CTA Case No. 5080 (Decision)

,.! .. '. j / ' Republic of the Philippines COURT OF TAX APPEALS Quezon City BENJOHNSON U. SIAO. C.T.A. CASE NO. 5080 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUEr Respondent. X- D E C: I I 0 N This case involves an assessment .f'or Value Added Tax in �.� \ the amount of P261, 873. 25 on gross sales o.f' copra :for the year 1991. I Petitioner is a copr-a dealer-trader and a resident o.f' San Miguel, Pala-o, Iligan City. On 31 August 1993, respondent thru its Collection ..,�, Division sent an assessment letter to herein petitioner. Subsequently a BIR final notice dated 23 November 1993 was sent to the petitioner, upon receipt thereo:f an A;nswer :4. .' protest dated October 19, 1993 was made. Finally on 22 January 1994 petitioner formally prQtested the assessment, then on February 22, 1994 petitioner received a letter from respondent denying such protest. 1L .:..I.u~' r; iJ ~ / L~~�:~�=

DECISION - C.T.A. Case No. 5080- - 2- On 23 March 1994 petitioner �iled its petition �or review before this Court. Petitioner averred that respondent acted without jurisdiction and with grave abuse o� dis6retion in its ;~ assessment and in attempting to collect Value Added Tax <VAT) �i' on its gross sales of copra for the year 1991. Corollarily, it maintains that copra is an agricultural food product and when sold by �armers/ producers in t~eir natural state should thus be exempt from VA~~�J: .~: '1fFfl Also, petitioner asserts that there is no const~tutional and legal basis to impose VAT on them as there is no scientific basis for classiiying copra as non-agricultural food. ..It is ~ontended that respondent acted whimsically in enforcing VAT Ruling 190-90 and RMC 47-91 on August 17, 1990 I considering that these rulings and regulations were never published hence unconstitutional and void for being violative I of due,process. Moreover, petitioner held that the assessment against the petitioner is erroneous as the method o� computation is palpably wrong. .' Respondent by way o� special and a��irmative de�ense alleged among others the following that: 1. t Petitioner hae no cauee o:f act.ion �� there is no final decision yet by the respondent on its protest. .~ ' ,.

DECISION -' C. T. A. Case No. 5080 - -3- 2. > Copra per se is non-:food agricultural product, thus it is exempt from VAT provided the sale is made by the primary copra producers l~ter sold the same to other persons or buyers. Therefore, as copra trader it is subject to lOX VAT in accordance with Section 103 <a> o:f the National Internal Revenue Code and Sec. a(b) o:f Revenue Regulations 5-87. 3. > Petitioner bought_ copra :from primary copra producers later sold ~the same to other persons or buyers. Therefore, as copra trader it is subject to lOX VAT in ,accordance with Section 103 <a> of the National Internal Revenue Code and Sec. a<b> of Revenue Regulations 5-87. 4. > Administrative rules and regulations enacted by administrative bodies to interpret the law which they are entrusted to en:force have the - force and effect of law and are entitled to great respect.- "'', 5. > In case an administrative agency renders an opinion by means of a circular or memorandum it merely interprets a pre-existing law, and- no publication is necessary for its validity. Thl! fundamental issue involved here in order to determIine whether Petitioner is liable :for the -assessed deficiency tax is: whether or not copra in its original state \ The is considered agricultural food product or not. corollary question that should be answered is: whether the BIR or the BFAD is the proper agency to determine the classification of copra as an agricultural :food product or otherwise. The other corollary issues brought for resolution �' ' are: whether or not petitioner and all o~her copra traders -' are a��orded oonatitutional right to equal proteotioQ o� lava in their sales of copra subjected to VAT and, whether or not VAT Ruling No. 190-90 dated August 17, 1990 classifying copra ;.../.

DECISION - C.T.A. Case No. 5080 - -4- as an agricultural �ood product is en�orceable against petitioner despite the lack o� notice and publication requirements mandated by law. This case is not o� �irst impression as We similarly ruled in the case o� .Joebon Karket:ipg Corporation vs. CIR, CTA Case No. 5001, April 26, 1992, thus: Undoubtedly, the BFAD and NOT the BIR is the proper agency o� the government empowered to determine the correct classi�ication o� agricultural products as food or otherwise. it is the agency tasked exclusively to rule on the matter. This is so, since the matter '� of classifying an agricultural product as food or otherwise involves scientific skills and thorough know-how patently lacking in the BIR. To rule otherwise will render the BFAD, a technical agency of the government inutile. Needless to emphasize that the power and duties conferred upon the BIR under Section 3 of the NIRC are anchored, if not limited, � only to areas of assessment, collection, enfo~cement of all forfeitures as well as adm~nistering the supervisory powers conferred upon the Bureau. In fine, its function is limited to raising taxes and similar revenues for the government. Since when, then, was the BIR empowered to classify an agricultural 1 product as �food or otherwise? I� the government, then, desires to con�er the BIR o� such authority, the Legislature can easily do so in the form of an amendment to the law. ~o do otherwise, is rather arbitrary, i� not beyond the scope of the SIR's powers and authority. In the similar case of Li� Hoa Ting vs. ,. .Centra1 Bank of the Phi1ippines, <104 Phil 574) Qf which this case � should be decided in the same light, the High Court thus, said: With no disrespect to the scientific opinions cited by the de�endant Bank, we prefer to accept the opinion of our local Institute of Science and Technology,

DECISION - C.T.A. Case No. 5080 - -5- which holds that mono-sodium glutamate is a flavor or flavoring extract, and that it even includes condiments. Furthermore, according to the record, mono-sodium glutamate has in the past been consistently classified and ,. considered as a flavor and flavoring extract, not only by the Import c;ontrol Commission, but also by its successor, the defendant Bank itself~~to say nothing of the fact that the law itsel� seems to have favored this interpretation. This contemporaneous construction is highly persuasive: "The practice and interpretive regulations by officers, administrative agencies, departmental heads and other;. officials charged with the duty of administering and enforcing a statute will" carry great weight in determining the operation of a statute.� <2 Sutherland, Statutory Construction, p. 516) � In the construction of a doubtful .. and ambiguous law, the contemporaneous construction of those who are called upon to act under the law, and were appointed to carry its provision into effect, is entitled to very great respect.� <Edwards Lessee va. Darby, 12 Wheat. 206, 210>. Finding that the BFAD is the proper agency to classify an agricultural product as food or otherwise and having said agency classi�ied copra as an "agricultural food product, since copra is produced from coconut meat which is �ood and based on available information, more than SOY. of products derived from copra are edible products" <Annex �o�, ibid> nothing is left for Us to do but to resolve this case in favor of the Petitioner pursuant to Section 103(b) exempting fro~ VAT the �sale or importation in their original state o� agricultural and marine food products�. <Emphasis supplied) Although �as a rule, any claim for exemption �rom ~�� �tatute ~� �tr~ot1y con�trued again�t tha taxpayer, howavar, where tha 1aw ~� c1ear and unambiguous, th� law mu�t be takan �� it i� davoid of judicial additional or subtraction" <Acting Co��iaaioner of Cuato�a vs. llani1a E1ectric :..!"' ' 1b3Cr

DECISION - C.T.A. Case No. 5080 - -6- ;, Co�pany, 77 SCRA 469). the applicable .law above- cited is too plain to be missed and too categori:'cal to be misunderstood. l'loreover, "tax statutes are to be construed strictly against the government for tax, being burdens, are to be presumed beyond what the applicable statute expressly and clearly declares" <Republic vs. Inter�ediate Appellate Court, 196 SCRA 335) Indeed taxes are burdens which if not properly applied will work an injustice against if not profu~ely bleed an already ailing and anemic copra industry. Let not the government cut open the abdomen of the goose that .lays the golden eggs. The above-qouted case, however, was promulgated on April 26, 1994 long before the case of Misa�is Oriental Association 108524 was decided by the Supreme Court on November 10, 1994 which virtually overturned this �Court's ruling on the matter. In the said case, the Supreme Court in disposing all the abov...e issues brought for resolution ruled, thus: 1 The question is whether copra is \ an agricultural food or non-food product for purposes of this provision of the NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue issued _the circular in question, classifying, copra as an agricultural non-food product and declaring it "exempt from VAT only if the sale is made by the primary producer pursuant to Section 103 (a) of the� Tax Code, as amended." The reclassification had the effect of denying to the petitioner the exempt it previously enjoyed when copra was classified as an agricultural food product under # 103 (b) of the NIRC. Petitioner challenges Rl'lC No. 47-91 on various grounds, which will be presently discussed a.lthough not in the order raised in the petition for prohibition. '; ... , 1b3J.

DECISION - C.T.A. Case No. 5080 - -7- First. Petitioner contends that the Bureau o� Food and Drug of the Department o� Health and not the BIR is the competent government agency to determine the proper classi�ication o� �ood products. Petitioner cites the opinion o� Dr. Quintin Kintanar of the Bureau o� Food and Drug to the e�fect that copra should be considered "�ood" because i t is produced from c~conut which is �ood and 801. o� coconut products are edible. On the other hand, the respondents argue that the opinion o� the BIR, as the government agency charged with the implementation and interpretation of the tax laws, is entitled to great respect. We agree with respondents. In interpreting #103 (a) and (b) of the NIRC, the Commissioner o� Internal Revenue gave it strict construc1;:.ion consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in �avor of the state. Indeed, even Dr. Kintanar said that his classi�ication o� copra as food vas based on "the broader de�inition o� �ood which includes agricultural commodities and other components used in the manu�acture/processing o� foo... d.". The �ull text of his letter reads: 10 April 1991 KR. VICTOR A. DEOFERIO, JR. Chairman VAT Review Committee Diliman, Quezon City Dear Kr. Deofer~o: This is to clari�y a previous communication made by this Office about copra in a letter dated 05 December 1990 stating that copra is not classified as food. The statement vas made in the context o� BFAD's regulatory responsibilities which foo~� main~y on foods that are proo����d and packaged, and thereby copra is not covered. :..--"' '� {_.

DECISION - C.T.A. Case No. 5080 - -8- However, in the broader de�inition o� �ood which include agricultural commodities and other components used in the manu�acture/processing o� food, it is our opinion that copra should be classified as an agricultural. �ood product since copra is produced from coconut meat which is �ood and based on availabl.e information, more than SOY. of products derived from copra are edibl.e products� �Very trul.y yours, QUINTIN L. KINTANAR, KD. Ph.D. Director Assistant Secretary o� Health �or Standards and Regu�.l..ations Moreover, as the government agency charged with the enforcement of the l.aw, the opinion of the Commissioner of Internal. Revenue, in the absence of any showing that it is pl.ainl.y wrong, is entitled '~ � I to great weight. Indeed, the ruling was made by the Commissioner of Internal. Revenue in � the exercise of his power under #245 o� the NIRC to "make rul.ings or opinions in connection with the ., im... pl.ementation of the provisions orf internal revenue l.aws, including rulings on the plassification of articles for sales tax and similar purposes. w Second. Petitioner compl.aints that it was denied due process because it was not heard be�ore , the rul.ing was made. There is a distinction in 'administrative law between legislative rules and interpretative rul.es. There woul.d be :force in petitioner's argument if the circular in question were in the nature of a l.egislative rule. 1 The reason for this distinction is � that a l.egislative rul.e is in the nature o:f subordinate l.egislation, designed to implement a primary l.egisl.ation by providing the details thereo:f. In the same way that laws must have the bene:fit o:f publ.ic hearing, it is generally required that before a legialative rule is adopted there must be hearing. In this connection, the Administrative Code o~ 1987 provide�s .... , lb3~ v: {..

DECISION C.T."A. Case No. 5080 - -9- Pub~ic Participation. I� not otherwise required by law, an agency shall, as :far as practicable, publish or circulate notices o� proposed rules and a:f:ford interested parties the opportunity to submit their views prior to the adoption o� any rule. <2> In the :fixing o� rates, no rule or :final order shall be valid unless the proposed rates shall have been published in a~ewspaper o� general circulation at least two (2> weeks be:fore the :first hearing thereon. <3> In case o� opposition, the rules on contested cases shall be observed. In addition such rules must be published. On the other hand, interpretative rules are designed to provide guidelines to the law which the administrative agency is in charge o� en:forcing. Accordingly, in considering a legislative rule a court is :free to make three inquiries: <i> whether the rule is within the delegated authority o� the administrative agency; ( ii > whether it� is reasonable; and <iii) whether it vas issued pursuant to proper procedure. But the court is not :free to . substitute its judgment as to the desirability or wisdom o� the rule :for the l~gislative body, by its delegation o� administrative judgment, has committed those questions to administrative judgments and not�� to judicial judgments. In the case o� ��an .interpretative rule, the inquiry is ~ot into the validity but into the correctness or propriety o� the rule. As a matter o� power a court, when con:fronted with an interpretative rule, is :free to (i) give the :force o� law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree o� authorities weight to the interpretative rule. XXX XXX XXX In the case at bar, we :find no reason :for holding that respondent Commissioner erred in not conaid�ring copra a� an "agricultural food product" within th� meaning o� *103 (b) o� the NIRC. Aa the Solioitor Oeneral oont�nd�, "oopr� p�r �� i� not �ood, that i�, it i� not intended �or human consumption. Simply stated, nobody eats copra :for "':....! .. ' (_.

DECISION - C.T.A. Case No. 5080 - - 10 - food. " That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner: of Internal Revenue is not bound by the ruling of:his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws. The High Court has already spoken. Though its wisdom runs counter to Our position, We nevertheless submit to it. WHEREFORE, petitioner is hereby ordered to pay respondent the amount of P261,873.25 representing deficiency tax for non-payment of VAT on its copra transactipns year 1991. SO ORDERED. /fk.u GRUBA Asso judge WE CONCUR: ~~ 0 D. ACOSTA ::~g ~udg"V/ RAIIOH 0.. DE Ryi.xiJ Associate Judg CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the- Constitution. Q.~ .... ~ ERIIESTO D. ACOSTA '� Pr��iding J'udge Court of Tax Appeals �, �:..:"' ' 1 u;_u,.,u�� ,. --------------- -------------- �---�-