CTA Case No. 5395 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY LA SUERTE CIGAR AND C.T.A. CASE NO. 5395 CIGARETTE FACTORY, INC., Petitioner , - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - DECISION This case involves a claim for refund in the amount of One Hundred Forty Two Thousand Six Hundred Eighty Pesos and 75/100 (P142,680. 75), allegedly representing specific taxes paid under protest during the month of July, 1994. Petitioner La Suerte Cigar and Cigarette Factory, Inc. (La Suerte for b revity) is a corporation engaged in the manufacture of cigarettes out of stemmed- leaf tobacco which it purchases in bulk from both local and foreign tobacco manufacturers. On four occasions during the month of July, 1994, the Commissioner collected from La Suerte the aggregate amount of ~142,680.75 for specific taxes due on the latter's bulk purchases of stemmed-leaf tobacco from foreign tobacco manufacturers. La Suerte paid t h e said amounts under protest. The dates of payment, the respective weight/description of stemmed-leaf tobacco on the basis of which the specific tax was paid, the @

DECISION - C.T.A. CASE NO. 5395 - 2- Authority to Accept Payment of Excise Tax (ATAPET) Serial Number as well as the amount of each payment are as follows: Date ATAPET Amount Description Serial Number 07/05/94 07/11/94 27,760 kgs. 1589085 fl 20,820.00 07/11/94 55,521 kgs. 1589100 41,640.75 07/21/94 27,760 kgs. 1589099 20,820.00 79,200 kgs. 1589128 59,400.00 Total fl142,680.75 On January 31, 1995, through a letter, dated January 26, 1995, La Suerte filed, through counsel, a letter- claim for the refund of specific taxes paid by La Suerte on its importations of stemmed leaf tobacco which included the amount of fl142,680.75 (Exhibit "A"). As no action was taken by herein respondent in the subject claim for refund, La Suerte filed the instant petition on July 3, 1996. The sole issue to be resolved is whether or not petitioner is entitled to the refund of the specific taxes which it paid under protest during the month of July, 1994. Petitioner, in claiming that it is not liable for the payment of excise tax for its importation and local purchase of stemmed leaf tobacco, relied on Section 137 of the NIRC, which in part reads as follows:

DECISION - C.T.A. CASE NO. 5395 -3 "Section 137.- x X X Stemmed leaf tobacco, fine cut shorts, the refuse of fine cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to a n ot h er, wit h out payment of the tax under such conditions as may be prescribed in the regulations of the Department of Finance. (Underscoring supplied) Respondent, on her part, raised the proposition that the liability of petitioner to pay the deficiency excise tax is governed by Sectio n 141 of the NIRC, which provides: "Section 141. There shall be collected a tax of P0.75 on each kilogram in the following products of tobacco: XXX XXX XXX (b) Tobacco prepared or partially prepared with or wit h out t h e use of any machine or instrument or without being pressed or sweetened. " Likewise, respondent averred that under Revenue Regulations No. 17-67, particularly Section 1, par. 1, a ste mm ed-leaf tobacco has been considered a partially prepared tobacco within the ambit of Section 141 of the NIRC. In the light of the decision of the Court of Appeals in the case entitled Commissioner of Internal Reve nue vs. Fortune Tobacco Corporation, CA-G . R. SP Nos. 38219 and

DECISION - C.T.A. CASE NO. 5395 - 4- 40 3 13, dated January 30, 1 998. We find for the petitioner. In said case, the Court of Appeals ruled: "There is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. The issue, therefore, is whether or not Revenue , Regulations No. 17-67 is valid insofar as it interprets the statutory term "partially prepared tobacco " so as to include stemmed leaf tobacco. It is an elementary principle of Administrative Law that in interpreting or implementing a provision of law, a government agency cannot go beyond the terms and provisions of the basic law. Much less can it go against the law itself. Administrative rules and regulations issued by a particular department or agency must be in harmony with the provision of law and should be for the sole purpose of carrying into effect the statutory provisions which it is construing or implementing. An administrative agency cannot extend, diminish, or otherwise amend the general provision of law (Fernando Juan vs. Musngi, 155 SCRA 133 [1987]; U.S. vs. Tupasi Molina, 29 Phil. 119; Director of Forestry vs. Munoz, 23 SCRA 1183 [1968]; Gonzalo Sy vs. Central Bank, 70 SCRA 570 [1976]; Bautista vs. Juinio, 127 SCRA 342 [1984]). There are limitations to the rule making power of administrative agencies. When Congress authorizes an administrative body to promulgate rules and regulations to implement a given legislation, all that is required is that the regulation must not contravene the statute, but must conform to the standards it prescribed (Tayug Rural Bank vs. Central Bank, 146 SCRA 120 [1986]; Del Mar vs. Philippine Veterans Administration, 52 SCRA 340 [1973]). XXX XXX XXX In case of discrepancy between the basic law and a rule or regulation issued to

DECISION - C.T.A. CASE NO. 5395 - 5- implement it, the basic law prevails. The regulation cannot go beyond the provisions and terms of the basic law (Shell Philippines Inc. vs. Central Bank, 162 SCRA 628 [1988]). After a careful study of all aspects of the law and the revenue regulation involved in this case, We come to the conclusion that the Commissioner of Internal Revenue has not engaged in mere interpretation but has gone into unauthorized modification or amendment of the law. Only Congress can do this. Section 2(M)(1) of Revenue Regulations No. 17-67 is, therefore, ultra vires and invplid. � Section 137 of the Tax Code, earlier cited, expressly defines "stemmed leaf tobacco" and excludes it from payment of the tax when sold in bulk as raw material by one manufacturer directly to another. While this particular section provides for removal of tobacco products without prepayment of tax, it is significant that the Tax Code defines and classifies stemmed leaf tobacco under its Section 137. When Revenue Regulations No. 17- 67 undertakes to classify stemmed leaf tobacco under Section 141 in a manner different from the way it is treated in Section 137, it is no longer engaged in mere classification. It is already adding something to the law not in consonance with what the law itself specifically provides but contrary to it. It is not only engaged in amendment but in amendment contrary to a specific provision of the same law. The petitioner argues that Section 137 is for one tax purpose while Section 141 is for another. The fact is that the reason for one provision is also present in the other and must, therefore, be treated in the same light. Section 141 of the Tax Code specifically excludes "fine cut shorts and refuse, clippings, cuttings stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco" from the 75 centavos per kilogram tax when disposed of or sold. The condition in the statute is that the above must be exported or used in the

DECISION - C.T.A. CASE NO. 5395 6- manufacture of other tobacco products. The reason for the exclusion is that the excise tax will eventually be paid on the finished product. The same reason applies to stemmed leaf tobacco which is intended solely as a raw material in the manufacture of cigarettes and other tobacco products. After the cigarettes are manufactured, excise taxes will be paid. In effect, what the petitioner has provided in the disputed regulation is double taxation the payment of excise taxes on the raw material and later, the payment of excise taxes on the manufactured product. Double taxation must be specifically and clearly provided by law. It cannot be imposed by administrative rule-making body. If specifically excluded under the last paragraph of Section 141, taxes cannot be included under paragraph 2 of the same section by a mere interpretation of the petitioner. It is elementary that any taxes not specifically imposed by law cannot be mandated on the strength of an administrative regulation which purports to implement the said law. Only Congress, not the BIR, can provide for additional taxes. Revenue Regulations No. 17- 67 is correct when it provides for the procedure in enforcing the statute. It can state the rules, taxation-wise, on securing permits, putting up factories and machineries, procuring raw materials, recording production, and disposing of the finished product. But the petitioner's powers are limited to procedure and implementation and not substantive law which seeks to add new taxes in addition to those specifically taxed under the law. This is especially true when the particular product being taxed by regulation is expressly excluded from taxes in another section of the same law and also in another law. The petitioner is arrogating powers to itself which it does not possess. The argument that stemmed leaf tobacco u~ed as raw material is exempt from taxation only when it is from one L- 7 manufacturer to another L-7 manufacturer suffers from the same infirmity. It is based on the SIR's own

DECISION - C.T.A. CASE NO. 5395 - 7- Revenue Regulations V-39 which add to the law something which is not there. Us ing it s power of classification, the petitioner has ventured into an amendment and amplification of the ba s ic law. Section 141 taxes fine cut short s and refuse, s craps, clippings, stems and sweeping s but the unnumbered paragraph after Section 141(c) exempts these items if they are used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. The law defines and exempts certain raw materials on condition that excise taxes will eventually be paid on the finished manufactured product. The BIR has classified the s e raw materials in a restrictive manner - only from one L- 7 to another L- 7 when all that the law requires is that the excise taxes not collected at the start will eventually be paid once the tobacco product comes out in final form. For a wide variety of raw materials, there is double imposition by the BIR of excise taxes when the law obviously removes taxes at the start of the manufacturing process and imposes them only once - when the process i s completed . Again, double taxation i s valid but only when it i s provided by statute. It cannot be impo s ed through an interpretative rule. The petitioner's contention that the classification of stemmed leaf tobacco as "partially manufactured tobacco" under Revenue Regulations No 17-67 prevail s over the definition of processed tobacco under Rep. Act 698 is fanciful to say the least. Revenue Regulations No 17-67 is not a ba s ic law. It i s s imply an implementation of the statutory provision of the Tax Code . A mere regulation of a quasi - legislative agency cannot prevail over the express definition under a law passed by Congress itself. It is elementary that an administrative regulation cannot amend or repeal the express provision s of s tatute s enacted by Congress. How can the petitioner argue that an admini s trative regulation prevails over a statute or law?

DECISION - C.T.A. CASE NO. 5395 - 8- The petitioner states that Sections 141 and 137 of the Tax Code must be read and construed together. It explains that under Section 141 stemmed leaf tobacco, being partially prepared tobacco is subject to specific tax. However, under Section 137 if the stemmed leaf tobacco is sold in bulk directly from one manufacturer to another in accordance with the conditions prescribed in Section 20(a) of Revenue Regulation No. V-39, it is exempt from specific tax. It is very obvious that it is not the Tax Code which taxes on one hand and exempts from taxes on the other hand the tobacco involved. It is the addition of a definition of partially manufactured tobacco which clashes with the law itself and the regulatory conditions of BIR which restrict the application of the law to an extremely limited class that form the basis of BIR action. The petitioner engages in legislation and then uses its own administrative or quasi - legislative powers to add a certain class of tax which is neither expressed not contemplated in the basic law. We are aware of the ruling in Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. SP No. 38107 issued on December 29, 1995. We ' note, however, that this Court in the case of La Suerte Cigar failed to take into account the limitations in the exerci s e of quasi - legislative powe~s by administrative agencies. True, the law in Sections 141 and 137 of the Tax Code contains the phrase "under such conditions as may be prescribed in the regulations of the Department of Finance." However, the power to prescribe regulations is not a carte blanche giving the BIR full discretionary authority to add to the law. It is not a roving commission. It is subject to established and basic principles of Administrative Law enunciated in scores of Supreme Court decisions. There is no discrepancy between the principles enunciated in this decision and in the La Suerte decision except that the latter stopped short and did not go into the powers of administrative agencies. If it had gone fully and far _ ough

DECISION - C.T.A. CASE NO. 5395 - 9- into the quasi-legislative powers of Bureau of Internal Revenue, it would have arrived at conclusions fully consonant with our findings." WHEREFORE, in view of all the foregoing, respondent is hereby ordered to refund to petitioner the sum of P142,680.75, representing erroneously collected specific taxes. SO ORDERED. WE CONCUR: GQ. ~ / ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VI I I of the Constitution. ~ � 0, ~ ERNESfb D. ACOSTA Presiding Judge Court of Tax Appeals