CTA Case No. 5418 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY LA SUERTE CIGAR AND CIGARETTE FACTORY, INC. , Pet i tioner, - versus - C.T.A. CASE NO . 5418 COMMISSIONER OF INTERNAL REVENUE, Pro~~~ g 1~� ~g98 ~' Respondent. -~ X - - - - - - - - - - - - - - - - - - - - - - - - DECISION This case involves a claim for refund of alleged erroneously or illegally paid specific taxes in the amount of P338,784.75 during the month of August, 1994. Petitioner is a do mestic corporation engaged in the manufacture of cigarettes out of stemmed - leaf tobacco which it purchases in bulk from both local and foreign tobacco manufacturers. It is thus a manufacturer of tobacco. During the month of August, 1994, petitioner purchased an d imported stemmed-leaf tobacco from various sellers abroad on nine ( 9) occasions, whereby the aggregate amount of P338,784 . 25 for specific taxes allegedly due were subsequently collected . Petitioner paid the said amounts under protest. Shortly thereafter, petitioner, throug h counsel, filed a claim for refund of specific taxes paid by it on its importations of stem med-leaf tobacco. Petitioner protested the assess ment and collection invoking Section 137 of the National I n te r nal Revenue Code wherein it

DECISION - C.T.A. CASE NO . 5418 - 2- exempts the sale of s temmed leaf tobacco "by one manufacturer directly to another" from excise tax. As the claim for the said refund has not been acted upon, petitioner was compelled to file this Petition for Review before this Court on August 2, 1996. The issue in this case is whether or not petitioner is entitled to the refund of f\338,784.75 allegedly representing specific tax payments erroneously collected by respondent. 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 137. Removal or t:obacco product:s w.i.t:hout: prepayment: or t:ax. Produ c ts of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Department of Finance. Stemmed leaf tobacco, fine cut shorts, the refuse of fine-cut chewing tobacco, scrap s , cuttings, clipping s , 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 maybe prescribed in the regulations of the Department of Finance. "Stemmed leaf tobacco" as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco." "Section 141. Tobacco Product:s. There shall be collected a tax of seventy-five

DECISION - C.T.A. CASE NO. 5418 - 3- centavos on each kilogram of the following products of tobacco: (a) X X X (b) Tobacco prepared or partially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and XXX XXX XXX 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 prescribed 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 ste mmed leaf tobacco products and as a result, excise taxes were assessed and collected. It s hould also be noted that the imported ste mmed leaf tobacco was blended with locally purcha sed stemmed leaf tobacco and both were incorporated as raw materials in the manufacture of petitioner's cigarettes. Petitioner contends that to tax stemmed-leaf tobacco under Section 141 of the Tax Code simply because it is also "partially manufactured tobacco would render useless the express grant of exemption given to stemmed leaf tobacco under Section 137 of the Tax Code; besides,

DECISION - C.T.A. CASE NO. 5418 - 4- Section 141 does not purport to be the exclusive law on deferment of excise taxes". Respondent, on the other hand, avers that the question on whether or not the stemmed-leaf tobacco imported by petitioner is liable to tax depends upon compliance with the conditions laid down by the Department of Finance for that purpose. The present controversy has already been settled and passed upon in the recent case entitled Commi s s i on e r of Internal Revenue vs. Fortune Tobacco Corporati o n. docket e d a s CA -S P No s. 38219 a n d 403 1 3 (CTA Ca se No s. 4587 and 4616) promulgate d on January 3 0 , 1 998, wherein the Honorable Court of Appeals ruled in this wise: "There is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. XXX XXX XXX 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 pre-payment of tax, it is significant that the Tax Code defines and classifies stemmed leaf tobacco under its Section 137. When the 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

DECISION - C . T.A. CASE NO. 5418 - 5- specifically provide s 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 s pecifically excludes "fine cut shorts and refuse, clippings, cuttings, stems and s weepings of tobacco resulting from the handling in 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 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 mu s t 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 s ame Section by a mere interpretation of the petitioner. It is elementary that any taxe s 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 s ecuring

DECISION - C.T.A. CASE NO. 5418 - 6- permits, putting up factories and machineries, procuring raw materials, recording production, and disposing of the fini s hed products. But the petitioner's power are limited to procedure and implementation and not s ubstantive 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 i s arrogating powers to itself which it does not possess. The argument that stemmed leaf tobacco used a s 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 BIR's own Revenue Regulations V-39 which add to the law something which is not there. Using its power of classification, the petitioner has ventured into an amendment and amplification of the basic law. Section 141 taxes fine cut shorts and refuse, scraps, clippings, stem s and sweepings but the unnumbered paragraph after Section 141(c) exempt s these item s 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 these raw materials in a restrictive manner - only from one L-7 to another L- 7 when all 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 s tart 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 cannot be imposed through an interpretative rule.

DECISION - C.T.A. CASE NO. 5418 -7 The petitioner's contention that the classification of stemmed leaf tobacco as "partially manufactured tobacco" under Revenue Regulations No. 17-67 prevails over the definition of the processed tobacco under Rep. Act 698 is fanciful to say the least. Revenue Regulations No. 17-67 is not a basic 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 under 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, 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 Regulations 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 nor contemplated in the basic law." XXX XXX XXX In the case at bar, after a careful consideration of the factual circumstances obtaining, We find that

DECISION - C.T.A. CASE NO. 5418 - 8- petitioner has successfully and sufficiently performed its duty to establish its right to the refund claimed. Respondent, on the other hand, opted not to submit any evidence because she believes that the issue in this case is purely legal, therefore, there was no need to submit any document to disprove petitioner's claim (TSN, dated July 17, 1997). Furthermore, in her Answer, respondent admitted the fact that the total amount of P338,784.75 was paid by peti~ioner as specific taxes for the latter's purchases of stemmed leaf tobacco. In conclusion, We find petitioner to be entitled to the refund in the amount of P338,784.25, detailed as follows: Date Description AT APET Amount Serial Number 08/02 / 94 08/02/94 59,400 kgs. 1589165 p 44,550.00 08/02/94 46,539 kgs. 1589159 34,904.25 08/02/94 46,539 kgs. 1589150 34,904.25 08/02/94 83,281 kgs. 1589157 62,460.75 08/02/94 27,760 kgs. 1589163 20,820.00 08/16/94 62,052 kgs. 1589161 46,539.00 08/23/94 27,742 kgs. 1589194 20,806.00 08/25/94 79,200 kgs. 1589212 59,400.00 19,200 kgs. 1589222 14,400.00 Total P338,784.25 WHEREFORE. premises considered, finding the petition meritorious and in accordance with law, the same is hereby GRANTED and respondent is hereby ORDERED to REFUND in favor of La Suerte Cigar and Cigarette Factory, Inc.

DECISION - C.T.A. CASE NO. 5418 - 9- the amount of P338,784.25 representing erroneously or illegally paid specific taxes for the month of August, 1994. No prono un ceme n t as to costs. SO ORDERED. ~Q.~~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certi f y that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitu tion. ~Q~O~ ERNESTO D. ACOSTA Presiding Judge