STERLING TOBACCO CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPURI.lC OF THE PHII.JPPfNES COURT OF TAX APPEALS QUEZON ClTY STERLING TORACCO CORPORATION, C � T � A � C /\ S J~ N0 � '' "i 'l ? Petitioner, = JUL 13 1995 - \' e r sus - ---if~ THE GOMMISSTONF.R OF INTERNAL - - -� -~~-~ RF.VENUE, RPspondent. X- - - - - - - - DECISION This is A CASe involving An :lS~�i<'SS1nPt11 nf deficiency excise tax on import::ttinn ::tnd lnrr~l p11["f'h'1SP o f s t em me d- 1e a f to b :1. c co cove r i n g t h P Jl e r i o d ] q fH) t o lllfl') i n the am o u n t o f P 5 , 1 8 7 , 3 t, 2 . 0 0 . Petitioner is a domestic corpnrr:~t ion Pngn!:!r>d in t liP manufacture of tobacco products \.Jhirh purchAsPd leaf tobacco to he used as raw materi.B t. On .January 12, 1990, Petitioner recei.vPd assessment notice, �la ted Decem her lR. 1<)8(}, in� a 1 I ~'0" (' d deficiency excise tax on i. mp or tat i n n :~ n d I n r :1 l of stem mP d- 1 e a f tobacco cover in g t tH� per i o rl I q fHi t o i n t h e am o u n t o f P 5 , 1 8 7 , 3 4 2 . 0 0 ( Anne ~: " :\ " ) . 955

DF.CISION - C.T.A. Case No. 4532 ... 2 - On Janur~ry 19, 1990, Petitioner filerl a pr()tr�'~' against the above assessment and requested 11 t� h A t W P 1"' advised of the particulars by which thf' amount ()f P5,187,342.00 deficiency excise tax wac; arrived at" (Exh. "B") . On January 22, 1990, petitioner rlntPd January 19, 19_90, reiterated its protest on thf' suh_jrr�t assessment and requested for a reinvestigation t� he rPn f . (Exh. "C"). On December 7, 1990 petitioner received two lettPrs from the Respondent dated August 31, 1990 anrl October 17, 1990 respectively, denying with finality petitioners' protest saying that "in a ruling daterl 12 December 1972, it was held that sale or transfer of stemmed-leaf tobacco from all manufacturer of tobacco prorlucts to anothPr manufacturer is subject to the payment of specific tax of P0.75/kilo unless there is an express grant of P~POlpt i(lfl from the payment of tax. However, up to this point in time, you have not presented any authority issuf'd by thP Commissioner granting such exemption". (Exh. "n") Respondent then reiterated his demand for the psymPnt of alleged "deficiency specific tax on yout� importntion nnrl local purchase of stemmed-leaf t o h rH� co co v P r i n g I h f' 956

DECISION - C.T.A. CaHe No. 4532 - 3- period from November 1986 to June 211, 1989 in d1r> lotr~l amount of P5,187,342.00 computed as follows: STEMMED-LEAF TOBACCO RATE OF TAX SPECIFIC TAX Imported 1,086,550 kls. x P0.75 P 814,912.Sn Local 5,829,906 kls. X 0 . 75 (]_ ~!.2_1.L?:....t!!12.~S Total Amount Due (Basic Tax) p 5 ' 1 8 7 ' 3ft 2 . -~)g_" (Exh. "E") Hence, this appeal. The issue i s : Whether or not petitioner is I i<thle to pay the alleged specific tax on locally purchasPd r~nd imported stemmed-leaf tobacco used as a raw mnterial j II the production and manufacture of cigar and cigarettes? We answer in the negative. This in not a case of first impn~c;sion. This Cnnrt has already ruled out in a number of cr~ses bPfnn' involving the same question of law. In a similar casP involving the same issue (La Suerte Cigar and Cigarette Factory vs. Commissioner of Internal Revenue, CTA CriSP No. 4617, dated September 6, 1994) thus: . Respondent relies on the provisions nf Sec t i on 11, 1 ( b ) , l 2 7 ( a ) , and 1 2 8 o f the T r1 x Code as basis for the deficiency specific tnx assessment, which we quote hereunder: "SEC. 141. Tobacco Products. There shall be collected a tax of sevrnty- five centavos on each kilngt�Am of thP following products of toba 0 co: 957

DECISION - C.T.A. Case No. 4532 - 4- (a) XXX XXX XXX (b) Tob~cco prepared or partially prepr-tred t.Jith or without the use nf any mr-tchine or instruments or t.rithnnt- being pressed or sweetened; nnd (c ) XXX XXX XXX "SEC. 127. Payment of excir:;e taxes on domes~ic products. (n) Persons liable; time for payment. Unless otherwise especially allowed excise taxes on i!omestic products shall br pa'id by the manufacturer or producer before removal from the place nf production: Provi<:led, that t-hf' excise tax on locally m<'Hlltfactnred petroleum products and indigenn11s petrolc>um levied under Sect inns JI,C) and 151 (a) (4), respectively, of this T it 1 ~ s h a 11 he p a i d '" i_ t h in 1 '1 days from t-he date of remnvn] t:herrof from the t'lace of production. Shnnld domestic products be removed from the p I ace o t p rod u c t i on tv i t h n u t t- h f' payment of the tax, the owner or person having possession therPnf shall be 1 fable for thP tax dnP thereon. XXX XXX XXX "SEC. 128. Payment of exrisP taxes on imported articles. (a) Persons liable. - Excise taxes on imported articles shall be paid hy the own~"r or importer to the c us t n ms of f i (' e r s , conformably with the regulations nf the,Department of Finance and before the'release of such artirlPs from the customhouse, or by the prrson who is fonnn i.n possession of articles t\'hirh are exempt from excise taxes other than those legally entitled tn exemption. In case of tax-free ~rticles brought or imported into thP 958

.. -~ DECISION - C.T.A. Case No. 4532 - 5- Philippines hy persons, entitiPs, n r� ,. agencies exempted from tax which are subsertuently sold, trAnsferrPd () exchAnged in the Philippines to non- exE'mpt persons or entities, t l1 e purchasers or recipients shall lH> considered the importf'rs thPrE'of, And shall be liable for the duty nnd intPrnal "':'evenue tax dtte on stwh importation. The tax rl.tte on such article shall constitute n lien on the article itself, superior to All other charges or liens, irrespective of the pos:;essor thereof. (h) Rate &nd basis of the excise tax on imported articlPs. Unlpsc; otherwise specified, import~ert articles shall be subject to the same rates and basis of excise taxes applicable to 1ocally manufacturPd articles." and its implementing rPgulnt:ion Reven11e Regulations No. 17-67, as amPnded, pertinent portion of which provides: "REVENUE REGULATIONS NO. 17-67 [as amended by Rev. Regs. NnH. 9-72 (Sept.27, 1972), 1-73 (Dec. 26, 1972), 5-75 (Nov.11, 1975), and 1-76 (Nov. 16,l97fi)) SUBJECT: Tobacco Revenue Regulntinns on leaf, scrap, other partially manufactured tobacco and other tobacco products; grading, classification, inspection, shipments, f>Xportatinn, importation and the> manufacturers thereof under the provisions of Act No. 2613, as amended. To: All Internr1l RPVPntiP OthPrs Officers nnd Concerned: 959

� DECISION - C.T.A. Case No. 4532 - 6- Section 1. XXX XXX Section 2. Definitions of t-_erms XXX XXX XXX ( m) " P :1 r t i a 1 1 y man 11 f r1 c t- tll� "~ d tobacc .. " - includes: (1) "Stemmed leaf" tnbaccn, hands tripped pnrti~1lly clPan, good, free from .broken feaf only, mold ::tnd dust." We shall discuss each of the items appearing in the preassessment notice issttPrl by respondent's office holding petitioner linhle for deficiency specific tax. The first and third items will be discussed jointly. In Item No. 1, rPS{lllnd:~nt assessed the petitioner for specific tnx on locally purchased stemmed-leaf tob:-tcco from 1o c a 1 s u p p 1 i e r s p u r s u a n t t o S e r t- i n n lltl ( h ) o f the Tax Code. Petitioner's purchases of 11~,703,61,1, kilos of local stemmPd�-1Paf tnhncf'O was assessed a specific tax nt the rRt�e of P0.75 per kilo or a total of P11,027,711.00. In Item No.1, respondent assessr>d pf"tit-inner the P0.75 per kilogram specific tax on its snlP I of 157,200 kilos of stemmed-leaf tobacco from an L-7 account to Associated Anglo-American Tobacco Corporation equal to PJ:l7,900.00 pl.11s 25% surcharge of P29,47S.OO or a total nf p lit 7 � 3 7 5 . 00. In rPfuting the arguments raised hy respondent~ petitioner insists that thP applicable'provision of law is Section 137 of the Tax Corle, and not Secti.on lid (b), \-:'hich provides: "SF.C. 137. Removal of tobacco products without prepayment of tnx. - Products of tobacco entirely unfit for chP\ving or smoking mny hP remov1~r:l f ree of t a x f o r a g r i c u 1 t 11 ,. :1 1 n r 9GO

DECTSION - C.T.A. Case No. 4,12 - 7- industrial use, under such conditions as may be pr~scrihed in thP r, f regnl at ions of the DepA r�t men t F i nan c e . S t em me d 1 e a f to~_.'!_~:.."~ f i n P cut shorts, the refusP nl' finp-cut che\-Jing t<�hAcco, scrAps, cuttings, clippings, stems or rnidrihs, and sweepings '-'f tobacco rnay be sold in bulk as raw material by one manufacturer directly to anothPr, without payment of the tax 11nder such conditions as may be presc1�ibed in the regulattons of the Der:trtment nf Fin'anre. "Stemmed leaf tobacco", as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken le:-t( tobacco." (Emphasis Ours.) There is nothing abstract in the l:~ngt1:1ge of the snid provision. The afon'qnnted provision is clear and leaves no ronm fnr strained interpretation. The language is rlear and unequivocal and must be taken tn mean exactly what it says. "It is the fund:1mrnt:1l duty of the courts to apply the ]aw. Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without t�hem." (People vs. Mapa, G.R. No. L-22101, August 10, 1967.) The records will show that pP.t� it� i oner 's local purchases of stemmed-leaf tobacco werP acquired from various manufactHrPt� and t!JP S:liDP were used as raw materials for the manufactnre of cigar~ and cigarettes. XXX XXX XXX By and large the term "manufacturers" as mentioned in Section 137 of th~ T~x Cod~ rAn he interpreted to mean both "man11facturPr nf tobacco" and/or "manufacturer nf ('i.gars And/nr cigarette". as defined in RPVPtl1!P Regula! inns No. 17-67, as amended, to wit: "Section 2. Definition of tPrms 961

.- DECISION - C.T.A. Case No. 4532 - 8- XXX XXX XXX (i) "Manufacturer of tobacco" fnclnr!Ps every person whose httsinPss it is to mantt facture to hnc('() or snttff or who employs others to manu f a c t u r e t n h a c c �) o r snuff, whether sttch manufacture be by ('1Jiting, pressing (not billing), grinding, or ruhhing (grating) any raw or leaf tobac~o, or ot hPn"i se preparing raw or leaf tobacco, or manufactttred or partially manufactured tobacco and snuff, or putting up for consumption scraps, refuse, or strms or tobacco resu 1 t i ng fr�om any process of handling tohr~cco stems, scraps, clippings, or waste or sifting, twisting, screening or by any other process. (j) "Manufacturer of cigars and/or cigaret~es"- Includes those prrsons \" h o s e b u s i n e s s i t is to make or manufacture cigars and/or cigarettes for sale, or who employ others to make or manufacture cigars and/or cigarettes for salf'; bttt the term rlnPs not include artisans nr npprentices employ('d to make cigars <ntrl/or cigarettes from material i supplied by the employer, f,, ' ;' t: h e 1 a t t e r be i n g L:u,� f 11 1 l y r .1 engaged in the mRt111f:1cturP I\ of cigars n11d/or ;~'� cigat"~ttes. ,j , XXX XXX XXX 962

- ...,....... DF.CISTON - C.T.A. Case No. 4532 - 9- SincP petitioner's purchaf-H'S of lnral stemmed-lPaf tobacco manufacturPrs and thr> same were llSPd as rAw materials in t:hP product inn ()f cigars and cigarettes it is t:h�~reforP rlear that it is covered by Section 1''7 of tltP TilX Code. Thlls, petitioner's purch.'lses of lncnl stemmf'd-lf'af tobacco from \'arious tnharrn manufacturers are exempt from the payment of the specific tax. Furthermore, Sect ion 20 ( f1) of RevPnuf" Regulations No. V-39 [The TohClrco Products Regulations], as amended, even bolstPrs the provision- of S~ction 137 nf the Ta'< Corle considet'l.ng that stemmed-legf tobr-~cc�1 \vas spec if ica 11 y mentioned as an PYJ'mpt: ion f rnm t�hp payment of the specific tax. Sect ion 20 (n) of said regulation provides: "Section 20. Exemption from tR~ of tobacco products intended for agricultural or industrial purposes. -(a) Sale of stemmed leAf tobncro, et., by one factory to another. SuhjPct to the limitation�; hr>reiH established, products of tobacco �entirely unfit for chewing CJr smoking may he removed free of tax fnr agr icul tura 1 or industria 1 nse; nnd stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut , chewing tobacco, refHsP, s~raps, cuttings, clippings, and s1veeping of tobacco may be sold in btD~--~.:_~ materials by one manufacturer directly to another without the p rep a y men t of t he spec i f i c U! x :.. Stemmed leaf tobacco�, fine-cltt s h o r't s , the r e fuse o f f i n r - c 11 t chewing tobacco, scrAps, cutting, clippings, and sweeping of lP~lf tohac~o or partially mr:~nufnrtur~"d t� o h r:t c co or other ref us P o f to h :H' (' n may be transferred from ~~-'!~__E�!:..~_L)' to another under an o---f~f--i�--c-i-a-l---L---7 i n v o i c e on wh i c h s h a 1 1 tw P n t� �"' r P d t It r exa~t weight of the tnh:l�'('O at tlu� time of ir-s removal, and rntry shall 983

DECISION - C.T.A. Case No. 4532 - 10 - be made in the L-7 register in the place provided on the page for removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under heading "Refuse, et., received from other factory", showing date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, and the net weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another."(Emphasis Ours.) The term "manufacturer of tobacco products" has been defined to include all persons engaged in the ~anufacture of any of the forms of tobacco such as cigars and cigarettes [Sec.2(b), Revenue Regulations No. V-39~. When the law and regulations enumerate and define various categories of manufacturers subject to the excise tax and thereafter exempt them if the sale of stemmed-leaf tobacco was made by one manufacturer directly to another then the term "manufacturer" as broadly used should be interpreted to mean "manufacturers of tobacco" and "manufacturers of tobacco products" or "manufacturers of cigars and cigarettes". The whole concept being that the stemmed- leaf tobacco will not be sold or transferred as is but is sold in bulk to be used as raw materials in the manufacture of tobacco products such as cigars and cigarettes wherein the corresponding excise tax will eventually be paid on these finished products. The rationale, is that the tax incidence is merely postponed for it will later be collected as part of the excise tax on the finished product (cigar and cigarettes). Thus, the purchase of stemmed-leaf tobacco to be used as raw materials by petitioner in its manufacture of cigar and cigarettes is therefore exempt from the payment of the specific tax. 964

.. DECISION - C.T.A. Case No. 4532 - 11 - With respect to its sale of stemmed-leaf tobacco with Associated Anglo-American Tobacco Corporation (Item No.3), petitioner also maintains that it need not pay the specific tax thereon pursuant to Section 137 of the Tax Code. Petitioner has proven that it is a manufacturer of cigars and cigarettes as evidenced by its Mayor's Permit issued by the Mayor of Parafiaque, Metro Manila for the years 1989 (Exh. CW, p.231, CTA record) and 1990 (Exh. CW-1, p. 232, CTA record), stating that it is engaged in business as a Cigarette Manufacturer. Therefore, stemmed-leaf tobacco sold in bulk by petitioner, a manufacturer of cigars and cigarettes, to another manufacturer, Associated Anglo-American Tobacco Corporation, is exempt from the-payment of the specific tax. The stemmed-leaf tobacco sold can thus be removed without the prepayment of the specific tax. This Court has observed that while Section 127 of the Tax Code requires that excise taxes on domestic products shall' be paid by the manufacturer or producer before removal from the place of production, the bulk of the assessment herein imposed against the petitioner is on the basis that it is a possessor, having bought the stemmed-leaf tobacco from other tobacco manufacturers or local suppliers. In other words, the law identifies the person or taxpayer primarily liable and yet respondent failed to enforce its collection against them although they are known to the respondent. To show her inconsistency in enforcing the procedure to collect, petitioner is likewise being assessed not as buyer-possesor but this time as manufacturer- seller of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation. We do not wish to question the way respondent enforces the law, but for the guidance of taxpayers a uniform enforcement of tax laws may be suggested. While it is true that the respondent may collect excise taxes even against a mere possessor, she is first required to collect the same from the manufacturer or producer, as the entity primarily liable to the said tax. To interpret otherwise would render 965

- --.... DECISION - C.T.A. Case No. 4532 - 12 - the first portion of Section 127 a mere surplusage which could not have been the intention of the Lnnnaker. It is only after there is a clear showing that the manufacturer or pt:oducer could uot pay or failed to pay the excise tax for some valid or justifiable reasons could the respondent run a[ter the possessor. The \.Jay respondent enforces the 1aw may not lwve been the intention of the l<Hvmaker. While it is true that stemmed-leaf tobacco are classified as "partially manufactured tobacco" under Section 2(m) of Revenue Regulations No. 17-67, as amended, still it will be observed that in Section 43 of the same Revenue Regulation, falling under Chapter XI entitled "Partially manufactured tobacco and tobacco products for expot't", it provides: "Section 43. Tobacco exempted from specific tax. - No specific tax shall be collected on the following: (a) Leaf tobacco partially manufactured tobacco, except imported leaf tobacco, unless L-7 official register entered in the book. (b) Manufactured products of tobacco for export and/or use by the Armed Fou:es of the Philippiues or the United States "Armed Forces, and other entities specifically exempted by law." (Emphasis Ours.) It is clear from the above-quoted provision that no specific tax shall be collected on partially manufactured tobacco including stemmed-leaf tobacco. Thus, even assuming arguendo that stemmed- lea[ tobacco Ealls under the category of partially manufnct:ured tobacco still the same is exemptE'd from the payment of the specific t;:1 x 1111 d e r S e c . It 3 ( a ) o r R e v e n u e H e g n 1 a t i o n s No . 17-67, as amended. There is no showing that the provision of Section 43(a) has been repealed or superseded by another regulation. 968

... --- DECISION - C.T.A. Case No. 4532 - 13 - The respondent has no right to rule otherwise because a revenue regulation issued pursuant to law has the force and effect of law unless found to be contrary to law. XXX XXX XXX Furthermore, it is an elementary rule in statutory construction that a statute must be read or construed as a whole or in its entirety. All parts, provisions, or sections, must be read, considered or construed together, and each must be considered with respect to all the others, and in harmony with the whole. (St. Martin, et. al. vs. Iberville Parish, et. al., 212 La. 886, cited in MARTIN's Statutory Construction, p. 132.) Under this rule, that construction is favored which will render every word operative rather than one which makes some words idle and nugatory. (Shimonek vs. Tillanan, 1 P. 2d, 154; ibid.) Thus, courts are duty bound to adopt a construction that will give effect to every part of a statute, if at all possible, following the maxim "ut magis valeat quam pereat" (that construction is to be sough t w.h i c h g i v e s e f f e c t to the who 1e statute). (Almeda vs. Florentino, G.R. No. L- 23800, December 21, 1965.) In the case at bar, there being no conflict with the provisions of Section 2(m) and 43(a) of Revenue Regulations No. 17-67, as amended, the local purchases of stemmed-leaf tobacco classified as partially manufactured tobacco are therefore exempt from the specific tax. Anent the second item, regarding the alleged deficiency specific tax on imported stemmed-leaf tobacco in the amount of P582,167.25, respondent applied the provisions of Sections 128 and 141(b) of the Tax Code. At this juncture, petitioner pointed that it imported foreign leaf tobacco from various manufacturers of tobacco from the United States of America. These were properly recorded in its L-7 (see Exhs. DA up to DS-4, inclusive; and Exhs. DA-01 through DS-31, inclusive) and 9C7

. -- DECISION - C.T.A. Case No. 4532 - 14 - L-7-1/2 (see Exhs. FA to FP, inclusive) registers. Section 137 of the Tax Code does not make any distinction whether the sale of stemmed- leaf tobacco by� a manufacturer to another is imported or local. What is essential is that the sale of stemmed-leaf was made by a manufacturer directly to another to be used as raw material in its production in order that the same may be removed without the payment of the excise tax. There appears to be no distinction as to the term "manufacturer" as mentioned in Section 137 of the Tax Code. The manufacturer that supplies stemmed-leaf tobacco may either be foreign or local 'suppliers. Where the law does not distinguish we should not distinguish. There is nothing cryptic nor abstract in the language ot the said provision as would pose an ambiguity in its application. We should ensure the continued application ot said provision as it is in all fours with the case at bar. XXX XXX XXX As a rule no specific tax shall be collected on leaf tobacco and partially manufactured tobacco (which includes stemmed- leaf tobacco), e~cept imported leaf tobacco, unless entered in the L-7 official register book [Sec. 43(a) of Rev. Regs. No. 17-67, as amended]. Thus, while it is true that imported leaf tobacco is subjected to the specific tax still the same is exempted if entered in the L- 7 official register book. For its part, petitioner has amply proven that the imported tobacco were properly recorded in its L-7 and L-7 1/2 official register book (see Exhs. DA to DS-4; DA-01 to DS-31; FA to FP, all inclusive). Having complied with the requirement of Section 43(a) of Revenue Regulations No. 17-67, as amended, we see no reason why petitioner should not be exempted from the payment of the specific tax in question. Not onJy that. 968

. -- DECISION - C.T.A. Case No. 4532 - 15 - In a later case, (Fortune Tobacco Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4587, dated November 23, 1994) involving the same issue, We again ruled for the assessment's dismissal. Said We: The issue is not new. The question has already been passed upon in C.T.A. Case No. 4616, promulgated October 6, 1994, involving the same parties herein and the analogous issue, where this Court set aside respondent's assessment of deficiency excise tax on stemmed leaf tobacco principally because under Section 1-b of Republic Act No. 690 entitled "An Act to Limit the Importation of Foreign Leaf Tobacco" as amended by R.A. 1194, stemmed leaf tobacco is specifically excluded from the definition of processed tobacco. In the absence of a statutory definition of what is the meaning of "tobacco prepared or partially prepared" we may adopt the definition of law on "processed tobacco" because its definition clearly refers to tobacco being prepared for manufacturing purposes which for ready reference is being quoted below: "Section 1-b. By processed tobac'co is meant leaf tobacco �which is either blended, cased, flavored, ready-cut or cut fillers ready for manufacturing purposes and shall not include tobacco leaf only the stem of which is removed. xxx" In accordance with the above definition, "processed tobacco" cannot possibly refer to finished tobacco products but to tobacco leaf being prepared so that it will be ready for manuf~cturing purposes similar to "prepared or partially prepared tobacco". In fact, under Section 2(m) of Revenue Regulation No. 17-67 defining what is partially manufactured tobacco, "ready-cut or cut fillers" included in the phrase "processed tobacco" is also specifically enumerated, among others, as one 969

.. -- DECISION - C.T.A. Case No. 4532 - 16 - type of partially manufactured� tobacco. However, the same revenue regulation likewise included "stemmed leaf tobacco" as a type of partially manufactured tobacco which by definition of law is specifically excluded. In case of this conflict, the rule in statutory construction is very clear that said provision of the implementing regulation which is contrary to law is considered null and void and of no effect. This construction is specifically true in the case of tax statutes because statutes imposing tax are strictly construed against the state and liberally in favor of the taxpayer. This is because tax laws operate to impose tax burdens on the public or to restrict them in the enjoyment of their property and the pursuit of their occupation. Thus, in the interpretation of such statutes it is the established rule not to extend their provisions by implication, beyond the clear import of the language employed, or to enlarge their scope as to include matters not specifically pointed out. In case of doubt, they are construed most strongly against the government. (Gould vs. Gould, 62 L. ed. p. 211, cited in the Handbook on Statutory Construction by Ruperta Martin, 1972 ed. p. 193.) This strict interpretation is especially true in the case of specific taxes because these taxes are those imposed on specified articles, such as the taxes on articles mentioned in Sectious 123 to 148 of the National Internal Revenue Code (now Sections 126 to 151) (Shell Co. vs. Vano, 94 Phil .. 189). Concerning the argument of the respondent that unlike in Section 137 of the Tax Code, stemmed leaf tobacco is not specifically mentioned in the penultimate paragraph of Section 141 as among those not subject to specific tax when us~d in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product and therefore subject to specific tax. This court believes that the legislature has to provide the said exemption in Section 141 because the same sect ion imposes specific , tax

--- DECISION - C.T.A. Case No. 4532 - 17 - on those specified items under subletter(c), namely: fine-cut shorts and refuse, scrap, clippings, cuttings, stems and sweepings of tobacco. Stemmed leaf tobacco is not included because in the first place, it is not being taxed specifically under said section. Respondent merely expanded the meaning of "partially manufactured tobacco" to include \vithin the scope of stemmed leaf tobacco by implication contrary to the aforementioned rule on statutory construction. On the other hand, Section 137 of the Tax Code mentions stemmed leaf tobacco among those not subject to specific tax when sold by one manufacturer directly to another manufacturer. Does it mean when those items mentioned are not sold by one manufacturer to another, these items are already taxable? If our answer is yes, why then are imported leaf tobacco not taxable? Maybe your answer would be because no provision in the Tax Code imposes specific tax on leaf tobacco. And further because it is being used as raw materi~ls in the manufacture of other tobacco products on which the excise tax will eventually be paid. But is it not a fact that stemmed leaf tobacco like leaf tobacco is not also taxable under any provision of the T~x Code and likewise being used as raw materials in the manufacture ot other tobacco products on which the excise tax will eventually be paid. Why then will there be a different tax treatment just because one provision of the Tax Code exempts stemmed leaf tobacco from specific tax under certain condit:ions. Following, the strict rule against taxation as explained above, we cannot imply t h a t s t em me d 1e a f tobacco '"' i 1 1 be tax a b 1e i f i t failed to meet the condition set forth under said section in the absence of a clear provision taxing the .same. The obvious intention of Sections 137 and the penultimate paragraph of Section 141 is not to tax the articles enumerated therein but to exempt them from being taxed when those articles will be utilized in the manufacture of finished tobacco products on which the specific tax will eventually be paid, otherwise, it will lead to double taxation. Although double taxation is 971

DECISION - C.T.A. Case No. 4532 - 18 - not prohibited in this jurisdiction, the same is however being discouraged because of its disincentive effect. In accordance with the cardinal rule on statutory construction, legislative intent must be ascertained from a consideration of the statute as a whole and not of an isolated part or a particular provision above (Aboitiz Shipping Corporation, et al vs. The City of Cebu, et al., G.R. No. L-14526, March 31, 1965, cited in the Handbook on Statutory Construction by Ruperta Martin, pp. 42-43). The rule has been to exempt raw materials or even semi-finished products from taxes if it will be utilized in the manufacture of articles subject to specific tax. So that under Section 103(e) sale or importation of raw materials to be used by the buyer or i~porter himself in the manufacture of petroleum products (except lubricating oil and grease) subject to excise tax is not subject to value added tax. Even finished products such as wines and distilled spirits for treatment of tobacco leaf to be used in the manufacture of cigars and cigarettes may be withdrawn from bond free of excise tax pursuant to Section 130 of the Tax Code. Removal of spirits for rectification need not pay excise tax under Section 134 of the same Code and under Section 145(1) & (13), tax credit is granted on feedstock utilized in the manufacture of exciseable articles and naptha shall be subject to zero rating if utilized as raw material in the production of petrochemical products, respectively. Similarly, stemmed leaf tobacco which is basically a raw material in the manufacture of other tobacco products such as cigars and cigarettes on which the specific tax will eventually be paid will have to be exempted also from specific tax. The construction is done pursuant to the spirit of the law or the reason for it. The spirit or intention of the law prevails over the letter thereof. (U.S. vs. Yee Ngee, How, D.C. Cal. 105, F. supp. 577, Martin, op cit, p.64). Granting for purposes of argument that the term "partially manufactured tobacco" includes "stemmed leaf tobacco", the Bureau of Internal Revenue itself pursuant to Section 43(a) of 972

DECISION - C.T.A. Case No. 4532 - 19 - Revenue Regulation No. 17-67, tobacco product regulation, which provides: "Section 43. Tobacco tax. - No exempted from specific collected specific tax shall be on the following: (a) Leaf tobacco and partially manufactured tobacco, except imported leaf tobacco, unless entered in the L-7 official register book. XXX XXX XXX (Underscoring supplied, See Revenue Regulations Updated by Prof. Eustaquio 0. Ordono, p. 801). Pursuant to said provision, partially manufactured tobacco including local and imported leaf tobacco shall not be subject to specific tax if entered in the L-7 official register book. This is the book of manufacturer of tobacco. There is no showing that the provisions of Section 43(a) has been superseded by any other regulation. The respondent has no right to rule otherwise because the revenue regulatiort issued pursuant to law has the force and effect of law unless found to be contrary to law. Furthermore, when a particular construction has been operative over a long period and has acquired the sanction of usage, it is entitled to "respectful consideration" especially if rights have been adjusted and determined by it for many years, as a change may result in inequitable treatment of similarly situated taxpayers and may occur after many persons have acted upon the faith of the Regulation. The rule is also, perhaps, particularly applicable where a change in the administrative construction would produce great administrative inconvenience or inequality. (Law of Federal Income Taxation, Mertens Vol. 1, 1978, Sec. 3.20, p. 40). Long and continuous construction given by government officials entitled to 973

DECISION - C.T.A. Case No. 4532 - 20 - consideration (Phil. Sugar Central vs. Collector, 51 Phil. 131). This provision in the regulation may have been the reason why for a long time the BIR has not been collecting specific tax on stemmed leaf tobacco and other partially manufactured tobacco if these articles will be utilized in the manufacture of other tobacco products on which the corresponding specific tax will eventually be paid. WHEREFORE, in all the foregoing, the assessment of alleged deficiency specific tax in the amount of P5,187,L.J2.00 issued by the Respondent is hereby CANCELLED for lack of merit. SO ORDERED. WE CONCUR: I ~il; .. ~ ERNESTO D. ACOSTA ~:1 lingGRUBA Assoc1ate Judge 974 J

-- .... DECISION - C.T.A. Case No. 4532 - 21 - 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..q.A- ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 975