaus!';) Petit i one 1�~ r~elied on the appr��o va 1 s of concer~ned government agencies in good faith s ; and that the alleged 2 Citing the cases of ABS-CBN vs. Court of Ta x Appea l s, 108 SCRA 142; Advertising Associate vs. Court of Tax Appeals, 133 SCRA 765; Ca gayan Electric @

DEC IS I ON -�- C.T.A. CASE NO . 5657 6 "deficiency" specific taxes for� the yea1�~s 1'3':3~::: to ~Tune 18, 1995 had already prescribed pursuant to Section 203 of Republic Act No. 8424 inasmuch as more than three years had elapsed fro m the ti me said taxes were paid through the use of TDM s . I n a le t ter dated June 17, 1998 and received by the Petitione 1�~ on June 22, 1998, Respondent Hegional Di�r~ector~ sent his r~esponse to the above ar~gumen t at ion of the Petit i one�r~ contained in i t s letter~s of )ilay 14 and i'r1ay ~==: 1 ' 1998. He underscored the fact that si n ce <all the aforementioned TCCs were issued under the authority of the Omnibus Investments Code of 1987, as amended by Executive Order No. 226, the rules applicable thereto are governed by the provisions of Article 21 of the said Code, as implemented by Rule VII of the BOI implementing rules and DOF-BOI Memorand u m of Agreement, dated August Respo n dent l~egional Director asseverated, alia, that the action of the Collection Progra ms Division in accepting TCCs' and issuing TDMs in order to effect payment may not be legally treated as a BIR ruling because pr~o vi d ed in Sectio n c:-4�5 of the old National Hevenue Code, the law allegedly applicable to Power & Light Co. Inc. vs. Commissioner o f Internal Revenue, 138 SCRA 629. 3 Amended DOF-BOI Memorandum of Agreement dated Octo bel"' 5, 1982.

DEC I !3 I 01\1 -�- C.T.A. CASE NO. 5657 �- 7 - the case, the power to issue BIR rulings is vested by law exclusively upon the Commissioner of Internal Revenue; that the doctrine applicable to the case is not on non- retroactivity of BIR rulings but the doctrine that estoppel does not apply against the Government; that BIR Ruling No. 009'+87--360--87 is inconsistent with the BIR~s system of numbering rulings and that it cannot be located from the records; that the case does not as~~essment notice because what is involved is a collection case for a delinquent tax account and not a deficiency assessment; that as regards the BIR overruling the DOF, his office is merely implementing the clear provisions of Article 21 of Executive Order No. 226 as implemented by Rule VII of the BOI implementing rules and DOF-BOI Memorandum of Agreement, dated August i~9, 1989; that the construction on interpreting all doubts in favot~ of registered enterprises as provided in the Omnibus Investments Code is not applicable because from the clear facts of the case, doubt does not exist; that the word "supplies" as contained in the lettet~ of the BOI, dated May 15, 1998, refers to such supplies as are used by the transferors of TCCs in the manufacture of their products for export and forming part of said products; and lastly, that the BIR in collecting the delinquent taxes is not encroaching upon the domain of the BOI but is met~e l y exercising the powers and duties provided under Section 3

DECISION -� C.T.A. CASE NO. 5657 -a of the Tax Code which comprehend the assessme n t and collection of all intern al revenue taxes. With the looming threat to collect the delinquent specific taxes through warrant of distraint and levy 1f not paid immed iat ely upon receipt of said letter~ of Re spondent Regional Director, Petitioner felt that it had no alternat ive but to elevate its case before this Court. On J"uly 7, 1'3'38, Petitioner~ filed the instant "Petition for Review with Mo tio n for Temporary Restraining Order and after due notice and hearing for Issuance of Writ of Injunction". Petitioner reasserts its stance a quo and contends further , among others , that the BIR has no moral nor' legal right to col lect again the excise taxes in question on the ground that the TCCs were already cancelled and the BIR's obligation to refund the 801- registered export producers has been extinguished; that to re q uire Petition er to pay again the excise taxes is tantamount to unjustly enriching the BIR at its expense 4 ; that Respondents 1 lack of attempt to return the TCCs to the Petitioner before sending the collection letter shows a pattern of bad fait h on th ei r part, contrary to the language of the S u p r eme Co u rt in Commissioner o~ Internal Revenue vs. Procter & Gamb l e Manu~act uring Corporation 4 Citing the case o f Commissioner o~ Internal Revenue vs. F ireman' s Fund Ins urance Company and the Court o~ Tax Appeals, 148 SCRA 315 .

DECISION -�- C.T.A. CASE NO. 5657 -� 9 - , and the Court of Tax Appeals, G. R. 66838, December .-.o.. 1991 , 204 SCRA 377 , that " a sover~eign gover��nment should act honorably and fairly at all time, even taxpayer~s"; and that, the acceptance of the TCCs and issuance of TDMs following the procedures contained in Revenue Memorandum Order No. 20-91 have the same effect as a r�'uling which Respondents cannot r�'evoke ret r~ o act i v e 1 y. I n t h e i r~ An s we 1�~, Re s pond en t s i n t e t~ p o s e , i n t e r' a .l i a, the following special and affirmative defenses, to wit: 8) The mandatory requirements of Pre- assessment and Assessment Notices have no appl i cation in the instant case as said prerequisites apply only to deficiency tax assessments after audit i n vestigation pursuant to Section 229 of the old NIRC as implemented by Revenue Regulations No. 12-85. This case involves a collection case against petitioner for its delinquent specific taxes covering the years 1993 to 1997; 9) While the Tax Credit Certificates duly issued by the BOI were accepted by the BIR through the issuances of the corresponding Tax Debit Memos, their assignment, conveyance, transfer and use by herein petitioner in payment o f its specific tax liabilities were invalidly made being contrary to the provisions of Article 21 of the Omnibus Investments Code of 1997 (sic), as amended by E.O. No. 226, as implemented by Rule VII of the BOI Rules and Regulations and DOF-BOI MOA, dated August 29, 1. ':389; 10) Tax Credit Certificates may only be assigned, conveyed and transferred by a BOI registered enterprise/grantee to another BOI registered enterprise provided that in connection with TCC for raw materials, supplies and semi-manufactured products sold and supplied by herein petitioner, such raw riiY

DECISim\1 -- C.T.A. CASE NO. 5657 10 -- materials, supplies and semi-manufactured products must be used by the TCC transferor in the manufactu~~ed ( s i c ) .1 pl�'ocessing o�r~ production of the export products and must form par't of such expor~t p~~oducts <Rule VII, supl�~a) 11) Petitioner does not qualify as a transferee of the TCCs even if it is a BOI registered enterprise because the petroleum fuel p~~oducts (e. g. Bunke~-� fuel oil) that it supplied and sold to TCC transferors did not form part of the manu fact u�r-�ed products for export; x--x�-x x-x-x :1.5) The r--<:'!spondents 1 accept,:mce of the TCC's (sic) thru the issuance of the Tax Debit Memos cannot be treated as a BIR ruling, hence, the non-retroactivity doctrine does apply in the instant case; 16) Moreover, the action of the Collections Program Division in accepting the TCC's (sic) and issuing the Tax Debit Memos to effect payment cannot legally prevent the government from collecting the rightful taxes due and demandable from the petitioner. It has be<~n held that "an e~'l�'oneous con�>tl�'uction of the law does not preclude or estop the government from collecting a tax which is legalJ.y due." (Hilado v. CIR, 100 Phil. ;:::88); x-x-x x-x-�x x-x-x of herein case, Petitioner filed a "Manifestation .:md Ur'gent IYiotion", datec:l July ;=:o, 19'~38.1 praying that any Writ of Preliminary Injunction that may be issued by this Court based on its Motion for Temporary Restraining Order and/or Writ of Pr~el iminar-�y Injunction which was hean:l :i.n the mot'ning of ,July 17.1 l~398, should include the cancellation or dissolution of the Warrant of

DECISION �-� C.T.A. CASE NO. 5657 �- l1 - Garnishment issued by Respondent Regional afte�r~noon of that same day, J"uly 17, 1998. On July l ~-398' hOII'JE-~Ve"r"', Petitioner filed another manifestation infot�'min~l this Court that the aforesaid Warrant of Garnishment has been lifted by Respondent Commissioner himself on July 20, 1998, the day it filed the urgent motion. In vieii'J of this development, Petitioner declared in open court in the he.:n'in~:J of July 24, 19'38 that said twgent motion has The parties submitted their Pre-trial succeeded in coming out with a Joint Stipulation of Facts and Issues. There being no other evidence to be both pat't if:: s opted to file their respective memot~andum. Petitioner elaborates in its memorandum that it did not violate the general conditions for availment of incentives prescribed under Rule IX of the Rules and Regulations issued by the BOI to implement P.D. 1\lo. 1789 and B. P. 391, as stated in the collection lettet' of Revenue District Officer Somera, because the assignment of the TCCs by the transferors in payment of diesel oil and fuel pt'od uct s it supplied to them is a mode of payment which has been continuously accepted and approved by the BIR, pat��ticu.lat~ly in 1993 to 1997.

DEC I !:.1 I 01\1 �-�� C.T.A. CASE NO. 5657 - 12 - It observes that the disavowal of such practice by the BIR five ( ~j ) years thereafter is contrary to the Supreme Court's dictum in ABS-CBN Broadcasting Corp. vs. Court of Tax Appeals, supra, at pp. 151-152, wher'e :i.t was stated that t he Comm is s i oner is precluded from adopting a posi tio n i nconsistent wi t h one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. It likewise emphasized on the application to its case of the well�-enh�enched pr��inciple that gl'eat weight must be accorded on the interpretation or construction of a statute by the government agency called upon to implement the sa m e ~ , in view of the fact that the BOI, which is the agency tasked to i mplement the provisions of the Omnibus Investments Code, had ruled as far back as 1990 that diesel fuel oil is classified as "suppl1es" and that supplier'S of the same ar�e "qualified t1�',:1nsfer�ees of tax cr�edits. In addition, it refutes Respondents' i nt er'pl�'et at ion that bunker fuel and fuel products should Finished products in Or'd er' to be consider-ed "supplies" when such pr�oduct s must necessar'i ly be consum e d in th e ir u se for t he p r ocessing a n d manufacture 5 Citing the cases of Madrigal vs. Rafferty, 38 Phil. 414 and Soriano vs. Offshore Shipping and Manning Corporation, 177 SCRA 513 .

DECISION -- C.T.A. CASE NO. 5657 - 13 - of exp ort products. It deduces that if machinery and equipment imported by the export for~ the processing and manufacture of their export products are given f-}Xemption from customs duties and taxes under (-1r~t i c 1 e 3':3 (c) of the Omnibus Investments Code, no reason why the oil and fuel supplies used to run such machineries and equipment cannot be cons idet~ed supplies under Article 39 (k) of the said Code which, as a public and semi-manufactured products used in the manufacture, pl�~ocessing or�� pt~oduction" of the expor't pr'oducts. Citing the cases of Commissioner of Customs vs. Caltex <Phi 1s. > Inc., et. al., 106 Phil 830-832; Philippine Phosphate Fertilizer Corporation vs. The Hon. Commissioner of Customs, CTA Case No. 4661, May 31, 1993 and United States Fidelity and Guaranty Co. vs. Feenaughty Machinery Co., 85 P2d 1085, 1089, 197 Wash., it holds that "gasoline <:tnd oil" and " pE�tr'oleum pr'oducts like bunker�� oil Or' fuel" have been con~;idet�� ecl as supplies and that while they do not enter into and become a physical of a finished structure, such supplies become as much part of the structure. On their' pal�'t, Respondents reiterated most of their arguments except on the imposition of surcharges and Citing p.::n'e:-q;waph 1, Ar'ticle 2, Chapter�� 1 of the Omnibus Investments Code and I Mertens, Law of Feder'al Income Taxation, 1991-94 ed., p. 76.

DEC I !3 I 01\1 -- C.T.A. CASE NO. 5657 -�� 14 �-� inter~e�st on the specific taxes herein being demanded and the t~ight of the government to collect the ~,arne having While they acknowledge that the Supreme Court has deemed it wise not to impose surcharges and interest in some cases when the taxpayers relied in good faith on rules or circulars or rulings or when the assessments are they nonetheless remonstrate against the applicability of such principle in this case. They contend that Petitioner "wc.\s not at all in good faith in accepting the TCCs of the export producers in payment of the bunker~ oi 1 and fuel products supplied to them and then applying said TCCs in payment of its excise tax liabilities and that 7 neither could they assent that the acceptance is controversial because there was a clear error on the part of the offic1als of the Respondents on the interpretation of the applicable law and and regulations, negating any controversial nature of the matter. Based on the factual and legal milieu obtaining in the case at the parties have stipulated on the following issues, to wit: 1. Whether Petitioner's payment of its excise tax liabilities for the years 1'::393 t 0 1997 thru the use of the Tax Cl-~E�d it Certificates assigned to it by the expot~t

DECISION -� C.T.A. CASE NO. 5657 15 producers in payment of bunke~~ o i 1 and fuel products supplied to t hem is valid. 2. Whether the bunker oil and other fuel products supplied by Petitioner to the export pr~oducer~!:; constitute "Supplies" under~ Ar~t. 21 of the Omnibus Investments Code and Rule VII of the BOI Rules and Regulations used in the manufacture, processing and production of export products which may be paid by the export producers thru assignment or transfer of Tax Credit Certificates issued as tax credits for the use and pur~ch<:~se of suc h supplies, ~-~aw materials and equipment. 3. Wh~ther an adverse ruling by the BIR invalidating the use and approval of Tax Credit Certificates in payment of Petitioner's excise tax liabilities can apply retroactively to nullify the payments made by Petitioner for excise tax liabilities in the years 1993 to 1 9~37. 4. Whether Petitioner can be held liable for surcharges, interests and other charges as a result of the invalidation of the use and approval of Tax Credit Certificates as payment for Petron's excise tax liabilities for the years 1993 to 1997 assuming arguendo that the BIR ruling is correct. 5. Whether~ the r~ight of the Gover n ment to collect the excise tax liabilitit':!s of Petitioner has prescribed. For a better picture of the issues, the pf~l�~tinent provisions of law, r~ules and r~egulations, opinions and agreements cited are hereby reproduced, to wit: 1. ARTICLE 21 of Omnibus Investment s Cod e ot= 1987: "ART. 21. "Tax Cr~edit" shall mean 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

DECISIDN ����� C.T.A. CASE NO. 5657 - 15 - shall be issued by the Secretary of Finance or his representative, or the Board, if so delegated by the Secretary of Finance. The tax credit certificates including those issued by the Board pursuant to laws repealed by this Code but without in any way dimi n ishing 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. The tax credit certificat e shall be used to pay ta><es., duties ? chat~!;Jes and fE~es due to the National Govet'nment: PJ�'ovided, That thf:.' ta>< credits issued under this Code shall not for m part of the gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue Code and are therefore not taxable: Pr�ovided~, 1:-:u r�t he t', That such tax credits ~:;ha 11 be valid only fat~ a pet~iod of te n (10) ft�om date of issuance." Section 39(k) of t h t~ Omnibus Investments Code of 1987: no II Tax Ct~edit fat' taxes and duties on raw materials.-Every registered enterprise shall enjoy a tax credit equivalent to the National Internal Revenue taxes and Customs duties paid on the supplies, raw materials and semi-manufactured products used in the manufa c ture, processing or production of its export pr oducts and forming part thereof, exported directly or indirectly by the t'egister��ed entet~pl�~ise: Pt�ovided, howeve�r', That the taxes on the supplies, raw materials and semi-manufactured products domestically purch ased or indicated as a separate item in the sales invoice." 3. RULE VII of BOI Rules and Regulations implemen t ing the Omn i bus Investments Code: II RULE: I) I I. TRANSFERABILITY OF TAX CREDIT CERTIFIUHE "Tax cr' edit ce l�~tificates fot~ taxes and duties that would have been paid on domestic capital equipment purchased, and on raw mat e r ials, supplies and semi-ma n ufa c t ured products used in the manufacture, processing or product io n o f its export pr oduct s and fo r mi ng ~

DECISIOI\1 ��- C.T.A. CASE NO. 5657 17 - part thereof shall be issued by the Secretary of Finance or his representative, or by the Board, if so delegated by the Secretary of Finance. "Said certificate may be transferred in accordance with the memorandum of agreement between the Department of Finance and the Board of Investments dated October 5, 1982 . However~, for tax credits not covered by the said memcn'andum, i.e., net value eal�'ned and net local content tax credit certificates issued under-� P. D. 178'3, as amended, they shall be transferable only to domestic raw material or component suppliers of the registered entel�~pr~ise." 4 . Memorandum of Agreement between the Department of Finance and the Board of In v estment, dated October 5, 1982, as amended by DOF-BO I MOA, dated August 29, 1989, to implement ARTICLE 21 of the Omnibus Investments Code of 1987: "Sec. ;~. The fit~st thr~ee (3) par�agt~aphs of the guidelines contained in the a f Ot'e mentioned t'te mor��andum of Agr'e em ent al'e hereby reworded to read as follows: "I) Hencefot~th, all tax ct�edit cer~tificates, except for~ net 1 oca 1 cont ~~nt CNCL) and Net Value Earned <NVE:>, issur~d to BOI-registered enterprises under EO 226, PD 1789 and PD 1789 as amended by BP 391 on or after the effectivity date hereof, may be transferred under conditions provided herein. ~~~~) The transferee should be a SOl- re g istered fi rm which is a domestic capital equipment supplier or a raw material and/or component supplier of the transferor . "3) The tr~ansfer~ee 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 BOI incentives under its law o f l' f? 9 i s tr~ at i o n ,

DECISION - C.T.A. CASE NO. 5657 - 18 �-� " Sec. 3. A1 1 o t h e r~ pt~ o v i s i on s i n t h e afore menti o ned Me morandum of Agreement not otherwise amended herein shall continue to have full f orce and effect. "Sec. LJ.. The tr~ansfet~abil:i.ty of a l l tax cJ�~ed:i.t cer-�tificates, except tho!~e fDl'-� NLC and NVE, issued to BOI-registered enterprises prior to the effectivity of h e rein a mendments shall continue to be governed by guidelines/conditions existing a t the time s a id certificates were issued." 5 . BOI Letter dated May 15, 1998: "DU'r''ing the BOI Bo.:n~d of Govet'nor�'s ' meetings of July ~:::7, August 17 and 29, 1990, the following issues regarding transferability of tax credits were clarified and approved: 1. Assignee should be a BOI-registered company and at the same time a domestic producer of the raw materials and components being supplied. However, its registration need not be the product that it supplies. The condition that the assignee should be a SOl- registered company shall only apply to tax cr~edits issued after' Januar~y 30, 1990. 2. Hydrau lic oil and penetrating oil shall be classified as supplies in the s ame manner as diesel fuel oil and industrial gase s have been classified and supp l i e rs o f the same should be considered as qualified transfer ees of tax credits. <Emphasis supplied on the above pr~ovisions) We shall discuss the first two issues jointly, both being i nt en'e 1 at ec.i. painstaking review of the attending facts and circumstances surrounding the current issues would reveal that herein parties are at odds v.J:i.th each other over the validity of the transfer of TCCs to

DECISIOI\1 -� C.T.A. CASE NO. 5657 - 1'3 - the Petitioner and the consequent use by the latter of such TCCs in payment of its excise tax liabilities. Respondents at~e steadfast in their belief that Petitioner' is not a valid transferee of the TCCs originally issued to BOI-registered export producers on the ground that the bunker oil and other fuel that sold to said producers are not considered "supplies" and of export products within the contemplation of Article 39 ( k) of the Omnibus Investments Code and Rule VII of its implementing rules. Not to be outdone, Petitioner-� cr~ies foul over' Respondents' i nt er~r.wetat ion. It primarily invokes BOI's classification of diesel fuel oil as "supplies" and its appr��o va 1 that suppliers of the same are qualified as transferee of tax credits. It likewise impresses upon the fact that the transfer of tax credits in its name has been duly approved by the DOF Center 7 for five years from 1'3'33 t 0 1997 before Respondents issued a collection letter for delinquent taxes. Without any qualm or quibble, this Court rules in favor of the Petitioner. Respondents' non-acceptance of thf.~ TCCs' is pr'~~mised on hollowed r.~r'otmds .. They have~ imprudently misconstrued the provisions of BOI laws, 7 A government office created under Administrative Order No. 266, dated Fe br'uar'y 7, 1'::39c:: of the Office of the President. @

DEC I f:l I 01\1 - C.T.A. CASE NO. 5657 ���- 20 -� rules and regulations and agreements in point in the case Correlating the aforementioned provisions, 21 of the Omnibus Investments Code sets the legal basis for the transferability of TCCs' when it provided that the sarn<0 ar~e "t:r�anst::-e/"',-::~ble under� such conditions as m,."'_V be determined by the Board aFter consultation with the Dt..> par f m1? n t o F Finance." Pursuant thereto and as prescribed under Rule VII of the BOI Rules and l~egulat ions implementing said Code, the conditions governing the transferability of TCCs' were embodied in the Memorandum of Agreement, dat E~d 1 'JBC.: (amended on August 2'3, 1'38'3) by and between the DOF and the BOI.. In par~t.1 i t i s t'equir~�ed in the latter~ agr~eement that the transferee of the TCCs' should be a BOI- registered firm which is a raw material and/or component supplier of the transferor. Along this line, Respondents insist on the disqualification of the Petitioner as a qualified transferee of TCCs in view of their observation that the bunker fuel oil it supplied to export producers owning the TCCs did not of their export We strongly disagree. The BOI letter, dated May 15, 1 '3'38, sup,.~a, upon by the Petitioner holds the key to the resolution of the instant case. It is plainly stated therein that in the meetings of the BOI Board of Governors held on July @

DECISION - C.T.A. CASE NO. 5657 -� ;::: 1 -- c~7, t~ugust 17 and ;.:::'3, 1':3':30, supplie�r-�s of diesel fuel oil, hydraulic and penetrating oils as well as indus t t' i a 1 gases have been considered and clarified as qualified transferees of tax credits. Said letter undoubtedly contains the latest "conditions" affecting the transferability of TCCs as determined by the BOI pursuant t o Al�'t i c 1e 21 of the Omnibus Investments Code. The DOF- BOI MOA, dated OctobeJ�' 5, 1'382, as amended on t~ugust ;.:::'3, 1'38'3 is for all intents and purposes was clarified by the said BOI letter-�. As regards the additional requirement that such conditions should be detet'mined "after�' consultation with the De pad:; ment of Finance", the 1=wesumpt ion is that the DOF has been duly consulted before the BOI Board of Governors made any clarification on the entitlement of oil and gas suppliers as qualified transferees of TCCs. Be it noted that no allegation or contrary evidence obtains at bar to show that the DOF was not f.:w i o y�� l y consulted nor has objected to the said i nt er�'pt'et at ion. Hence, it is presumed that the law has been obeyed and that official duty has been regularly performed by the BOI in determining new conditions for transferability of TCCs. (pat's. ff and m, Section 3.J Rule 131 of the Revised Rules of Cour't) For another reason, the long practice of the DOF Center in approving the �rccs to

DECISION �- C.T.A. CASE NO. 5657 Pet :i. t i OTH?�r-� is the DOF ~ representative of which acts as ex-officio chairman of the DOF Center, has agreed to the clarification made by the BDI. As one of its powers, duties and functions under Administrative CJt-�d e r~ i\l o. on February 7, 1992, the DOF Center is empowered to enforce compliance lrJith t<:\X cr~ed it policy and guidelines. Actual events show that b<.\sed on BOI guiddines, the DOF Center approved the transfer to herein Petitioner the TCCs in question. 1-\nowledge and consent of the DOF to the new conditions as determined by the BOI is therefore more than apparent and well nigh incontrovertible. The belief of the Respondents that "supplies" so :tel by the Petitioner to export producers should form part of their export products in order that it can be a qualified transferee of TCCs is untenable. While it is true that Article 39(k) of the Omnibus Investments Code requires that supplies should form part of the pr�'oduc:t before a BOI-registered enterprise can enjoy tax credit, such a requirement only applies to an export pr~oducer-� o1�~ original grantee of TCCs and not to transferees thereof. A minutiose scrutiny of the provision of law reveals nary a requirement that the transferee should be a component supplier of the export What the provision simply demands is that supplies should form part of the

DECISION - C.T.A. CASE NO. 5657 export product of the export producer before it can enjoy tax c1�~edits. It must be observed that the conditions affecting the transferability of TCCs is solely governed by Article 21 of the Omnibus Investments Code. As it conditions are left open to the determination of the BOI after consultation with the DOF. The conditions can therefore be anything. The condition under Rule VII of the BOI Rules and Regulations and DOF-BOI MOA, dated October 5, 1982, as amended on August 29, 1989 that the transferee could be a capital equipment supplier or a raw material and/<n�� component supplier of the export producer is one of such conditions. Please note that not only a component supplier is a qualified transferee but also a capital equipment supplier and other supplier��. Later event will show, however, that the BOI decided to clarify said condition, lucidly in the BOI Of grave concern to this Court is the penchant attitude of the Respondents to disregard the officiod acts of other government agencies such as the BOI and the DOF Center based solely on their personal of the laws, rules and regulations and policies of said agencies.

DECISION -- C.T.A. CASE NO. 5657 -� 24� - While it is settled tha.t the BIR possesses the authority and the expertise when it comes to matters on taxes, one has to concede tha t it pales in the a~~ea of ad mini s t e ~~in g the Omnibus Investmen ts Code, most especially in t he policy of granting tax incentives, the wisd o m of which is reposed by law to the BOI and the DOF Cen t e1�~. Administrative regulations and policies enacted by administrative bodies to interpret the law have the force anc:l effect of law and are entitled to great respect. <Warren Manufact uri n g Wo rker s Union <WMWU> vs. Bure au of Labor Relations, 159 SCRA 387 ) It was thus held in Eslao v s. Commission on Audit, 236 SCRA 161 , that thE~ Commission on Audit is no t authorized to substitute its own judgment for any applicable law or administrative regulation with the wisdom or propriety of which it does not agree at least not before such law or regulation is set aside by the authorized agency of government. Applying the preceding principle laid down by the to he~'ein case, the BIR cannot simply question the regulations and policies promulgated by the BOI and the DOF Cen t er and invalidate the TCCs. It is worth noticing that aside fr'om the infirmity of the aforementioned interpretatio n s by the Respondents on BOI laws, and regulations and policies, theit~ complete the BOI and DOF.

DECISION - C.T.A. CASE i\10. 5657 -� 25 - opinions and consequently~ their demand to the Petitioner for the payment of delinquent taxes is in��-egular. Respondents should have observed the pr~oced twe 0 j�-� mechanism prescribed under Chapter 14, Boo 1-< IV of Executive o the r~w i s e 1-<no~A.m ClS the Administrative Code of 1991, that is' to bt~ in g the matters they dispute with the BOI and DOF Center before the Solicitor General or the Secretary of Justice, as the prior to any decision to collect delinquent taxes. If the Secretary of Justice decides in favor of the actions taken by the BOI, then the BIR is bound to respect the validity of the TCCs. If, however�-, the BIR is upheld, then and only then can the BIR be legally authorized to collect any delinquent tax. At lec.ist administratively, the BIR has a stand to lean on. This is without pr~e.judice, however~, to the r~ight of any p1�~ivate person or entity to bring an action before a Court of Law should his or its right is violated in the s s . pr~oce We note that the right of the Petitioner to due process and fair play has also been violated in this C<::\Se due to the non-observance by the Respondents of the abovestated procedure under the Administrative Code on controversies between government agencies and offices. It has been caught in a crossfire not of its doing.

DECISION - C.T.A. CASE NO. 5657 - 26 - Any government act that militates against the ordinary norms of justice or fair play is considered an infraction of the great guaranty of due process; and this is true whether the denial involves violation merely of the procedure prescribed by the law or affects the very va l idity of the law itself. (Constitutional Law by Justice Isagani Cruz, 1995 ed., p. 95 ; emphasis supplied) Although no longer crucial to the disposition of the case at bar, We chose to dwell into the propriety of the other issues raised by the parties for the sake of legal clarity and enlightenment of disputes to come. Dealing with the third and fourth issues which are intertwined, we refuse to be drawn into a discussion on the retroactive effect of a BIR ruling on t he Pe t i ti oner. Facts of the instant case is bereft of any BIR ruling as having been duly issued by Respondent Commissioner Internal Revenue to the Petitioner. By practice, a BIR ruling numbered and co n tai n s the official written interpretative opinion of the Commissioner of Internal Revenue addressed to an individual taxpayer regarding his taxability over certain matters. It cannot grow from mere acquiescence or long practice nor can it be implied. Petitioner at bar failed to cite any specific ruling duly issued to it by Respondent Commissioner of Internal Revenue. Herein issues are therefore moot and academic and present no actual and particular justifiable controversy. A ruling i~ a written statement issued to a taxpayer or his authorized representative by 6

DECISION - C.T.A. CASE NO. 5657 C~.7 1 - the National Office which interprets and applies the tax laws to a specific set of facts. (Mertens Law of Federal Income Taxation, Section 49A.09) A ruling is an interpretation by an administrative agency of t h e law under wh ich it operates applicable to a given statement of facts. (Webster Third New Internatio n al Dictionary) We would just like to mention in passing though that the retroactivity or non-retroactivity of BIR rulings is well governed by Section 246 of the Tax Code and that the liability for surcharges, interests and other charges has in some cases been deleted by the Supreme Court e.g. in C.M. Hoskins vs. Commissioner of Interna l Re v en u e, 71 SCRA 511 and Cagayan Electric Power & Light Co., Inc. v s . Commissioner of Internal Revenue and Co urt o f Tax Appeals, G.R. No. 60126, 25 September 1985. On the last issue of whether or not the right of the government to collect the subject taxes has prescribed, while petitioner alleged that prescription has set in especially taxes covering taxable years 1993 to 1995, respondent on the other hand alleged otherwise, that the government is not legally prevented from collecting the rightful taxes due and demandable from the petitioner there being a wrong interpretation of the law involved. Petitioner alleged that pursuant to Section 203 of the Tax Code, assessment should have been issued within three (3) years from the filing of the corresponding tax return. Respondent alleged however, that there is no

DECISIOi\1 -� C.T.A. CASE NO. 5657 requirement for pre-assessment and assessment notices in the instant case as said prerequisites apply only to deftciency tax assessment after audit invest igat ton to Section 229 of the NIRC as tmplemented Revenue Regulations No. 12-85 and this case only tnvolves a collection case. Th t s Cotwt believes that the in the it' respective desire to defend their position failed to t'ealize that the letter' dated L�=..�rl�:.:�-' 199'3 of the Revenue District Officer Ruperta P. Somera to Petron Corporation demanding the payment of Pl, 107,542,547.08 inclusive of delinquency surcharge and stating his reason therefore is an assessment. It has all the peculiarities of an assessment which is commonly defined as a written notice and demand for payment of tax liability that; is definitely set and fixed. communication containing a computation by a l"evenue officer of the tax liability, giving the taxpayer an opportunity to contest or disprove the BIR examiner's findings is not an assessment since it is yet indefinite (J.ust ice Jose Vitug, Compendium of Tax L.aw and 3twi spr'udence, Th it'd ed., p. 2'+3). As held in the case of Alhambra Cigar and Cigarette Manufacturing Co. v. Collector of Internal Revenue, 105 Phil. 1337 and Estate of Maria Lina Vda. de Uy vs. Pacita Uy, 57 OG 526, ~'lsses~;ment is merely a notice to the effect that the

DECISIOI\1 �- C.T.A. CASE NO. 5657 �- ;:::9 -- amount stated therein is due as tax and a demand for-� the payment the r~eof. It is not an action or proceeding for~ the collection of t<:n<es. is a step preliminary, but essential, if still feasible, and also to establish a cause for~ judicial action. Without an assessment , there is no debt fro m t h e taxpayer and ther~e is no obligation on his par~t which can be enforced in an action <Galusha vs. Wendt, 14 IOWA 604, cited in the boo I-< of Jose Ara~as, J::)nn ot at ion ,7:\nd Jurisprudence on the National Internal Revenue Code, Vo 1. I ' 1':378 ed., pp. 20-f~ 1) . Consequently, legal consequence will be fall if no on the l�~espondent assessment at all is issued under the circumstances, just because of a wrong notion that by doing so the year prescription will nat l�~u n . Aside fr-o m the above legal co n sequences the non--issuance of a for'mal assessment v-Ji 11 const i tute violation of the due clause of the Constitution consider~ing the requ i rement of the law under Section 228 of the Tax Code requir i ng the Commissioner to first notify the taxpayer of his findings and allowing the taxpayer to file -:?.. formal protest therefore. This is an administrative due process provided by law which must be followed. Granting for the sake of argument that ther��e is no need for~ the issuance of an assessment and that the letter' of RDO Somera is a mer-�e collection letter, the !J77

DECISION - C.T.A. CASE NO. 5657 Supreme Court in Republic vs. Ledesma, G.R. No. L-18759, February 28, 1976; 19 SCRA 455 , has a 1 ~-�ead y enunciated the 1�~u1e old Tax Code, mot~e Section 331 thereof, that the prescriptive collection of taxes is within five years from assessment and " i t ther��e is no assessment~ a pt�oceeding .in cot..wt r�ot' collection must be com menced within the s,.::~n1e period". Said Section 331 has been subsequently renumbered as Section 203 under the applicable Tax Code of 1':3':32 but the pe~~i od has been reduced fro m five yea~~s to th~�� ee yeat's. Thus: SEC. 203. Per'iod or limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the t~et:_wn, and no pt�oceeding in court without assessment tor the collection of" such taxes shall be be�gun attet' the e .�<pil�'ation at such period: x-x-x (italics supplied) In other words, with or without the requirement of an assessment, the right of the government to collect has mostly prescribed. Going into the allegation of the respondent that the go ve~~n ment is not legally prevented from collecting the being i nt er~pt'etat ion of the law involved. This but thir:; pl'inciple admits certain exceptions as when grave injustice would result if government is allowed to adopt a position inconsistent @

DECISION - C.T.A. CASE NO. 5657 -- 31 �- with one previously taken. In the case of ABS-CBN Broadcasting Corporation vs. Court of Tax Appeals, 108 SCRA 142~ the Supreme Court held that: "This Cot_wt is not unawat~e of the Wf::>ll- entrenched principle that the Government 1s never estopped from collecting taxes because of mistakes or errors on the part of the agents. In fact, utmost caution should be taken in this l�-�e~~at~d. But, like other~ pt~inciplt'!S of l<:n"-l, this admits of exceptions in the interest of justice and fair play. The insertion of Sec. 338-A (now Section 246) into the National Internal Revenue Code, as held in the case of Tuason vs. Lingad, is indicative of legislative intention to support the principle of good faith x ><." The application of the above principle is especially tr~ue to the instant case consider'ing the long acquiescence by the Board of Investment, Department of Finance and the Bureau of Internal Revenue itself of the acceptability of the tax credit certificates transferred to the oil companies in payment of theit~ ovm tax liabilities. To conclude otherwise would violate the principle of justice and fair play. Even granting the government can still validly collect, as discussed above without such assessment if we will adopt the stand of the respondent and absent any proceeding in court commenced by the Respondents for the collection of Petitioner's delinquent taxes, pt~escJ�~iption has started to set in. 1994, 1'395 and the fir~st half of 19':'16 wher~e (i3

DECIS I OI\1 - C.T.A. CASE NO. 5657 32 respect i ve returns has been duly filed, prescribed following the three-year prescriptive period for judicial action to collect the delinquent taxes involved het~ein. If evet~ thus, only a sm a ll portion of the delinquent taxes is recoverable by the Respondents. WHEREFORE , in view of the foregoing, the instant Petition for Review is hereby GRANTED. The collection of the alleged delinque n t excise taxes in the amo unt of Pl, 107,542,547.08 is hereby CANCELLED AND SET ASIDE for being contrary to law. Accot�din!=Jly, Respondents at~e ENJOINED from collecting the said amount of taxes against the Petit i onet~. SO ORDERED. ~ ~~ ~~ ERNESTO D. ACOSTA Pt�esiding Judge ~' "Jv� RAMON 0. DE VEY A ~issociate Jud e

DECISION - C.T.A. CASE NO. 5657 33 - CERTIFICATION I hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Artice VIII of the Constitution. n QQ~ ~0 D. ACOSTA Presiding Judge Court of Tax Appeals