CTA Case No. 5015 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FORTUNE TOBACCO CORPORATION, C.T.A. CASE NO. 5015 Petitioner, Promulgated: - ver sus - LIWAYWAY VINZONS - CHATO In Her Capacity As COftMISSlONER OF INTEHNAL REVENUE, Respondent. X- - - - - - - DECISION This is an appeal from the final decision of respondent Commissioner of Internal Revenue denying petitioner's request for review, reconsideration and recall of Revenue Memorandum Circular No. 37'-93 dated July 1, 1993 reclassifying the cigarettes manufactured by petitioner o� the brands "HOPE", "MORE" and "CHAMPION" as locally manufactured cigarettes b.earing a foreign brand and subject to the 55X ad valorem tax under Section 14 <c ><l> o� the National Internal Revenue Code <NIRC), mended by Re public Act No. 6955 and holding '(50

DECISION - CTA Case No . 5015 -2- pet~tioner liable �or the amount o� P9,598,334.00 as de�iciency ad valorem tax on its removals o� "HOPE", "MORE" and "CHAMPION" cigarettes on July 2, 1993 �rom 6:00 p.m. to 12:00 midnight, in relation to the implementation o� Revenue Memorandum Circular No. 37-93 (�or brevity, RMC No. 37-93). Petitioner Fortune Tobacco Corporation is a corporation duly organized and existing under and by virtue o� Philippine laws, principally engaged manu�acture o� cigarettes o� various brands, among which are Hope Luxury M. King, Hope Luxury M. 100, s, More Premium International, More Premium M. 100's, Champion M. 100, s, Champion International M. lOO's, Champion M. King and Champion Lights. The Philippine Patent O��ice in a certi�ication t: dated July 24, 1986 <Exhibit "C"> has certi�ied that the �allowing trademarks �or cigarettes are registered in the name o� Fortune Tobacco Corporation: Trademark Cert. o� Req'n. Issued CHAMPION 15'34'3 Nov em be r 2, 1970 . HOPE 16'327 Oct obe r 18, 1971 20077 Aug us 17, 1978 t10RE I n a l etter dated January 6, 1987 a - essed to r~ pu ty Min is te r Ramon Diaz of the Preside nt ia l S o mmission ~� . Go o d Gove rnm e t, then Commissioner of In t e � ~ 1 Revenue 7 5.i

DECISION - CTA Case No. 5015 - 3- Bienvenido A. Tan, Jr. stated that "The initial position o� this O��ice c lassi�ied the a�oresaid brands <Champion, Hope and More> as �oreign brands since the same are listed in the current World Tobacco Directory as belonging to �oreign companies. Later, however, Fortune Tobacco changed the names o� Hope to Hope Luxury and More to Pr emium More, thereby removing the said brands �rom the �oreign brand category. Proo� was also submitted to this Bureau that Champion was an original Fortune Tobacco Corporation register and there�ore a local brand." <Exhibit "D"> The a� orementioned � position was sustained by the BIR a s "HOPE", "MORE" and "CHAMPION" continued to be classi�ied and taxed as locally manu�actured cigarettes not bearing a �oreign brand throughout the term o� Commissioner Jose U. Ong. Prior to the promulgation o� RMC No. 37 - 93 on July 1; 1993, the above - named cigarette brands manu�actured by petitioner wer e classi�ied and taxed as �ollows: 75 2

DECISION - CTA Case No. 5015 -4- A D VALOREJI TAX RAT�l- BRAIID E.O. 22 and E.O. 273 RA 6956 06-23-86 07-25-87 06-18-90 07-01-86 01-01-88 07-05-90 Hope Luxury II. 100's Sec. 142, tel, !21 401 451 Hope Luxury II. King Sec. 142, tel, !21 401 451 !lore Pre1iu1 II. lOO's Sec. 142, tel, !21 401 451 !lore Pre1iu1 International Sec. 142, tel, !21 401 451 Cha1pion International ft. lOO's Sec. 142, tel, <21 401 451 Cha1pion II. lOO's Sec. 142, tel, !21 40X 451 ChaMpion II. King Sec. 142, tel, last par. lSX 201 Cha1pion Lights Sec. 142, tel, last par. lSI 201 Quoted hereunder are the pertinent portions of aforestated provision of law: "Sec. 142. Cigars and Cigarettes. <a> Cigars. - xxx (b) Cigarettes packed in thirties. - xxx (c) Cigarettes packed in twenties. There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price: <1> On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55/.) Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manvfacturer. Whenever it has to be determined whether or not a ci garette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. 1 . ~ ri g i na l Se ct ion 126 of the NIRC, as ame nd e d by E.O. ~ o . 22 ated J une 20, 1986 and took effec t on July t , 1986 . men ded and renumbered to Sectio 142 by E .O No . 2 73 d at ed July 25 , 1987 and to ok ~ f fect on J a u a ry 1 , 1988. Further amended by - .A . t o. 6956 Jate d Jun e 18, 1 990 and took effect on J ly , , 1990.

DECISION - CTA Case No. 5015 - 5- <2 > Other locally man u factured g_ig9_n?�t,te_�_; forty five percent (45/.). Duly registered or existing brands of cigarettes packed in twenties shall not be allowed to be packed in thirties. When the existing registered wh olesale price, including tax, of cigarettes packed in twenties does not exceed P4.00 per p a ck , the rate shall be twenty per cent <20/.). (d) Imported cigarettes. - xxx For purposes of this .section, "manufacturer'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 value - added tax imposed under Title IV of this Code" <Underscoring supplied. Revenue Memorandum Circular No. 37-93 dated July 1, was then issued by r e spondent Commissioner of Internal Revenue, the dispositive portion of which provides <Exhibit "G"J: "In view of the foregoing, the aforesaid brand s o:f c igarettes, viz: "HOPE", "l'lORE" and " CHAMPION" being manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes bearing a foreign brand subject to the 551. ad valorem tax on cigarettes. " A copy of RMC No. 37 - 93 was telefaxed to the factory of petitioner at Parang, Marikina, Metro Manila, under a covering letter dated July 2, .1993 signed by Deput y Commissioner Victor A. Deoferio, Jr. at 17:50 hours, Jul y ?.L . 1 '3'93, a Friday ( EJ�:hibi t "G-1"> but appears to ha v e to the ltnow ledqe of petitioner several days 754

DECISION - CTA Case No. 5015 -6- thereafter considering that it was not addressed to anyone in particular. Republi c Act No. 7 654 took effect on July 3, 1993. It amended Section 142 of the Tax Code, the pertinent port ions of which read: "SEC. 142. Cigar and cigarettes. - :>tXX X:>CX (c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher: Cl.) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent <55%> provided that the minimum tax shall not be less than five pesos CP5.00> per pack. <2 .) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum tax shall not be less than three pesos CP 3.00> per pack. }CXX )t)C}C X}DC "When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher of existing brands of cigarettes, including the amounts intended t .o cover the ta:>ces, of cigarettes packed in �twenties does not exceed four pesos and eiglJ �ly centavos ( P4. BO> . per pack, the rate shall be twenty percent C20%).ft <Underscoring supplied.> In the column oi Fil C. Sionil in the "Business Bul l eti II n issue of July 4, 1993, the reclassification was 755

DECISION - CTA Case No. 5015 -7- fir s t reported <E>chibi t "�") prompting petitioner's President, in letters dated July 6 and 9, 1993 to inquire into i ts veracity and to request for a copy of RMC No. 37-93 from respondent <Exhibits "F" and "F- 1">. A certified xerox copy of RMC No. 37-93 was received by the petitioner on July 1 !:�, 1993 by ordinary mail. <E x hibit ~A" and "A - 1">. Petitioner requested for review, reconsideration and recall of RI'1C No. 37-93 in a letter dated July 19, 1993 and received by the Appellate Division of the Bureau of Internal Revenue <BIR> on July 20, 1993. <Exhibit "H">. Respondent denied the request for review, reconsideration and recall of RMC No. 37 - 93 in a letter dated July 2'3, 1'393 with the concluding statement that "This constitutes the final decision of this Office on the matter." <Exhibit "B">. In a letter dated July 30, 1993, and received by the peti �ti oner (.111 ( E:.chibi t "W"l, Deputy Commissioner '11 c tor A. Deofer io, Jr. stated that per veri�ication i� o j the Tobacco Ta:1-: Division o� the BIR i n relation to tht::: implementation o� RMC No. 37 - 93, it wa s as-.er t a in ed t hai. petitio ner has incurred a deficiency a d va1ol m ta >~ l i a t i.l it y on removal s of "HOt'E ". " MORE" an d 75()

DECISION - CTA Case No. 501 5 -8- "CHAl'1PlON" cigarettes on July 2 , 1993, �rom 6:00P.M. to 1 2 :00 Midnight, in the total amount of P9,598,334.00, exclusive of surcharge and interest; and in view of the Final Venial cd Petitioner"s request for review and reconsideration dated July 29, 1993. the assessment therein is likewi se considered the Final Decision of the BIR on the matter. In view thereof, demand is made on Petitioner to pay the total amount. of P9,598,334 . 00 within ten<lO> days �rom receipt of said letter. Henc e, a petition for revi ew was filed by pet itioner with this Court on August 3 , 1993 CCTA records, pp. 1- 34) . An Amended Petition for Review with Urgent Motion for S us pen sion o� Collection of Tax Liability was �t subsequently filed on August 12~ 1993 <CTA records, pp. 133-1'71). ..199�'3\ Tht- Court. issued an injtmction on Se p t.ember 30, CC.T.A . records, pp. 307-309) which r eads: "Accordingly, t he Cou rt resolves to grant the mo tion and h ere by enjoins the Commissioner of Internal Hevenue and her agents from collecting the amount of P9,59B,~~4.00 by the institution o� any action fur the c ollection of said tax. However, Respondent must issue the cuxres p o ndin 9 warrants oi levy on r eal p1u per t ies ~ nd c onstructive di s traint ov e r all �pE:�rson al p Y.o pert.ies lis �t.ed . lox� pu rpos '"' of an n o tating the tax lien short o~ se l l in t he <=l a td p.t u p er t ies i n a public au _ct.io n p �1d in g fi .lt;.:J l adjud "cali o n of this case. So a s n ~~ to ha111p e J the business operation of the Pe t i ~~ ner t her e by injur i n g further its i ntR�es t, ''�;

DECISION - CTA Case No. 5015 -9- Respondent is likewise enjoined not to en�orce her collection by issuing warrants of garnishment over the cash deposits of Petitioner inasmuch as the properties o�fered as security are sufficient to protect the interest of the government. n The issues submitted for resolution of this Court are: I. Wh e�t. her Revenue Me morandum Circular No. ::.:0 - 93 is valid, effective and enforceable. ll. Whether petitioner is liable for the assess ment in the amount of P9,598,334.00 as deficiency ad valorem tax on its removals of "HOPE", "MORE" and "CHAMPION" cigarettes on July 2 , 1993 from 6:00P.M. to 12 :00 midnight. The grounds on which petitioner anchors its prayer to have RMC No. 37-93 declared void ab initio and o� no force or effect are as follows: 1. Rl'!C: No. 37-93 is violat.ive o� due process since it contravenes the due process clause o� the Constitution ; the procedures . prescribed in the 1987 Administrative Code on publication, registration and holding a� hearings and the �ormalities required by Revenue Memorandum Circular No. 20-86. 2. RMC No. 37-93 is violative o� the equal protection clause of the Constitution and the cons titutional provision that the rule a� taxation shall be uniform and equitable in as much as other locally manu�actured cigarettes similarly situated have not been reclassified as such. 3. RM C No. 37-93 dated July 1, 1993 was issued in circumvention o� R.A. No. 7654 which took e�fect on July 3 , 1993. 758

DECISION - CTA Case No. 5015 - 10 - 4. Provi s ion in Sec. 142(c}(l) of the NIRC, upon which RMC No. 37 - 93 was based is null and void for it constitutes undue delegation of Legislative power. 5. Finding of respondent Commissioner tha�t "HOPE", "MORE" and "CHAMPION" are foreign brands is contrary to the facts. On the other hand, respondent based her claim of the validity, effectivity and enforceability of RMC No. 37-93 on the following: 1. RMC No. 37 - 93 is not violative of due process. It is a ruling classifying certain cigarettes for excise tax purposes pursuant to Section 245 of the Tax Code. Hence, its publication is not necessary for its validity, effectivity and enforceability. The government is never estopped from collecting legitimate taxes due to the mistakes of its agents. 2 . RMC No. 37 -93 is not violative of the rule on uniformity and equality in taxation since the fact that the other cigarettes similarly situated were not actually reclassified is already a matter of implementation. It applies to all cigarettes similarly situated. 3. At th e time RMC No. 37-93 was issued, Section 142<c><1J of the Tax Code, as amended by R.A. No. 6956 was still in effect such that at the time of the effectivity of R.A. No . 7654, the subject brands were already classified and taxed at 55X. 4. The adoption by the legislature of the World Tpbacco Directory as an authori ty is a matter of legislative prerogative which the courts cannot inquire into. 5 . The ci 9 aret.t .e .brands " HOP E " , "MOHE " brands. The an d " CHA HPl ON" are forei~n a s s e ssme nt is pres umed correct . '75 9

DECISION - CTA Case No. 5015 - 11 - To better appreciate the nature and implication of RMC No. 3 7- 93, i t is reproduced in full hereunder: REPUBLIKA NG PILIPlNAS KAGAWARAN NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS July 1, 1993 REVENUE HEHORANDUH CIRCULAR NO. 37-93 SUBJECT: Reclassification o� Cigarettes Subject to Excise Tax TO All Internal Revenue Officers and Others Concerned In view of the issues raised on whether "HOPE", "MORE" and "CHAMPION" c igarettes �hich are loc ally manufactured are appropriately considered as locally manufactured cigarettes bearing a foreign brand, this Office is compelled to review the previous ruling on the matter. Section 142(c)(l) National Internal by R.A. No. 6956, Revenue Code, as amended provides: "On locally manufactured cigarettes bearing a foreign brand, fifty - five percent (55%) Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign bran~, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall qovern. ft 780

DECISION - CTA Case No. 5 015 - 12 - Under the fore going, the test for imposition of the 55% ad valorem tax on cigarettes is t hat the locally manufactured cigarettes bear a foreign brand regardless. of whether or not the right to use or title to the foreign brand wa s sol d or transferred by its owner to the local manufacturer. The brand must be originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however, not definitely determinable, "xxxx the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall �lOVe:CU. )tXX 11 " HUPE" is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco , Japan and (b) Fortune Tobacco, Philippines. "MORE" is listed in the said directory as being manufactured by: <a> Fills de Julia Reig, Andorra; (b) Rothmans, Australia; <c > RJR - I'lacdonald, Canada; <d) Ret tig-Strenberg, Finland; <e) J{arellas, Greece; <f) R. J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco Philippines; and Ci > R. J. Reynolds, Puerto Rico; < j > R. J. Reynolds, Spain; ( k > Tabacalera, Spain; Cl> R.J. Reynolds, Switzerland; and (m) R.J . Reynolds, USA. "CHAMPION" is registered in the said directory as being manufactured by Ca) Commonwealth, Bangladesh; ( b > Sudan, Brazil, Ce) Japan Tobacco, Japan; Cd> Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tobacco Reunies Switzerland. Si nce thrre is no showing who among the above - listed ~anufacturers of the cigarettes bearing the s~id brands are the ~eal owner/s thereof, then ! it follows that the same shall be considered f p reign brand for purposes of determining t~e ad valorem tax, � pursuant to Section 142 ot the National Internal Revenue Code. As heJd in BlR Rulinq No. 410-88, dated A 1gust 24, 19f �8, "in cases w'here ;i t c an not be cst a ishe d or t here is dearth of ev idence as ~o w eth e r ~ brand is foreign or nqt, r es ort t o th e Wo rl d To ba~co Di re c tor y should be ma d e. " 761

DECISION - CTA Case No. 5015 -- 13 - In view of the foregoing, the aforesaid brands of cigaret.tes, viz: "HOPE", "MORE" and "CHAMPION" being manufactured by Fortune Tobacco Cor poration are hereby considered locally manufactured cigarettes bearing a foreign brand subject to the 55X ad valore m tax on cigar ettes. Any ruling inconsistent herewith is revoked or modified accordingly. SGD. LIWAYW AY VINZONS - CHATO Commissioner A readin�1 of Rl'IC No. 3 7 - 93 would readily show that on its very face it makes a determination that "HOPE", "1'10RE" and "CHAMPION" cigarettes manufactured by petitioner are locally manufactured cigarettes bearing a foreign brand. Said finding overturns the previous determination of two other Commissioners before her that the brands in question are local brands and subjects them to a 55X ad valorem tax rate with a minimum tax of PS.OO per pack as against the previous rate of 45X and 20X as the case may be. Not.wi t .hs -tandiJtg the :far reaching impact of t .he aforementioned circular not only to petitioner ' s business but also to th~ tobacco industry at large, petitioner being the single biggest buyer of tobacco in the country , s a me was is s ued wi t .hout not.ice, without prior .be- ri n g , wit.h o 1t s u b mission of evide.nce and without c� p' -. t. u JJ �l t y t o co n t.r overt.. The Sec retary of Finance and ., I

DECISiot~ - CTA Case No. 5015 - 14 - respondent Commissioner testified before the House Co rnmi t t .ee on Ways and Means that they did not deem i t necessary to conduct publ ic hearings thereon despite acltnowledging ~ --- i t .s significance <Exhibit "FF-3 - b", pages VI - 5; VII - 1; August. 11, 1993; Ex hibit "FF-2 - g", page XV- 5, August 10, 1993). In fact, petitioner first learned of the reclassification in the co lumn of Fil C. Sionil in the "Business Bulletin" issue of July 4, 1993 <Exhibit n En) and had to write respondent on July 5 and 9, 1993 to inquire about the veracity thereof and to request for a copy of RMC No. 37-93 <Exhibits "F" and "F - 1">. It is not likewise disputed that there was no publ ication of RI'IC No. 37-93 either in the Official Gazette or in any newspaper of general circulation in the Philippines. There is a hollow ring in respondent's contention that. no �tice , and publication are not necessary ;. i �or its effectivity siuce t .he aforesaid circular is only '' i nterpretati ve in nature, that it only lays down the guidelines for internal revenue officers to follow in I d e �ter mininq whether or not. a lo p ally manufactured c�J ~>~ e t. te l �e a rs a fo:c eign brand, and t .hat. i t. is mer�ely a c ,-:,r: l i ve t'.� �th e-� inte�r :nal revenue ofii (:~ers s o the correc ad un c ig arettes may b e col l ected. These 763

.. DECISION - CTA Case No. 5 015 - 15 - contentions would even sound as lame excuses considered in the light o� the circumstances surrounding the issuan c e of RMC No. 37- 93. The supposed "guidelines" were received at the Records Division o� the BIR "very late in th e af t ernoon of July 1, 199:::.:... with the day appe aring to have b e en snow faked <T.S.N. September 2 9, 1993, pp. 1'7-20). It was telefaxe d to petitioner's factory addressed to no one i n particular on July 2, 1993 , a Friday, at 5 :30 in the a�ternoon <Exhibit "G - 1"> and peti t ioner would be later assess ed �or deficiency ad valorem ta x on r emovals of "HOPE", "MORE" and "CHAMPION" cigarettes on July 2 , 1993 from 6:00P.M. to 12 midnight <E>~hibi t "W">. By 1 2 :01 A.M. of July 3, 1993 , R.A . No. already take ii effect doing away with the classification of brand. The whole thing is done and over with perhaps even before the same can be circulate~ to �t.IJe int.ernal revenue officers supposedly to be "guid~d" by them. Nu matter how said circular may _be rega r ded, the pJ ovisions which have bearing on the i ssue were c o mp r ehensively discussed by petition~r in i t s pleadin g t r� � � i c JJ t h i s Cou r t c o nc u r s, thus: fh - - - - -\-IP----p-r-o-c-e-ss- c lause of the Consti t ut i o n <Sectior j .ct icl t 11 1, Bi l l o f Rights> p r ohibit.e t h e a king o f 764

DECISION - CTA Case No. 5015 - 16 - property without due process of law. The issuance of RMC No. 37-93 amount to depriving petitioner of property without complying with the requirements for procedural and substantive due process namely, notice, prior ---t;learing, -~ ...-;---__ controvert. OJ? ortunity to Book VII entitled "Administrative Procedure" of the Administ rative Code of 1987 <AC '87> , which took effect on November 24, 1989, prescribes the requirements for the validity and effectivity of any rule issued by any Government agency; Sect.ion 1 provides that "t<his> Book shall be applicable to all agencies as defined in the next succeeding section, except the Congress, the Judiciary, the Constitutional Commissions, military establishment X X X, the Board of Pardons and Parole, and state unive sities and colleges. " "Agency" is defined in Section 2 , viz: " <1 > ' Agency ' includes an}' departments, l, bureau, office, commission, authority or officer of the National Government authorized t E" by law or executive order to make rules, issue licenses, 9rant rights or privileges, and adjudi cat e cases; x x x." ) Th e Bu r <=> a u cti Int ernal Revenue, as aq e n .y of N= . i a l Go' r nrne> n t, i s covered by Book I 1 , Ch apter .{! . s~ 18 o f AC ' 8 7 a n d t heref ore , is obl i ge t ~ abide b v 765

DECISION - CTA Case No. 5015 - 17 - its provisions concerni n~1 �the issuance , publication and ::;:---- ""'""'-::--- ~ .._____ effectivity of any rule; viz; "Rule" is also defined in Section 2, "< 2 > 'Rule' means any agency statement of general applicability that implements or interprets a law, fixes and describes the procedure in, or practice req uirements of, an agency, including its regulations . The term in_g)-= udes memoranda or statements concerning the internal administration or management of an agency not affecting the rights .of, or procedure available to, the public. " <Underscoring supplied>; Sect.ion 9, Chapter Book VII of the AC '87 requires that any proposed rule be f i r~=-...r::...=-= and ( submi t �ted to a hearing to afford interested parties the .....__ -~ opportunity to express their views or opposition thereto before its adoption: "SEC. 9. Public Part.icipat.ion. <1> If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of p roposed rules- and a ford interested parties the opportunity to submit their views prio r to the adoption of any rule. n ( 2) >t >C >t. "(3) In case of opposition, the rules on co o t .est.ed cases shall be observed. "; If opposed, the rules on contested cases require notice and hearing �to give all . interested parties the opportu11 i t .y t .o submit evidence and arguments ;I. i ss ues c oncerning �the proposed rule <Section 11, on all f _. Chapter '-=t � B o o k V 1 l ) ; 766

DECISION - CTA Case No . 5015 - 18 - The AC '87 1 i lt e wi s e d i c tate s that _"_,<-=~ e > ...:v_,e::..:r::.-Ly--=a:..:g::>..=:e-=n..:..=c"-y'- shall file with the University of the Philippines Law Center thre e <3> certified copies of every rule adopted by it Jo:: x x" <paragraph [11, Sectio n 3) and that "<i>n addit ion to other rule - making requirements provided by law not inconsistent with this Book, each rule shall become effecttve fifteen<15) days fro m the date of filing x x x" <Section 4>; As declared in Section 4, the administrative procedures mandated by Book VII of the AC '87 are in addition to other rule - making requirements not inconsistent therewith . Insofar as internal revenue tax rules and regulations are concerned, the additional requirements for notice, publication and effectivity are pres cribe d in Revenue Memorand um Circu la r <RMG> No. 20- 86, dated July 2 4, 1986 entitled: "~otice, publication ! .. and effectivity of internal revenue tax rules and ----------~~--------------- I: - - regulation. " <E Y, hibit "L" >, with t he .. avowed purpose -----:::___ \~ "that there shaJ.l be just enforcement of r ules and reg ulation, in cqnformity with the said basic element o f h.:.:�� pr o c e ss". Parag raphs numbered 1 and 2 there f O.i;:r�~ d e t h a t � "l. .~hj s Circ u lar shall appl y n.lf t�-. ( a) Re v en e Re{;:ulatio n s ~ (b > Reve nu e t �� d i t Me morandum Orders an d <c> Revenue M~m o ran dum \f

DECISION - GTA Case No. 5015 - 19 - Ci:r..gulars and Revenue Memorandum Orders bearing un internal revenue tax rules and regulations. "2. Except when t .he law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be 9.l?_.g_l::..2_t.ive until after due notice thereof may be fairly presumed. ' "Due notice of the said issuances may be fair 1 y pr es umed ""'o_,_n,_l,,_y.L-_ -"a',_,f,_t=e-"_r ___t,"-h'-'-"e"-----"f'-.'o::..l,_l,,...o,::..w=i'-'-n.:cg:::~.. procedures have bee n taken: "2.1 The Records Division of the National Office shall, furnish, thru registered mail, all of the following business and professional organizations with the corresponding revenue tax issuance: a. Philippine Institute of Certified / . Public Accountants~ b. Integrated Bar o.f the Philippines~ / c. Philippine Chamber o.f Commerce and / ludustry; d. American Chamber of Commerce; / e. Federation o.f Filipino-Chinese / Chamber o.f Commerce and Industry; and f. The Japanese Chamber ctf Commerce and / l.odust.ry of the Philippines, Inc. " 2.2 The provision of paragraph 2. 1 shall not be deemed as exclusion of other person or persons who may request .for a copy of the corresponding revenue issuance from the Bureau of Internal Revenue. i "2.3 Th ~ Bureau shall issue a press r e l e a se abo t the new revenue issua nce in an y n e ws p a pe r o r n ewspapers of gener~1 Circulation. Tl e pies s release shall cover the hig hl ights or fe at u res t he~ eo .f. "2. 4 ~ffect i vi t y date f o r enforce men t of t he new reven ue issuance shall t ake place

'. DECISION - CTA Case Ho. 5015 - 20 - thirtyC30> days �rom the date the revenue issuance has been sent thru registered mail to the organizations enumerated under paragraph 2.1 hereo�." <Underscoring supplied). Paragraph number 5 o� RMC No. 20-86 �urthermore states that "Cs>trict compliance with the �oregoing _ procedures is enjoined." There being no inconsistency between RMC No. 20-86 and Book VII o� the Administrative Code o� 1987, the additional requirements laid down by said circular are deemed incorporated therewith. In addition, it is worth mentioning that the p refatory statements of RMC No. 20-86 states that one o� the problem areas bearing on compliance with internal revenue ta>c - - - rules and regulations is lack or insu�ficiency of due notice to the tax - paying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly su��er from legal infirmity in the light o� the Constitutional provision on "~ue process o� law" and the essence of the Civil Code pro vision ~ of laws, whereby due r~ a ba~nent. CExhibit "L" , "L -1 " >� .. Th e rec o r d s of t he case are ~lo quen t t estimony th a t r' e sse nt..1a l r e q ui s i t .es prescribed �o r validit y , f' 71 6 9

DECISION - CTA Case No. 5015 - 21 - effectivity and enforceability of administrative regulations and circulars as provided under Book VII of ./ . the ~"dm-in-is-tr-a-ti-ve- -C-od-e -o-f -1-98-7 - a s well as ij~venue ~~ Memorandum Circular No. -----were not complied with. ~ publication of the proposed RMC There was no ....n. otice and No. 3 7- 93. Petitioner was not given a chance to be heard and to oppose the adoption of the circular. There is no record that the organizations listed in RMC No. 20-86, which need to be furnished copies thereof by registered mail for the circular to be effective were furnished their copies. No certified true copy of the RMC No. 37- 93 was filed with the U.P. Law Center until August 3, 1993 <T.S.N., September 29, 1993, p. 12. > that is, after petitioner raised its non-registration. Even as we have already d~scussed that RMC No. 37-93 is not merely interpretative or serves only as guidelines for internal administration or management of the BIR, it is still 1 of no moment if regarded otherwise because of the clear mandate of the Administrative Code of 1987 and RMC Nb. ----- - 20-86 that du~ notice is a basic requirement for the effectivity of said BIR isstiance. The Civ il Code of the Philippines in Article 2 thereof prov i des that "laws shall take effect after fifteen ( 15 > days :following the completion of their '(7 )

DECISION - CTA Case No. 5015 - 22 - public.ation in� the Official Gazette, unless it is otherwise provided. " The word "law" in Article 2 includes "regulations and circulars issued in accordance with the same <People vs. Que Po Lay, 94 Phil. 640). Since RMC No. 37 - 93 was issued in accordance with and for the purpose of implementing Section 142<c><1> of the NIRC:, it should may become effective. ~ In the recent case of Philippine Association o� Service Exportersr Inc. vs. Torresr et. al., 212 SCRA 298 - � ( 1992), the Supreme Court held that administrative ~ --- - . unenforceable c i :ycu 1 a r s are legaLly invalid, defective and ------- �--- in -the Office of proper publication and fili~g for lack National Administrative Register as req"'uired in Article 2 of the Civil Code and Sections 3(1) --- ____________ and 4, Chapter 2 , Boo-k VII of the Administrative Code of " .... ~987 and may not be enforced and implemented. Once more, "-.._ the Cour t adverted to the ruling in TaHada vs. Tuvera, 146 SCRA 446 that "xxx Administrative rules and regulations must also be ublished if their purpose is to enforce or implement existihg law pursuant also to a v~lid delegation." It should be noted that the cases cited by respondent holding that interpretative circulars need not

DECISION - CTA Case No. 5015 - 23 - be published, [La Suerte Cigar and Cigarette Factory, et., al., vs. CTA, et., al., ' 134 SCRA 29 ( 1985), Romualdez et., al., vs. Area, et., al., 2 7 SCRA 829 and Tafiada, et., al., vs. Tuvera, et., al., 146 SCRA 446 (1986)] ~~re all rendered prior to the promulgation o� ------- the involved 1 9 8 -7 -A-d ministra t i v e ~ode and issuances made ~ be�ore the e��ectivity o� said code. Premises considered, We cannot �ind any legal justi�ication to bestow legitimacy on the issuance o� RMC No., 37-93. ------------ According to the Constitution, the ~ le o� taxation The term uni�ormity <equality or "equal protection o� the law"> requires that all subjects or objects o� taxation similarly situated, are to be treated alike or put on equal �ooting both in privileges and liabilities <Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371>. In City o:f Baguio vs. De Leon, <25 SCRA 938), it has been said that equality and uni:for mity in taxation means that all taxable articles or kinds of property o:f the same cla~~ "" shall be tax ed at the same rate. A tax is considered uni:form when it operates with the same force and e��ect in every plac e where the subject may be �ound. When tile

DECISION - CTA Case No. 5015 - 24 - tax law applies equally well to all persons, firms and corporations placed in similar situation, there is no infringement of the rule on equality. (Vitug, Compendium of Tax Law and Jurisprudence, 2"d ed., p. 11. > The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. <Reyesp et. a1. vs. A1manzorp et. a1., 196 SCRA 322, 328 [1991)). It suffices then that the laws operate equa11y and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that eqtal prate ion and security shall be given to ,�- -----\ every person under circumstances, which if not identical are analogous. If law be looked upon in terms of burde~ or ~harges, those that fall within a class should be treatE-d in the same fashictn, � whatever restrictions cast on some in the group equally binding on the rest . (Sison. Jr. vs. Anchetap et. a1., 130 SCRA 654 [19841 :

DECISION - CTA Case No. 5015 - 25 - Citing J � .n. Tuason and Co. VB. The Land Tenure ' �" Administration, 31 SCRA 413 [1970). > It is evident from a reading of RMC No. 37-93 that only the cigarette brands locally manufactured by petitioner namely "HOPE", "MORE" and "CHAMPION" were = ' singled out for reclassification as "locally manufactured -~--------- cigarettes bearing a forei and subject to ad valorem tax at the rate of 55/. with a minimum tax of not less than P5.00 per pack. There is no doubt that RMC No. 37-93 covers only the subject brands since it is very specific and clear. There is nothing in the questioned circular that will show that all other brands similarly situated fall within its coverage. Respondent contended that RMC No. 37-93 merely lays down the test in determining whether of not a locally manufactured cigarette bears a foreign brand and "HOPE", "MORE" and "CHAMPION" were merely used as specific examples in the application of the test. She went em to state that the reclassification of the ot.her cigaret_tes similarly situated may be made separately. The fact that the other cigarettes similarly situated were not actually reclassified is already a matter of implementation: <Respondent's Memorandum, pp. 20-21>.

DECISION - CTA Case No. 5015 - 26 - If the avowed purpose for the reclassification is to be believed, that it is to correct previous "erroneous" rulings, how come the other cigarettes bearing a foreign brand pursuant to the test set forth therein (listing in the World Tobacco Directory> were not likewise re- --------------- classified? Is this not violative of the rule on -- .-- ...�..�.-.<"- u'-n-i-f-o-r-m--i-t-y----a-n-d-- equality in taxation? Examples of these brands were pointed out by petitioner and not controverted by respondent, viz: 1. Locally manufactured by ALHAMBRA INDUSTRIES, INC. (a) "PALM TREE" is listed as manufactured by office of Monopoly, Korea <Exhibit "R"> 2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY <a> "GOLDEN J{EY" is listed being manufactured by United Tobacco, Pakistan <Exhibit "S"> <b> "CANNON" is listed as being manufactured by A~pha Tobacco, Bangladesh <Exhibit "T"> 3. Locally manufactured by LA PERLA INDUSTRIES, INC. (a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia <Exhibit "U"> <b> "RIGHT" is listed as being manufactured by SVENSKA Tobaks, Sweden <Exhibit. "V-1 > 4. Locally manufactured by MIGHTY CORPORATION <a> "WHITE HORSE" is listed as being \ manufactured by Rothman 's, Malaysia ( E)t hi bit " u- 1 " )

DECISION - CTA Case No. 5015 - 27 - 5. Locally manufactured by STERLING TOBACCO . .~ CORPORATION <a> "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia and Brown and Williamson, USA <Exhibit "U-3"> (b) "WINNER" is listed as being manufactured by Alpha Tobacco, Bangladesh; Nanyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan. <Exhibit "U - 4"> In fact, respondent Commissioner herself informed the Committee on Ways and Means of the House of Representatives that she had doubts whether RMC No. 37-93 can cover c igarette brands manufactured by other cigarette c ompanies although similarly situated as petitioner ' s subject brands. Respondent fully knows that it is no longer legally possible to reclassify other cigarettes similarly situated because this would be in contravention of R.A. No. 7654. Quoted below are the t r anscript of the hearing conducted by the Committee on Ways and Means of the House of Representatives on August 10, 1993; THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have specific information on other tobacco manufacturers. Now, there are other brands which are similarly situated. They are locally manufactured bearing foreign brands. And may I enumerate to you all these brands, which are also listed in the World Tobacco Directory x x x. Why were these brands not reclassified at 55 if your want to give a level playing field to foreign manufacturers?

DECISION - CTA Case No. 5015 - 28 - MS. CHATO. Mr. Chairman, in fact, we have . '- already prepared a Revenue Memorandum Circular that was supposed to come after RMC No. 37-93 which have really named specifically the list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all these brands that you mentioned at 55 percent except that at that time, when we had to come up with . this, we were forced to study the brands of Hope, More and Champion because we were given documents that would indicate the that these brands were actually being claimed or patented in other countries because we went by Revenue Memorandum Circular 1488 and we wanted to give some ration~lity to how it came about but we couldn't find the rationale there. And we really found based on our own interpretation that the only test that is given by that existing law would be registration in the World Tobacco Directory. So we came out with this proposed revenue memorandum circular which we forwarded to the Secretary of Finance except that at that point in time, we went by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it sai~, that on locally manufactured cigarettes which are c urrently classified and taxed at 55 percent. So we were saying that when this law took effect in July 3 and if we are going to come up with this revenue circular thereafter, then I think our action would really be subject to _ question but we feel that Memorandum Ci r cular Number 37-93 would really cover even similarly situated brands. And in fact, it was r ~~~ because o� the study. the short time �that we were given to study the matter that we c ould not include all the rest of the other !;1_rands �that would have been really classified ~? �oreion brand i� we went by the law itself. 1 am sure that by the reading of the law, you would without that ruling by Commissioner Tan they would really have been included in the definition or in the Qlassification of foregoing brands. These brands that you referred to or just read to us and in fact just for your informat.ion, we reall_:v_Q_<;~me ou ~t with a pro g osed _. revenue memorandum circular for those pranps. <Underscoring S\lJ:�plied) <E::.tlJib i t "FF-2-C", pp. V-!:� to V-6, Vl - 1 to VI-3>.

DECISION - CTA Case No. 5015 - 29 - >tXX XXX >tXX "MS. CHATO. x x x But I do agree with you now that it cannot and in fact that is why I felt that we ... I wanted to ciome up with a more extensive coverage and precisely why I asked that revenue memorandum circular that wo~ld cover all those similarly situated would be prepared but because of the lack of time and I came out with a study of RA 7654, it would ~ot have been possible to really come up with the reclassification or the proper classification of all brands that are listed there. X X x " (Underscoring supplied) <Exhibit "FF-2d", page 1X-1> XX>t XXX XXX HON. DIAZ. But did you not consider that there are similarly situated? MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memo randum Circular No. 37-93 , the other brands came about the would have also clarified RMC 37-93 by 1 was saying really because of the fact that I was just recently appointed and the lack of time, the period that was allotted to us to come up with the right actions on the matter, we were really caught by the July 3 deadline. But in fact, We ha~e already pre_p_~_re_t:;_i __ ___ a revenue memorandum circular q:l.�l_!:_;i._!yir!9___ with the other _... does _not yet, wou.L~- h .?ve been a list _o :(_ J_ocally manufactured pJ.g~.r.t:> :tt.!?_?.__pearing a for_eion brand for excise ta ~_. __ p_urp_o~f?.s~hic!:L wo~_J,_(,i include a l l the other pT_:_pnt:;i _l?_._I;J:~�t._ we;r.:_e mentiO!JeQ by the Hono r:_able ~ h~i~:.II!...C!!}__� (Underscoring supplied> <Exhibit "FF -2- d", page lX-4>. > XXX XXX XXX The obviou s implication uf t~e foregoing is that in truth respondent Commissioner herself believes that RMC No. 37 - 93 effectively reclassifies only the three(3 ) c iga r e~l es brands manufactu re ~ by petitioner and no othe r '( '?8

DECISION - CTA Case No. 5015 - 30 - similarly situated brands. In �act, she admitted that she would have issued circulars to cover the other brands similarly situated had she not been overtaken by the e��ectivity of R.A. No. 7554 which prohibits her �rom making reclassi�ication. Not only is the inequality mani�ested so clearly in the circular itself but more so in the application thereo� by the BIR. There is no denying the fact that up to present time, only the cigarettes of the brand "HOPE", "MORE" and "CHAMPION" have been assessed for deficiency ad valorem tax in relation to the implementation of RMC No. 37-93. The above observation did not escape notice of the ,, Presiding O��icer during the hearing conducted by the Committee on Ways and Means on August 10, 1993 and We quote: THE PRES. OFFICER. We are aware, the chair is aware of the position of the BIR that it was your intention that the circular covers other brands except the three brands, outside of the three brands. But the fact indicates otherwise because after you issued the circular, it was only Fortune Tobacccr that was notified about the circular. That is on the records. Second, up to this time, vou are not collecting the increase revenue rate from the other brands. If really that was your intention, you should be collecting now. And the records show that up to now, you are not collecting. So, that is a very clear point on the matter. xx <Exhibit "FF- 3 - d, pages XII-2 to XI~-3.) <Underscoring supplied.> ,_ 77� .\

DECISION - CTA Case No. 5015 - 31 - The more telling blows were delivered by Mr. Isidro Tecson, Jr., Chief of the Tobacco Division of the Bureau of Internal Revenue during direct examination by Atty. Estelito Mendoza <petitioner's counsel> in the hearing of this case on September 20, 1993, viz: xxxx XX>C IJ. Prior to the issuance o:f Revenue Memorandum Circular No. 37-93, how were the brands "HOPE", "MORE" and "CHAMPION" classified? A. They were classified as local brands and taxed at 45X of the wholesale price. XX>CX XXX IJ. Now, the Bureau of Internal Revenue has stated in their Answer that this Revenue Memorandum Circular No. 37-93 is an interpretative circular and that other cigarettes could :fall under this circular, which means other than "HOPE", "MORE" and "CHAMPION". Now, will you inform the court whether after the issuance of Revenue Memorandum Circular No. 37- 93, any brand of a cigarette previously classi:fied as locally brand cigarette has been considered by the Bureau of Internal Revenue as foreign brand pursuant to RMC No. 37- 9:-i? A. Well, I can only say that we did not collect ad valorem tax on these other brands of cigarettes as foreign brands because our office did not receive any instruction to collect from these brands as foreign brands. Q. So after the promulgation of RMC No. 37- 93, no other cigarette brand 780

DECISION - CTA Case No. 5015 - 32 - previously classified as local brand was reclassified as foreign brand? A. Well, not until after the letter by the Bureau of Internal Revenue dated July 29 where it say that all other brands of cigarettes similarly situated will be classified as foreign. <Referring to Exhibit "B"). XXX XXX Q. XXX XXX Now, has the Tobacco Tax Division applied Hl'1C No. 37-93 to any other br,and of cigarette ot.her the "HOPE", "MORE" and "CHAMPION" since its issuance? A. Well, not yet. Q. What do you mean not yet? A. We have not received any instruction yet from the higher authorities. Based on RMC no. 37-93, i t would appear the brands "HOPE" "MORE" and "CHAMPION" were reclassified as foreign brand cigarettes because they appear in the current Wo r ld Tobacco Directory? A. Yes. XXX XXX U. As head of the Tobacco Tax Division which implements the assessment and collection of excise taxes on cigarettes, would you know whether there are any other locally brand cigarettes which appear in World Tobacco Directory? A. Yes, sir, I know there . are other local brands that also appear in the World Tobacco Directory? Q. But are classified by the Bureau of Internal Revenue as local brands? ~; 8 1

DECISION - CTA Case No. 5015 - 33 - A. Yes, sir. Q. Can you name some of them? A. Aurora Matamis, La Campana, Marvel, Miller, Miss Asia, then Alhambra, Fiesta, Kennon, Casi no. Q. These cigarettes were taxed as local brands? A. Yes, sir, that is correct. Q. But they appear also in the World Tobacco Directory. A. They appear in the World Tobacco Directory. >t>t>t >t>t>t CT.S.N., September 20, 1993, pp. 16-25> Such a flagrant actual uneven application of RMC No. 37-93 as revealed by the testimony of the BIR official concerned r oundly demolish all pretentiona to impartiality and stripped the same of its cloth of validity. It is clearly discriminatory. Republic Act No. 7654 was approved by the House of Representatives and the Senat.e on June=----=1'-"C::.JI,"-----=1:...:9::..9::::..3= and signed by the President on June 14, 1 '3'33. It was published on June 17, 1993 � and took effect fifteen(15) days thereafter qr on July 3, 1993. The law amended Sec tion 142 of the Tax Code by doing away with the d i s t inction regarding brand and provides in Section ?82

DECISION - CTA Case No. 5015 - 34 - 42<c><l> thereof that those locally manufactured cigarettes which are "currently classified" and taxed at 55% shall be taxed at the same rate. Revenue Memorandum Circular No. 37-93 which was purportedly issued on ::J....:u::.:l:..Ly_,l::..L,--=-1-=9:....:9:::..::::==~ recl assified "HOPE", "MORE" and "CHAMPION" as "locally manufactured cigarettes with foreign brand" and subjects them t6 a 55X ad valorem tax with a minimum tax of not less than P5.00 per pack from its erstwhile classification as "other locally manufactured cigarettes" subject to tax of 45X or 20X as the case may be. Consequently, it would appear that upon the effectivity of R.A. No. 7654 on July 3, 1993, "HOPE", "MORE" and "CHAMPION" were "currently classified and taxed" at 55% and would therefore be taxed at the same rate pursuant to said law, the pertinent portion of which read: SEC. 142. Cigar and Ci garet. t.es. - x x x (c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher: <1> On locally manufactured cigarettes whi c h are currently classified and taxed at fifty five percent<55X> or the exportation of whi c h is not authorized by contract or ~~ 8 3

DECISION CTA Case No. 5015 - 35 - otherwise, �i�ty �ive percent<55Y.> provided that the minimum tax shall not be less than �ive pesos per paclt. (Underscoring supplied> XXX XXX The threshold question that has to be addressed is whether "currently classi�ied" re�ers to the classi�ication at the time o� the passage and approval o� R.A. No. 7 654 by the House o� Representatives and the Senate on June 10, 1993 and then by the President on June 14, 1993 or the classi�ication at the time o� its e��ectivity on July 3, 1993. For the interpretation o� statutes, "intent o� the legislature" is the criterion, or test, that is most o�ten recited. An almost overwhelming majority o� judicial opinions on statutory issues are written in the idiom o� legislative intent. The reason �or this doubtless lies in an a s sumption that an obligation to construe statutes in such a way as to carry out the will real or attributed, o� the lawmaking branch o� the iu qovernment is mandated by the principles o� separation o� /> powers <Sutherland Statutory Construction, 4th Edition, Vol. 2A , p. 15) Legislature intent is the vital part, the heart, the soul and the essence o� law <50 Am. Jur. p. 2 00). Hence, every technical rule o� construction is dependent upon and must yield to the expression o� the pa r amount will of the legislature. The value o� the

.' DECISION - CTA Case No. 5015 - 36 - rules o~ construction rests on their use as aids to the Court in better asserting legislative intent <State vs. South K~ngston, 22 L.R.A., p. 65>. Legislative intent should be understood as the sum o� the individual ideas. views and attitudes o� all the members o~ the legislature i� i t is to be a meaning�ul and valid concept �or use as a criterion �or deciding questions o� statutory interpretation (Sutherland Statutory Construction, 4th Edition, Vol. 2A, p. 19>. It means the "objective �ootprints le�t on the trail o� legislative enactment. " (2 Sutherland Statutory Construction, 3rd ed., p. 322>. Re�erence can be made to the composite or net meaning that is communicated by operation o� the process o� enactment appl~ed to a statutory text. <Sutherland Statutory Construction, 4th Edition, Vol. 2A, p. 19). The intent o� Congress in enacting R.A. 7654 can be in�erred �rom the statements made by the Cha~rman and Members o� the Committee on Ways and Means during the hearings conducted relative to RMC No. 37-93. Said statements were partly quoted hereunder viz: THE CHAIRMAN. I� I may just ~nterrupt. I ' l l give you the real intention of this b~ll. ~J.!t;!'!)___ ~ __p~s~_ed tl1is law, �--~e �roze all cla_~si�icat~ons o� ciaarettes. That~s why we eliminated the listing in the World �Tobacco Direc tory as a test �or determining whether a '1 85

DECISION - CTA Case No. 5015 - 37 - cigar~tt~ i s a local or for~ign brand. So aft~r th~ ~ff~ctivity of t h i s law th~r~ could n o b~ mor~ r~classification b~caus~ th~ t~st was alr~ady ~liminat~d. And that was probably th~ r~ason why th~y jump~d th~ gun of Congr~ss b~caus~ th~y could no long~r ~x~rcis~ th~ pow~r of r~classification. That was th~ r~ason. Not b~caus~ th~r~ is a prohibition on any downward r~classificat ion . w~ froz~ a l l cat~gori~s of cigar~ttes y hen we passed this law. That was th~ intention. <Exhibit "FF-3-b", pages YII-4 to VII-5, transcript of th~ h~aring conducted on Augu st 11, 1993 by th~ Committ~~ on Ways and M~ans> CUnd~rscoring supplied.> XXX XXX HON. TINGA. Anyway, the best ~vidence will be the records, Mr. Chairman. So thank you very much, Mr. Secr~tary. May I address this question, then, to Commissioner Chato? The new law, R~public Act No. 7654 ordains that the existing classification of cigarettes should hold. As a matt~r of fact, the law prohibits a change in the classification. And in doing so, th~ law has institutionalized the classification ther~fore being done by the Bur~au of !nt~rnal R~v~nue. And part and parq?l of that classification is the administratiy~ int~rpr~tation of a law as embodied in the letters and r.ulings of C~mm~ssion~r Tan. That's how it is. In other ~ords,__ _ :the __ _way things stood at the time that ~ew__ law was ~nact~d. th~r~ was a classification o�__ cig<!_ret tefu__ And that classification was in g_sl3._eJ1ce__~dopted by the new law. So that ~-.t.<is_?if.:j,._g~.!;J,on __:!:_s part o� the new law. But the problem is befor~ the enactment of the new law, i t would s~em to neutral observers that the BIR jump~d th~ ~un an Congr~ss. The uncanny timing of th~ revenue ruling raises the point that the BIR attempt ~ d to pre-empt Congress, that' s haw i t is. And th~ Commissioner 'herself, adm i t ted it. But t .he BIR cannot dt� t.J) at. Und~r s cheme of t .hi n gs, th~ BIR merely adminis t e rs, ad mi n i .t .e rs the laws, the tax laws. So with I . !;_he - -~r.\ ac_tn_!e_ n,!;___Q_� . the law, the BIR was the , the !~- �.t?_r:~ ~ .l,g,.?_~_d__t,:_l}e__ autt!_g_!-:._,t_t;y____Q!___ ttl e BI R to <;:!l_�l_:f) q_~ _,. __\_h_!i? ___c!ass_ification. Because as f ar as tl' 86

DECISION - CTA Case No. 5 015 - 38 - Congress is concerned, the classification exist _hruL_at the time the law was enacted was maintained. As a matter of fact, Congress, the law is, was very <inaudible> in saying that a change in the classification is prohibited. The BlR could change the classification or could make a classification only with respect to brands to be registered, which shall be registered later on. That's how it is, Madam Commissioner. So the point is, why did the BIR, what compelled the BIR to come out with this revenue ruling or revenue circular except probably to clash with Congress? <Exhibit "FF- 2-e, pages XI-1 to XI-3, transcript of hearing conducted on August 10, 1993 by the Committee on Ways and Means. > (Underscoring supplied. > X>tX XXX HON. TINGA. But the problem is the law is y~ry clear, that the categorization made by the J3Ifi_~as adopted by Congress. The problem really is at that point in time, Congress had believed the BIR. Whatever categorization the BlR came out with at that point in time was ,!.ns_t_;ttut_ionalized in the law itself, so at that stage, the BIR have more power or authority to change the categorization which was eventually incorporated in the law. <Id. pages XI - 5 to XI -7 . ) (Underscoring supplied. ) HON. TAJON Ye s, in connection with the point of Cong. Teves. In fact, one of the questions that I propounded is why the discrimination on these three brands instead of inc luding all the 18 brands that are listed in th e World Tobacco Directory. And according to the Ap d those were repeated by other in t erpella�tors. And she repeatedly said that to the i r th ~ nking, the other brands, sti l l 18 of t.hem, arr also included . in this memor a ndum c i r c u l ar� s o th at there is no need of iss uing a n o t h Pi c irc u l ar. And moreo v er, �the y c a n not i s s ue ~ c irp ul ar anymore becaus~ i t woul d b e a v i o l a t i o n of Re pub li c Act 7 6!::14. Tha t ~ s why th e r e i s no e x pec t ation . that the Commiss ioner wi l l ~~ e r i ssu e an o ther circular beca us e t hat

DECISION - GTA Case No. 5015 - 39 - would be in violation of Republic Act 7654. And according to her, the understanding is that if it is not specified that the upgrading is prohibited, it is only downgrading that is prohibited. So according to her, her interpretation is that it is not prohibited even in the upgrading. But that was the point of disagreement because Congressman, the Gentleman from Pat.eros made i t premise that in law when we pass or discuss this bill leading to Republic Act 7654 the current interpretation or the interpretation then was on the basis of the BIR ruling with respect to Hope, More and Champion that was issued by Commissioner Tan. The___ruling was that these three brands of ciaarettes are locally manufactured cigarettes anQ__that was the present interpretation which was understood to have been adopted in Republic A~:!_.__ 7654. So that even if there is no clear provision there prohibiting uoaradina. it assumes that it is prohibited because the iJLte_rpretation that we adopted in law is that ~J.nd. of interpretation. So, we have frozen the classification of cigarettes at the time we ~~-!?_ec!_ this R. A. 7654. And that's why I would ask the Deputy Commissioner if he is awar~ that this assumption or his argument that the specif ic naming of a specific brand in the circular would also include other brands. Is it not a fact that when you do not mention, it is what we call in statutory construction, it is elementary that what is not included is understood to have been excluded? And this is very specific. <E:r-:hibi t "FF-3-d", pages XI-5 to XI - 6 , Xll-1, transcript of the hearing conducted on August 11, 1993 by the Committee on Ways and Means.> <Underscoring supplied. J XXX At this j uncture, it would appear pretty obvious from the forego ing remarks of the legislators that ~he ,leg.t.�...L ative inte nt in t=> ~c ting R. A. No. 7654 is to adopt, institutionaliz~ and incorporate as included in the new law the c lassification of cigarettes existing at the time ~1 8 8

DECISION - CTA Case No. 5015 - 40 - of the approval of said law together with the contemporaneous administrative interpretation thereof as embodied in BIR rulings and regulations. Part and parcel thereof is the classification of "HOPE", "MORE" AND "CHAMPION" cigarettes as "other locally manufactured cigarettes" subject to an ad valorem tax of 45Y. or 20Y. as the case may be. ., Noteworthy are the circumstances leading to the issuance of RMC No. 37-93 and the uncanny timing by which it was issued. While respondent Commissioner was involved in the discussions and deliberations on RA No. 76!:�4, she did not deem it proper to raise her contemplated reclassification before the Bicameral Conference Committee inspite of her admission that she was already working on said circular at that time. <Exhibit "FF-2- e", page XII-1 transcript of hearing conducted on August 10, 1993 by the Committee on Ways and Means. Finding the final form of RA No. 7654 not to their liking since it maintains the classification of cigarettes l at the time of it.s enactment and I~ reclassification will no longer be possible under the new law, Secretary Leung and his group, including officials of the BIR, tried to enlist Congress to its side but was reb uke. They tried to delay its approval by the

DECISION - CTA Case No. 5015 - 41 - President but was overr~led. They tried to control its publication but failed. Running out of time, the BIR issued RMC No. 37-93 allegedly as a "corrective" measure. The transcript of the hearings conducted by the Committee on Ways and Means on August 11, 1993 is partially reproduced hereunder: MR . LEUNG. It is hard to avoid that perception <midnight act>, your honor~ but the way we were looking at this, this was an issue that we have been on the forefront addressing it as best as we can with your aygust body, and we were stuck in a situation where a question of whether we should defer the signing on June 14,. or not. Our view was that perhaps it is wiser not to sign but were overruled by the President who felt it is necessary to sign for the continuation of cooperation. So, we were stuck in that situation, we felt that we probably can control the process some more by controlling the publication. However the publication went out without any of us aware of it, and we just learned later. that it was already published and the time was ticking and would have to come into effect on July 3. So, in the meantime, we made further representation with the President, both the Secretary of Trade ' ! and Industry and ourselves, and this situation had to be clear. <Exhibit "FF-3-b, page VI-5.) <Underscoring supplied.> XXX XXX HON. GOLEZ. Well, in effect, is there an admission h~re, Mr. Chairman, Your Honor, that you are try ~ ng to beat the gun on the full effectivity pf Republic Act 7654? MR . LE NG. Well, . we have tried o n a n u mbe r Qf o cc asions - it is no secret. Your Ho n o r - t o try to get legislation that wou l d be a bl e to a ddres s a very important issue. So the que s t ion of bea t i ng the gun is drive n by t hat ~'(- 8 l

DECISION - CTA Case No. 5015 - 42 - process. It is not trying to fool anyone. Our position was very clear, very afront at all times. <Underscoring supplied.) HUN. GOLEZ. You were trying to get a legislation passed, but you cannot get the support of Congress. So you tried to go around this. Is this what we are hearing, Mr. Secretary, by way of a memorandum circular, especially considering, Mr. Chairman, Your Honor, that in Section . .. well, paragraph D. I'm looking at page 3 of my copy here . It says that any downward reclassification or present categories for tax purposes of existing brands, cigars, etc. shall be prohibited. In your discussions prior to the issuance of this memorandum circular, Jour Honor, Mr. Chairman, may we know if the discussion also focused on this particular provision? MR. LEUNG. Yes, we did. HON. GOLEZ. In other words, you were very aware of this provision that if you were caught by the effectivity of this Republic Act that there cannot be any downward reclassifi cation anymore? MR. LEUNG. That ' s right, Your Hon or. HON. GOLEZ. So i t only supports again the contention of some parties that this is indeed a midnight act that you were beating the gun . You could have waited this month and maybe deliberate further on a revenue memo randum circular of �much impact, of such ma~nitud e. MR. LEUNG. Your Honor, as I said, the perception of midnight action is unavoidable, inevitable. Our intention was not to do midnight act. We have tried to get t his problem addressed early, transparently, but we were forced ~nto a situation wherein if we don't take a p y course in this area, then we have to look ' at what was possible under the e xis ting law at that time before it comes t o a s t y mie d situation. <Exhibit "FF-3-b" , pages VII -1 o VI -3> 791

DECISION - CTA Case No. SOlS - 43 - XXX X XX The conclusion is inevitable axter a circumspect study of the antecedent xacts and the disclosures made that RMC No. 37 - 93 is a sophisticated attempt to undermine b y executive fiat the intent ox Congress in enacting R.A. No. 7&5 4. What they could not have through the lawmaking process, they tried to accomplish through an admin istrative circular. It is ox course deplorable and cannot be countenanced by this Court no matter how well - meaning and noble the purpose. Premi s es considered, RMC No. 37-93 is without xorce and exfect for one that has no heart and soul cannot have lixe. Not only is it xar detached from the legislative I intent which is the essence ox law but it even subverts the same. ' Accordingly, any reclassixication prescribed by RMC No. 37- 93 runs counter and cannot change, the classification adopted by Congr ess, which can be changed by Congress itselx and not by the BIR Commissioner. The classification bf cigarettes existing at the time ox approval of R. A. No. 7&54 stands. The interp r etation prevailing at th e time that "HOPE", "MORE" AND "CHAMPION" I ------------------------- ciga:c:_e-tt-es__ are locally manuxactur ed cigarettes not bear ing a for eign brand is deemed incorporated with the new law . i' ?82

DECISION - CTA Case No. 5015 - 44 - Anent the arguments o� petitioner that Section 142<c><1> o� the NIRC, as amended by R.A. No. 6956, upon which Rl'tC No. 3 7- 93 was based is null and void on the ground that reference to the World Tobacco Directory is invalid for being an undue delegation o� legislative power and that the �inding o� respondent Commissioner that " HO P E", "MORE" and "CHAMPION" are foreign brands are contrary to the �acts, it should b e noted that upon the e��ectivity o� R. A. No. 7654 on July 3, 1993, the classifi c at.ion o� cigarettes according to brand and the corollary re�erence to the World Tobacco Director y have already been discarded. Respondent Commissioner has likewise no longer the power to make classification o~ cigarettes. A �ortiori, a discussion of said arguments is moot and academic serving no useful purpose in so �ar as her ein c ase is concerned. Su��ice it to state that a ,, resolution of the above questions would have no bearing '" -~ in the outcome of this case in view o� the �indings amplified in the discussions earlier. WHEREFORE, ~evenue Memorandum Circula r No. 37-93 re classi fyi n q th ~' brands o� cigarettes, viz: "HOPE" , ""~ O RE" a n d " C H ~ J1 P JON" being manufactu r ed b y Fortu n e Tob ac:l :o Co rp orat i on as locally manu:fact.u red c i garette s on bl ..o~ r:i a 1 ore i qn b r and subject t .o t .he =t5 /. a d v a l orem t ax '7 93 1f!..

DECISION - CTA Case No. 5015 - 45 - on cigarettes �is �ound to be de�ective, invalid and un�orceable, such that when R.A. No. 7654 took e��ect on July 3, 1993, the brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55Y. pursuan t to Section t 'l42 (c) ( 1 ) o� the Tax Code, as amended by R.A. No. 7654 ! and were there�ore still classi�ied as ~-_ er__l_o_c_a_l_ l "y"--== manu �actur ttes and taxed at 45Y. or 20Y. a the case may be. Accordingly, the de�iciency ad valorem tax assessment issued on petitioner Fortune Tobacco Corporation in the amount o� P9,598,334.00, exclusive o� surcharge and interest, is hereby cancelled �or lack o� legal basis. Respondent Commissioner o� Internal Revenue is hereby enjoined �rom collecting the d e�iciency tax assessment made and issued on petitioner in relation to '\ the implementation o� RMC No. 37 - 93. SO ORDERED. Q~Q.~ ERHESTO D. ACOSTA Presiding Judge 794

DECISION - - 46 - CTA Case No. 5015 WE CONCUR: CERTIFICATION I hereby c ertify tnat the decision was reached after due consulta t ion among the members of the Court of Tax Appeals i n acc ordance with Se c tion 13, Article VIII of the Constitution. <2-.:cco-~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 79