CTA Case No. 5426 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY / LA SUERTE CIGAR AND CIGARETTE 1!7 C.T.A . CASE NO. 5426 FACTORY, INC. , Promulgated: Petitioner , ~ MAY 18 1998 . - ve r sus - -------- COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - DECISION The decisive issue which is presented for our consideration is whether or not petitioner is entitled to the refund of the specific taxes it paid, for the month of October, 1994, on its importations of stemmed leaf tobacco in the amount of ~120,966.00. As represented, petitioner is a domestic corporation, principally engaged in the manufacture of cigarettes out of stemmed-leaf tobacco which it purchased in bulk from both local and foreign tobacco manufacturers. During the month of October, 1994, respondent collected from petitioner the total amount of P120,966.00 allegedly representing the specific taxes due on its bulk

DECISION - C.T.A. CASE NO. 5426 - 2- purchases of stemmed-leaf tobacco from foreign tobacco manufacturers, broken down as follows: Date Quantity of Amount of Exh. Stemmed-leaf Tax Paid 10-07-94 tobacco purchased A 10-07-94 B 10-07-94 13,880 kgs. p. 10,410.00 10-28-94 39,600 kgs. 29,700.00 c 38,400 kgs. 28,800.00 69,408 kgs. 52,056.00 D fl120,966.00 The said amount was paid by petitioner under protest. On September 2 7. 1996 and October 2 � 1996, petitioner filed with respondent a claim for refund of specific taxes it paid on imported stemmed leaf tobacco during the period October, 1994 to May, 1995, which included the amount of P-120,966.00 claimed in the herein petition. The same was not acted upon by the respondent, hence, on October 4, 1996, petitioner filed with this Court the instant petition for review, which avers that: I. The collection under Section 141(b) of the Tax Code of the P.0.75/kilo excise tax on sales of stemmed- leaf tobacco, to be used in the manufacture of cigarettes, is erroneous and/or illegal, for reasons that: a) Section 137 is the applicable provision, b) the administrative practice of BIR since 1939 was not to

DECISION - C.T.A. CASE NO. 5426 - 3- subject stemmed leaf tobacco to excise tax, c) payment of specific tax on �stemmed leaf tobacco amounts to double taxation because excise tax is again paid on the finished product, cigarettes, d) Section 141 is a general provision of law and does not apply to stemmed leaf tobacco, e) sale of partially manufactured tobacco is exempt from specific tax under Rev. Regs. No. 17-67, f) BIR ruling supports La Suerte's position, g) authority on tobacco law states that sale from one manufacturer to another is exempt from tax, and h) even if La Suerte is originally liable, it can no longer be held liable for specific tax at the present time. II. Assuming arguendo, specific tax was due, the amount collected was erroneous. Respondent on the other hand, in her answer raised the herein special and affirmative defenses, thus: ( 1) petitioner's claim for refund is pending administrative investigation, ( 2) the taxability of petitioner's importation of stemmed leaf tobacco in October, 1994 is governed by the provisions of Section 141 of the Tax Code, ( 3) under Revenue Regulations No. 17-67 specifically Sec. 1, paragraph 1 thereof, stemmed leaf tobacco is considered partially prepared tobacco within the ambit of Section 141, ibid., (4) Section 137 of the same Code upon which petitioner relies evidently does not

DECISION - C.T.A. CASE NO. 5426 - 4- grant automatic exemption from taxes on importation of stemmed leaf tobacco, (5) petitioner failed to show that its importation of stemmed leaf tobacco was made under the conditions set forth in the regulations issued by the Department of Finance, (6) purchase or sale of s temmed leaf tobacco is subject to specific tax when not expressly granted exemption from payment of such tax, (7) the amount of ~120,966.00 representing specific taxes on imported stemmed leaf tobacco purchased by petitioner from foreign tobacco manufacturers or suppliers in October 1994 were collected in accordance with law, ( 8) in an action for tax refund the burden of proof is on the taxpayer to establish its right to the refund and it is incumbent upon the herein petitioner to show compliance with the provisions of Sections 204 and 230 of the Tax Code, and (9) tax refunds are construed strictly against claimants since they partake of the nature of exemption from taxation. As earlier adverted to, the issues in this case may be simplified into one and that is whether or not petitioner is entitled to the refund of the specific tax it paid, for the month of October, 1994 on its importations of stemmed leaf tobacco in the amount of P120,966.00.

DECISION - C.T.A. CASE NO. 5426 - 5- Petitioner and respondent both agree that the resolutio n of this case centers on Sections 137 and 141(b ) of the Tax Code, to wit: "Section 137. Removal o~ t:obacco product:s w.i t:hout: prepayment: o~ t:ax. Prod ucts 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, 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 ma y be 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 ter m does not i n clude broken leaf tobacco." (Underscoring supplied) "Section 141. Tobacco Product:s . There shall be collected a tax of seventy-five 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 (c) Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. 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,

DECISION - C.T.A. CASE NO. 5426 6- without prepayment of the specific tax herein provided for under such conditions as may be 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 product. XXX XXX XXX Petitioner rationalizes that Section 137 broadly grants excise tax exemption for tobacco sold as raw material "by one manufacturer directly to another" without distinction, thus, its importation of stemmed leaf tobacco should not be subjected to excise taxes. Respondent, opposed this view of the petitioner and argued that stemmed leaf tobacco is partially prepared tobacco, hence, it falls within the ambit of Section 141(b), thus, subject to an excise tax of ~0.75 on each kilogram thereof. The issue at bar has been sJttled by the Court of Appeals in the case entitled Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, CA-G.R . SP No s. 38 2 19 and 40313, dated January 30, 1998, thus, in consideration of the same, We rule in favor of the petitioner. In said case, the Court of Appeals said: "There is no disputing the fact that stem med 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

DECISION - C.T.A. CASE NO. 5426 - 7- 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 Veteran s Administration, 52 SCRA 340 [1973]). XXX XXX XXX In case of discrepancy between the basic law and a rule or regulation issued to 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

DECISION - C.T.A. CASE NO. 5426 - 8- the law. Only Congress can do this. Section 2(M)(1) of Revenue Regulations No. 17-67 is, therefore, ultra vires and invalid. 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 manufacture of other tobacco products. The reason for the exclusion is that the excise tax will eventually be paid on the finished product. The s9me 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

DECISION - C.T.A. CASE NO. 5426 - 9- 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 used 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 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, stems and sweepings but the unnumbered paragraph after Section 141(c) exempts these items if they are used in the manufacture of other tobacco products on

DECISION - C.T.A. CASE NO. 5426 - 10 - 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 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 is completed. Again, double taxation is valid but only when it is provided by statute. It cannot be imposed 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 prevails over the definition of 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 Regulation No. V-39, it is exempt from specific tax. It is very

DECISION - C.T.A. CASE NO. 5426 11 - 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. 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 exercise of quasi-legislative powers by administrative agencies. True, the law in Sections 141 and 137 of t h e 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 i n to the powers of administrative agencies. If it had gone fully and far enough into the quasi-legislative powers of Bureau of Internal Revenue, it would have arrived at conclusions fully consonant with our findings." IN THE LIGHT OF ALL THE FOREGOING . respondent is hereby ORDERED to REFUND to herein petitioner the total amount of P120,966.00, representing its erroneously paid

DECISION - C.T.A. CASE NO. 5426 - 12 - specific taxes for October, 1994, without p:onouncement as to costs. S O ORDERED. G a.o~ ERNESTO D. ACOSTA Presiding Judge I ./ I 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 VIII of the Constitution. ~ Q~ ~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals