CTA Case No. 4619 (Decision)

. ,V I') � )l....- REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ALHAMBRA INDUSTRIES, INC., Petitioner, - versus - C.T.A. Case No. 4619 THE COHHlSSlONER OF INTERNAL REVENUE, Respondent. X- - - - -- - - -X DECISION There is no dispute as to the basic facts of the case at bar. Petitioner is a domestic corporation engaged in the manufacture and sale of cigar and cigarette products. On May 7, 1991, petitioner received from respondent a letter dated April 26, 1991 with the information that there was found due from it deficiency ad valorem tax in the total amount of' ?488,396.62, inclusive of increments, on the removals of cigarettes during the period starting November 2, 1990 to January 22, 1991 <Annex "A">. The computation is shown hereunder: Total AVT Due per ftanufacturer ' s Declaration P4,279,042.33 less: AVT Paid under BIR Ruling No. 473-88 3,905,348.85 Deficiency AVT p 373,693.48 Add: Penalties: 251 Surcharge !Sec. 248(cJ(3) NIRCJ 93,423.37 20X Interest !P467,116.85 x 82/360 days 21,279.77 Total A1ount Due p 488,396.62 On May 6 , 1991, the parties met in a formal

DECISION - C.T.A. CASE No. 4619 - 2- con�erence pursuant to Section 229 o� the Tax Code. Petitioner registered its protest to the proposed assessment in the said conference In a letter dated May 22, 1'391 which was received by respondent on even date, petitioner thru counsel filed a protest against the proposed assessment with a request that the same be withdrawn and cancelled <Annex "B">. On May 31, 1991, petitioner received respondent's letter dated May 27 , 1 991 denying its protest and request for cancellation and withdrawal of said disputed assessment s atin that th � s decision is final, and at the same time requested payment of the revised amount of P520, ti35. 29, interest updated, within ten ( 10 > days from receipt thereof <Annex "C"). ln a letter dated June 10, 1991, which respondent received on the same day, petitioner requested for a reconsider ation of respondent's denial of its protest <Annex "J.)" ) � Without waiting for respondent's reply to its request for reconsideration, petition filed on June 19, 19~1 the ins tant petition for review with the prayer that the deficiency excise tax assessment be cancelled and withdrawn (pp. 1-7, C.T.A. Records>. On June 25, 1991, petitioner received from the respondent a letter dated June 21, 1991, denying its 1 1 t1 , ,

DECHiiUN - C.T.A. CASE No. 4619 -3- request for reconsideration declaring again that this decision is final and reiterating its demand for the payment of the deficiency excise tax assessment of P520,835.29 within ten <10) days ' from receipt thereof <Annex "E 11 >. On July 8, 1991, petitioner paid under protest the disputed ad valorem tax assessment in the sum of P520,835.29, inclusive of increments, as evidenced by the following documents� Annex "G" CB Confirmation Receipt No. 822711233 dated July 8, 1991 for P520,835.29 Annex "H" BIR Payment Order No. C1131497 dated July 8, 1~91 for P520 , 835.29 On July 11, 1991, petitioner filed with the Bureau of Internal Revenue, Appellate Division its claim for tax refund in the amount of ?520,835.29, representing the alleged deficiency ad valorem tax paid under protest <Annex " I 11 >. On July 24 , 1991, petitioner filed with this Court an Amended Petition for Review with the prayer that the deficiency excise tax assessment be cancelled and withdrawn and that respd'ndent be ordered to grant the refund claimed <pp. 20-26, C.T.A. records>. The issue which t h is Court has to resolve is whether or not petitioner is entitled to the refund of P520, 83:::5. 29, representinq its payment under protest of

DECISION - C.T .A . CASE No. 4619 - 4- the disputed deficiency excise tax assessment �or the period from November 2 , 1990 to January 22, 1991. To be entitled to the refund claimed, petitioner has to establish that respondent's deficiency excise tax assessment has no legal basis and should be cancelled and withdrawn. The subject deficiency excise tax assessment resulted out of petitioner 's use of the computati on ,I mandated by B. I. R. Ruling No. 473 - 88 dated October 4, 1988 <Annex "J"> as basis for computing the 15X ad valorem tax due on its removals of cigarettes for the period November 2, 1990 to January 22, 1991. The correct compu tation, pursuant to said ruling, is illustrated by way of example as follows : P44.0U x 1/11 = P4.00 VAT P44.UO - P4.00 = P40 .00 Price without VAT P6.00 Ad valorem tax P40.00 x 15X = The above co mputation which shows that VAT is excluded from the tax base in computing for the 15X excise tax due is alleged! y in accordance with Section 127Cb> of the Tax Code, as amended by Executive Order No. 273, to wit: "SEC. 127. Payment of excise taxes on domestic products. XXX XXX XXX Cb> Determination of gross selling price of qoods subject to ad valorem tax. Unless otherwise provided, the price, excluding the

-- DECISION - C.T.A. CASE No. 4619 -5- valu ~- added tax, at which the goods are so ld at wholesale in the place o� production or through their sales agents to the public shall constitute the gross selling price. xxx" <Underscoring supplied> XXX XXX XXX Thereafter, respondent issued BIR Ruling No. 017-91 on February 11, 1991 (Annex "K") revoking BIR Ruling No. ) 473 - 88. It include back the value -added tax to the gross selling p rice in determining the tax base for computing the 15X ad valorem tax on native cigarettes. Cited as basis by respondent is Section 142 of the Tax Code, as amended by E.O. No. 273 quoted below: "SEC. 142. Cigar and cigarettes. XXX XXX XXX For purposes of this section, "manufact urer's or importer's registered wholesale price" shall include the ad valorem tax imposed in paragraphs <a), (b), (c) or (d) hereof and the amount intended to cover the val ue added tax imposed under Title IV of this Code. <Underscoring supplied> Respondent sought to apply the revocation retroactive to petitioner's removals of cigarettes for the period starting �rom November 2, 1990 to January 22, 1991 on the ground that petitioner allegedly acted in bad .faith which is an exception to the rule on non- retroactivity o.f B. I. R. rulings. Section 246 of the Tax Code provides as .follows: "SEC. 246. Non - retroactivity of rulings. - Any revocation, modif ication or reversal of any o.f the rules and regulations promulgated in

DECISION - C.T.A. CASE No. 4619 -6- accordance with the precedinq section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers ~..?iQeg_t _ in the following cases: <a> where the taxpayer deliberately misstates or omits materia l facts from his return or in any document required of him by the Bureau of Internal Revenue; <b > where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling � is based; or <c> where the taxpayer acted in bad faith. " <Underscoring supplied. ) To be noted is the difference in the taxa ble base on which the excise tax is to apply as mandated by the two incompa tible BIR rulinqs. The deficiency excise tax assessment can be attributed to the said difference. The question a to the correct computation of t he excise tax on cigarettes in the case at bar has been sufficiently addressed by BIR No. 17-91 dated February 11, 1991, revoking BIR Ruling No. 473 - 88 dated October 4, 1988, to wit: "It is to be noted that Section 127<b> of the Tax Code as amended applies in general to domestic products and !;?.XC lude s the value-added tax in the determination of the gross selling price, which is the tax base for purposes of the imposition of ad valorem tax. On the other hand, the last paragraph of Section 142 of the same Code which includes the value-added tax in the computation of the ad valorem tax, refers ?__ILecifica.:L!Y. to cigar and cigarettes only. It does not inblude/apply to any other articles or qoods subject to the ad valorem tax. Accordingly, cigarettes must perforce prevail over Section 127(b), a general provision of law insofar as the imposition of the ad valorem tax on ciqar and cigarettes is concerned.

DEt;lSION - G. T.A. CASE No. 4619 -7- Moreover, the phrase "unless otherwise prov ided" in Section 127(b) purports of exceptions to the general rule contained therein, such as that of Section 142, last paragraph thereof which explicitly provides that in the case of cigarettes, the tax base for purposes of the ad valorem tax shal l include, among others, the value-added tax. This Co u rt agrees with said r u ling a nd interpretation . Upon knowledge and information of the existence and effectivity of � SIR Ruling No. 017-91 , Petitioner immediately implemented the method of computation mandat ed therein by including back that VAT in computing for the tax base for purposes of the 1 5X ad valorem ta x. Well-entrenched also is the rule that "rulings and c irculars, rules and regulations, promulgated by t h e Commissioner of Internal Revenue would have no retroactive application if ' to so apply them would be prejudicial to taxp yers, except in the three instances enumerated in Section 246 of the NIRC. ". <PLDT vs . CI R, CTA Case No. 4056, Dece mber 28 , 1988 citing ABS - CBN Broadcasting Corporation vs. C'fA and CIR, 108 SCRA 142 and CIR vs. Buroughs, Ltd. and CTA , 142 SCRA 324. > Without doubt, petitioner would be prejudiced by a retroactive a pplication of the revocation as it woul d be assessed deficiency excise tax. What is left to be answered is whether petitioner acted i n bad faith in using BIR Ruling No. 473-88 in

DECISION - G. T.A . CASE No. 4 6 1 9 -8- computing its excise tax l iabilit ies for the period from Nov e mb er 2, 1990 to January 22, 1 991 to warrant a re tro a ct i ve application of BIR Ru ling No . 0 1 7- 91. Respondent's allegation of bad faith i s anchored on the following: (1) BLR Ruling No. 473-88 dated Oc t ob er 4, 1988 wa llegedly never publishe d or circulari~ed and even !naular-Ye b ana Tob a c co Corporation which r~ q uested said ruling did n ot implem nt the s me and nei th er did t h e b i g cigarette factories a vailed of it. ( 2) Petit.ioner al l egedly, in viola tion of Section 2'7 ( c > of t he NI RC, :fail ed to sub mit its amended Manufacturer 's Declaration bef or e shifting its manner of computing the ad va lo r em tax due on the oigar e t t ea it produced and did not secure the approval of the BIR unlike ot her cigarette manufacturers which ma d e offic ial consultation with t he BIR a nd were duly informed. On the other hand r petitioner's claim that i t acted in g ood faith is based on the following : <1> BIR Ruling No. 473-88 was publish e d on February 20, 1989 in Business Wo r ld, a n e wspaper of general circu l atio n in the Phi lippines and until BIR Ruling 0 17 -9 1 wa s neve r qualified nor disclaimed by t h e Bureau of Inter nal Revenue . such that petitioner's reliance thereon for the period under review cannot be faulted. <2 > The afor e said BIR ruling was clear and cate g o rical , leaving no room for any other i nterpretation that petitioner did not see the need to consult BIR before implementing the same . ( 3 ) Following the procedure it adopted through the years, pe titioner find no practical rea s on to file an amended Manufacturer's Declar at ion since , it is only i n instances where the qross s elli ng pric e is adjusted that petitioner files one. In the instant case, it

DECISION - C.T.A. CA SE No. 461Y -9- is only the excise tax due that was changed. <4) After the subsequent revocation of BIR Hu l ing No. 473 - 88 by BIH Ruling No . 017 -9 1, ) petit ioner immediately reverted to the previous method by which it computes for the excise tax due, which inc l udes the VAT. Bad faith does not simply connote bad judgment or negligence. i impo ts a ishonest purpose or some moral obliquity and � conscious doing of wrong. It partakes of he natu1�e of fraud. <Uoard of Luquidators vs. Kalav. 20 SCHA 1007>. It is a breach of a known duty through some moliv e of interest or i ll will. <Lopez vs. Pan Amex�ican Airways , 16 SCRA .4:JU . ) � Deing a state of mind , it is indicated by acts and circumstances and is provable by circumstantial evidence. <Lai~ ve. Court of Ap peals, 8~ SCHA 38!:�. > Going over the records of the case, We find no convincing evidence that petitioner's implementation of t he computation mandated by BIR Ruling No. 473 - 88 wa s ill mot ivated or attended with dishonest purpose that partakes of the nature o :f a'1d. We observed that BIR Ruling No . 473 - 88 was dated October 4, 1988 and publis hed on February 20, 1989 but petitioner used the computation therein only :for the pex- od sta:�ting Nc�vember 2, 1990 to January 22, In the interven ing period a fter Oc ober 4, 1988 but prior to November 2 , 1990, petitioner used tl�e previous computation but did not file a claim lor refund of the excise tax it overpaid. Even with the.

l>E(.;.lSIUN - t;.T.A. t;ASE No. 461Y - 10 - publication of BIR� Ruling No. 473-88 in a newspaper of general circu.lation on February 20, 1989, respondent did not disclaim or bother to correct it. Only upon the issuance of BIR Ruling No. 017-91 dated February 11, 1991 that the aforesaid ruling was revoked. Upon knowledge thereof, petitioner immediately reverted to the computation mandated by BIR Ruling 017-91. lt is a established doctrine that "a taxpayer cannot be convicted for taking the tax authorities at their word . " <International Business Machines vs. U.S., 343 F 2d (196!:5J p. 923. ) To impute bad faith and slap deficiency assessment on petitioner for merely relying on res pondent's own assurance in the form of a ruling that it is the correct computation is reprehensible for it is inconsistent with justice and fair play. While ' t is true that the Government is never estopped �rom co.llectinq taxes legally due it because of mistakes or errors on the part of its agents, this stands qualified by Section 246 of the Tax Code in the sense that rulings issued by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to taxpayers, except in the three instances enumerated therein. The publication of BIR Ruling No. 473-88 in a news paper of qeneral circulation serves as sufficient notice .. 1 l.: ~,

) l>EClSIUN - C.T.A. CASE No. 461Y - 11 - t o all which are similarly situa ted and petitioner's avai lme n t t her eo� cannot be t aken against it. The legal riqh t o� a t axpayer to decr ease the amount o� what other wise wo uld be his taxe s or altog e t h er avoid t hem, by means which the law permits, cannot be d o ub t ed. <Delpher Trades Corp. vs. Intermediate Ap pel lat e Cour t, 157 SCRA 349. As to the � contention t hat petitioner's � a i l ure t o submit the ame n ded Ma nu :f ac t u rer's Decl a ratio n for respondent's a p proval is t antamo unt to bad faith, We �ind said conclusion untenable in t he liqht o� t h e explana tion q iven by petitioner. The evidence on hand do not warrant s uch in�erence. Premises considered, We resolve t h at the defici ency excise tax assessment issued by respondent ag ainst petitioner in t h e a mo unt P520,835 . 29, inclusi ve of i ncrements, is without leqal basis because of the prohibition aqai n st the retroactive application o� the revocation of HIR rulings in the absence o� bad fai t h on the part of the petitioner. The a�oremen t ioned de�iciency excise tax assessment is hereby cancelled and withdrawn. lnasmuch as petit'oner has already paid under protest the �oreqoing deficiency excise tax assessment o� P520, 835. '2'3 as clearly established by the evi dence

DEClSIUN - C.T.A. CASE No. 4619 - 12 - submitted, the same should be refunded to petitioner. WHEREFORE, respondent Commissioner of Internal -' Revenue :i.s hereby ordered to �refund to petitioner the amount of P520,835.29. SU ORDERED. Quezon City, Metro Manila, December 1, 1993. ~~Q-~ ERNESTO D. ACOSTA Presiding Judge WE CONCUR: CER"riFICATION l 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 Constit ution. ~Q,~ EHNESTO D. ACOSTA Presiding Judge Court of Tax Appeals .. 1 i-