CTA Case No. 4689 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEAI,S QUEZON CITY LA SUERTE CIGAR AND CIGARETTE FACTORY, INC., Petitioner, -versus- C.T.A. CASE NOS. 4689, 4704, 4710, 4723, 4777, 4782, 4799, 4805, 4814, 4818, 4843, 4862, COMMISSIONER OF p� 4870,4880 INTERNAL REVENUE, Promulgated: Respondent. SEP 03 1998 x----------------------------------------------------- -x DECISION '1hese consolidated cases involve claims for refund of alleged erroneously or illegally collected specific taxes on various importation of stemmed leaf tobacco in the amounts of P54,000.00, P246,819.00, P53,343.00, P235, 767.00, P62,460. 75, P31,230.00, P116,070.00, P234,882.75, P52,050.00, P23,269.50, P85,250.25, P83,281.50, P57,391.50, P22,044.70 or for the aggregate amount of P1,357,859.45 covering the period from December 1989 to November 1990. Petitioner is a domestic corporation engaged in the manufactw"e of cigars and cigarettes out of stemmed leaf tobacco as raw materials which it purchases in bulk from both local and foreign tobacco manufactw"ers. Sometime in December 1989 to November 1990, petitioner purchased and imported stemmed leaf tobacco from various sellers abroad whereby the corresponding excise/specific taxes were subsequently assessed and collected. Petitioner allegedly paid

DECISION - C.T.A. CASE NOS . 4689, 4704, 4710, 4723 , 4777, 4782, 4799 , 4805 , 4814 , 4818, 4843, 4862, 487, 4880 - 2- said ammmts under protest Petitioner, through counsel, filed a claim for refund of specific taxes subject of CTA Case No. 4689 (Exhibit A-1), and on December 13, 1991 and February 12, 1992, consolidated claims for refund of the specific taxes filed covering all periods therein which are now the subject of CTA Case Nos. 4704, 4710, 4723, 4777, 4782, 4799, 4805, 4814, 4848, 4843, 4862, 4870 and 4880 (Exhibit A). In said claims, petitioner protested the assessments and collections of specific taxes, invoking Section 137 of the National Internal Revenue Code, wherein it exempts the sale of stemmed leaf tobacco "by one manufacturer directly to another" from excise taxes. Respondent formally denied petitioner's claim for refund in CTA Case No. 4689, and failed to act on the other consolidated claims, hence, petitioner was constrained to file Petitions for Review before this Cowt on December 26, 1991 (CTA Case No. 4689); January 18, 1992 (CTA Case No. 4704); February 06, 1992 (CTA Case No. 4710); ~1arch 5, 1992 (CTA Case No. 4723); April3, 1992 (CTA Case No. 4777); April 8, 1992 (CTA Case No. 4782); April 25, 1992 (CTA Case No. 4799); May 15, 1992 (CTA Case No. 4805); May 29, 1992 (CTA Case No. 4814); June 5, 1992 {CTA Case No. 4818); September 2, 1992 (CTA Case No. 4843); October 15, 1992 (CTA Ca.~e No. 4862); November 4, 1992 (CTA Ca.~e No. 4870); and November 26, 1992 (CTA Case No. 4880). It is important to note at this point that these cases were originally submitted for decision on June 28, 1995 but their final disposition was held in abeyance for reasons stated in a resolution, dated May 28, 1996 (page 317, CTA records). However, in view

DECISION - C.T.A. CASE NOS. 4689 , 4704, 4710, 4723 , 4777, 4782, 4799, 4805 ' 4814 ' 4818 ' 4843 , 4862 , 487, 4880 - 3- of the decision promulgated by the CoW1 of Appeals involving identical facts and issues in the case of Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, CA SP Nos. 38219 and 40313, dated January 30, 1998, We have decided to rule on these instant petitions in the same light. In her Answer, respondent considered stemmed leaf tobacco as "partially manufactured or prepared tobacco" as provided for in Revenue Regulations No. 17-67 (Sec. 1 (1)), and as such, subject to a ta~ of P0.75 for each kilogram in accordance with Section 141 , of the National Internal Revenue Code. She further avers that Section 137 of the Tax Code pertains to transfer from one L-7 directly to another L-7 but not from an L-6 (stripper or thresher) to an L-7. She claims that while imported leaf tobacco has never been su~ject to tax, partially manufactured tobacco is su~ject to the specific tax of P0.75/kg. Thus, according to respondent, whether or not the stemmed leaf tobacco imported by petitioner is liable to tax depends upon compliance with such conditions. The sole issue in these cases is whether or not imported stemmed leaf tobacco is exempt from excise (specific) tax, thus, entitling petitioner to the refund of the amounts mentioned in the foregoing facts. Resolution of the issue centers on Section 137 and 141(b) of the National Internal Revenue Code relied upon by petitioner and respondent, respectively, to wit: "Section 131.-xxx Stemmed leaftobacco, 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 another, without payment of the tax under such conditions as may be prescribed in the regulations of the Department of Finance. (Underscoring supplied)

DECISION - C.T .A. CASE NOS . 4689 , 4704, 4710 , 4723, 4777, 4782, 4799 , 4805 , 4814 , 4818 , 4843 ' 4862 ' 487, 4880 - 4- "Stemmed leaf tobacco" as herein used means leaf tobacco which has had the stem or midn"b removed. The tenn does not include broken leaf tobacco." "Section 141. - '!here shall be collected a tax of seventy-five centavos on each kilogram of the following products oft.obacco: � (a) XX X (b) Tobacco prepared or partially prepared with or without the use of any machine or instnnnent or without being pressed or sweel.cmed." Fine cut shorts and refuse, scraps, clippings, cuttings, stems, and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise, sold, without, prepayment of the specific tax herein provided for under conditions as maybe prescn"bed in the regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished products.,, The records show that petitioner purchased stemmed leaf tobacco products wherein it was assessed and excise taxes collected by the Bureau of Internal Revenue. It may also be noted that the imported stemmed leaf tobacco were blended with locally purchased stemmed leaf tobacco thus constituting the raw materials in the manufacture of petitioner's cigarettQ$, Petitioner paid the corresponding excise ta"{es of these finished products. Petitioner contends that to tax stemmed leaf tobacco under Section 141 of the Tax Code simply because it is ''partially manufactured tobacco'' would render useless the express grant of exemption to stemmed leaf tobacco under Section 137 of the Tax

DECISION - 4689 , 4704, C.T.A. CASE NOS . 4782 , 4799, 4843 , 4862 , 4710 , 4723 , 4777, 4805 , 4814 , 4818 , 487 , 4880 - 5- Code; besides, Section 141 does not purport to be the exclusive law or deferment of excise taxes. This is not a case of first impression. As adverted to earlier, the Honorable Court of Appeals has ruled on this issue in the recent case of Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, docketed as CA-SP Nos. 38219 and 40313 (CTA Case Nos. 4587 and 4616) and promulgated on January 30, 1998. The pertinent portions of the decision in said case read as follows: "There is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. XXX XXX XXX Sec,�Lion 137 of the Tax Code, earlier cited, expressly defines "stemmed leaf tobacco" and excludes it :from payment of the tax when sold in hulk a.q raw material hy one manufacturer directly to another. �while this particular section provides for removal of tobacco products without prepayment of tax, it is significant tlw the Tax Code defines and classifies stemmed leaf tobacco under its Section 137. When Revenue Regulations No. 17-67 undertakes to cla.q.qifY 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 itqelf specifically provides hut 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 manufactw�e of other tobacco products. Tite 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 m ufactw�e of cigarettes and

DECISION - NOS. 4689' 4 704' C.T.A. CASE 4782, 4799, 4777, 4843 . 4862 . 4710 , 4723 , 4818 . 4805 . 4814 . 487 . 4880 - 6- other tobacco products. After the cigarettes are manufactured, excise taxes will be paid. ht effect, what tlte petitioner has provided in tlte 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 catutot be ituposed by admittistrative rule-making body. If specifically excluded under the last paragraph of Section 141, taxes cannot he 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 he mandated on the strength of an administrative regulation which purports to implement the said law. Only Congress, not the Bffi, catt 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 permit~, putting up factories and machineries, procuring raw materials, recording production, attd disposittg of the :fittished 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 :fi�om taxes itt attotlter section of the same law and also in another law. The petitioner is arrogating powers to it~elf which it does not posses.~. Tite at-gwuent that stenuued leaf tobacco used as raw matelial is exempt from taxation only when it is from one L-7 manufacturer to another T.-7 manufacturer suffers from the same infirmity. It is ha.~ed on the BIR.'s own Revenue Regulations V-39 which add to the law somethittg which is not tltere. Usittg its power of clas~ification, the petitioner has ventured into an amendment and amplification of the ha.~ic law. Section 141 taxes :fitte cut shorts attd refuse, scraps, clippings, stems and sweepings but the wmumbered paragraph after Section 141 (c) exempt~ these items if they are u.~ed in the manufacture of other tobacco products on which the excise tax will eventually be paid on the :fittished product. The law defines and exempt~ certain raw materials on condition that excise taxes will eventually be paid on the finished manufactured product. Tite BIR. has classified these raw matelials itt a resttictive 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 fonn. For a wide vatiety of raw matetials, tltet-e is double ituposition 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 is completed. Again, double taxation is valid but only when it is provided by statute. It eatutot be imposed tlu�ough att itttetpretative tule. The petitioner's contention that the cla.~sification of stemmed leaf @

DECISION - 4689, 4704, C.T.A. CASE NOS . 4782, 4799, 4843 .� 4862 . 4710, 4723, 4777, 4805 . 4814 . 4818 . 487, 4880 - 7- tobacco as "partially manufactured tobacco" wtder Revenue Regulations No 17-67 prevails over tbe definition of processed tobacco wtder Rep. Act 698 is fanciful to say the least. Revenue Regulations No 17-67 is not a ha.~ic law. It is simply an implementation of the statutory provision of the Tax Code. A mere regulation of a quasi-legislative agency cannot prevail over the express definition wtder a law passed by Congress itself. It is elementary that an administrative regulation cannot amend or repeal the express provisions of statutes enacted by Congress. How can the petitioner argue that an administrative regulation prevails over a statute or law? The petitioner states that Sections 141 and 137 of the Tax Code must be read and construed together. It explains that under Section 141 stenuned leaf tobacco, being partially prepared tobacco is subject to specific tax. However, under Section 137 if the stemmed leaf tobacco is sold in hulk 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 vety 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 regulatoty conditions of BIR which resttict the application of the law to an extremely limited class that form the basis of BIR action. The petitioner engages in legislation and then u~es it~ own administrative or quasi-legislative powers to add a certain class of tax which is neither expressed not contetnplated in the basic law. XXX XXX XXX It appears that the consolidated cases at bar are no different from facts and circumstances obtaining in the case of Fortune Tobacco and with the same principal issue to contend with, We therefore adopt the aforesaid ruling. WHEREFORE, premises considered, finding the petitions meritorious and in accordance with law, the same are hereby GRANTED and respondent is ORDERED to REFUND in favor of La Suerte Cigar and Cigarette Factory Inc., the total amowtt ofP1, 125,268.25, representing erroneously or illegally paid specific taxes for the period of December 1989 up to November 1990 detailed as follows:

DECISION - 4689, 4704, C.T .A. CASE NOS . 4782, 4799, 4843 , 4862 , 4710, 4723, 4777, 4805 , 4814 . 4818, 487, 4880 - 8- Date of Amount of Confirmation Payment Payment Specific Tax Receipt No. Order No. Pai.d 02-06-90 p 53,343.00 Bl8396095 6916220(Exh.CD) B18720631 7160894("Exh.CE) 03-05-90 46,539.00 Bl9169730 7597793(Exh.CF) Bl9169748 759819l(Exh.CG) 03-22-90 72,870.75 Bl9415507 7598199(Exh.CH) B19415532 7598459("Exh.Cf) 03-30-90 116,348.25 Bl9764215 803286l(Exh.CJ) Bl9764221 8032856(Exh.CK) 04-04-90 62,460.75 B20071051 8033460(Exh.CM) B20070550 8033463("Exh.CN) 04-1 0-90 31,230.00 B20071053 8033458(Exh.CO) B20071058 8033467(Exh.CQ) 04-27-90 52,050.75 B20103832 8033643(Exh.CR) B20103831 8033642("Exh.CS) 04-27-90 20,820.00 B20103849 8360363(Exh.CU) B20104904 8360673(Exh.CV) 05-16-90 43,200 .00 B20104903 8360672(Exh.CW) B20291301 8360820("Exh.CX) 05-16-90 58,1 74.50 B20291302 8360818(Exh.CY) B20104924 8360822(E.xh.CZ) 05-16-90 23,283.50 B20623603 8825962(Exh.DA) B20623607 8569082(Exh.DB) 05-17-90 23,269.50 B20910826 9152912(Exh.DD) B10810827 9152911(Exh.DE) 05-29-90 31,230.00 B21191392 9153618(Exh.DF) B21191391 9153617(Exh.DG) 05-29-90 20,820.00 B21270273 9249834(Exh.DI,AG) 06-06-90 23,269.50 06-15-90 58,161.00 06-15-90 62,460.75 06-20-90 31,230.00 06-20-90 23,269.50 06-20-90 23,269.50 09-03-90 1,050.00 09-04-90 84,200.25 10-16-90 41,640.75 10-16-90 41,640.75 11-05-90 23,269.50 11-05-90 34,122.00 11 -27-90 22,044.75 TOTAL 121 ,125,268.25 SO ORDERED. W~CONCUR: / ~ \Q.t o~ I ~RN~STO D. ACOSTA Presiding Judge ~-U Associate Judge

DECISION - C.T.A. CASE NOS . 4689, 4704 , 4710 , 4723, 4777, 4782, 4799, 4805 , 4814 , 4818, 4843 , 4862, 487, 4880 - 9- CERTIFICATION I hereby certify that the above decision was reached after due consultation with the memhers of the Court of Tax Appeals in accordance with Section 13, Article vrn of the Constitution. GlQ ~ ~ ERNESTO D. ACOSTA Presiding Judge