CTA Case No. 4618 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY STERLING TOBACCO CORPORATION, Petitioner, - versus - C. T. A. L 1'' 461. THE COMMISSIONER OF INTERNAL REVENUE 1 )( - - - - Respondent. - - - - - )( and antecedents of the case at bar are not in dispute. P e t itioner is a duly registered domestic corpoya ; i o n engaged in the manufacture and sale of cigar an d cigarette products. A 1 <:? tter, dated April 26, 1991, was received by peti ti oner on April 29, 1991 notifying it of a proposed assessment for deficiency excise tax in the ": o i "'\ l amount o �f P4, 2 82,624.75, on the removal of c ipa1�ei tes for the period starting October 8, 1990 t 1991. <Annex "A" >� The comput a t on is shown hereunder: Total ~VT IBasicl P35,294,509.00 Less: AVT Paid under BIR Ruling No. 473-88 Deficiency AVT ;3?.,_Q�_Q,.~~1~-~1! Add : Pt>nalties: 25~ Surchargt> <Sec. 2481cl 131 NIRCl p 3,233,864.48 20~ Int erest IP4,042,330.65 x 107/360 days x 20~1 Total A1ount Due 808,466.13 _ ..f.~Q, f.~_!.J.Q ~=~~,L~~2?

DECISION C.T.A. CASE No . 4618 - 2- Pursuant to Section 229 of the Tax Code, the par ties met i n a formal co n ferenc e on May 6, 1991 whereby petitioner registered its protest to the fore go ing assessment. A protest l etter, dated May 14, 1991, was subsequently filed by petitioner's counsel with the BIR Excise Tax Service on even date, with a request that the proposed assessment be withdrawn and cancelled <Anne x "B"). In a letter, dated May 27, 1991, and received by petitioner on May 31, 1991, respondent denied petitioner's protest and request for cancel lation and withdrawal of the disputed assessme nt stating th at said decision is final, and at the same time requested payment o'f th revised amount of � P4,563,342.16, including updated interest, within (10) days from receipt thereof <Annex "C">. P et it i oner, in a letter, dated June 6, 1991, and received by respondent on June 7 , 1991, requested for a reconsideration of respondent's denial of its protest and request for cancellation a n d withdrawal of the disputed assessment <Annex "D"). Whi le awaiting respondent's reply to its request for reconsideration, petitioner filed with this Court the instant petition for review

DECISION C.T.A. CASE No. 4618 - 3- on June 19, 1991 with the prayer that aforementioned deficiency ta>< assessment be cancelled and withdrawn ( pp . 1 - 7, C. T. A. Records>. Respondent, in a letter, dated June 21, 199 1, and received by petitioner on June 25, 199 1' reaffi rmed its denial of petitioner's protest and request for cancellation and withdrawal of the di sputed assessment declaring again that this decision is final and re iterating its demand for paym ent of the deficiency e><cise ta>< of P4,5G3,342.16, inclusive of increments, wit hin ten <10> days f'rom rece ipt of the said letter <Anne>< "E" > � On July 1 7' 1991' petitioner paid under protest the defici ncy ad valorem ta>< assess men t in the total mount of P4,563 7 342. 1 6 as evide nced by the follow'ng: ~EX P.O. IT. C. C. ORITDM DATE AJIIOI.tlT H, I C-11315537 CBP No. 823292625 07-19-91 p 661,713.16 L,K BOC 006280 TDI'I SN 000089 07-17-91 1,115,835.00 J,M BOC 006336 TDM SN 000091 07-17-91 1,372,621. 00 N,O BOC 006292 TOM SN 000090 07-17-91 _1..li~L!73, 00 TOTAL p~:~-4~}:,~~~ On July 24, 1991' petitioner filed with the Appellate Division of' the Bureau of Internal Revenue its t for ~~fund/ta>< c~edit in the amo u nt of P4,563,342. 16, representin g the allege d

DECISION - C.T.A. CASE No. 4618 - 4- deficiency ad valorem ta>< it paid under protest <Anne>< "P" >. An Amended Petition for Review was likewise filed by petitioner on July 24, 1991 with the prayer that the disputed assess ment be cancelled and withdrawn and that respondent be ordered to grant the petitioner's cla im for ta>< credit/refund of its payment under protest of the alleged deficiency ad valorem ta>< amountin g to P4,563,342.16 (pp. 20-29, C.T.A. Records>. The issue addressed to this Court for resolution is whether or not petitioner is entitled to the ref und of P4,563,342. 16, representing the disputed deficiency e><cise ta>< assessment for the period October a, 1990 to -January 22 , 1991 which petitioner paid under protest. Peti t ioner's entit lem ent to the refund claimed hinges to a great e><tent on the determination of the validity of the deficiency e><cise ta>< a ssessment issued by respondent. The subject deficiency e><cise ta>< assessment resulted out of petitioner's use of the computat ion mandated by B.I.R. Ruling No. 473-88, dated October 4, 1988, as basis for com puting the 15?(. ad valorem ta>< due on its removal of

DECISION C.T.A. CASE No. 4618 -- 5 - cigarettes for the period October B, 1990 to January 22, 1991. The correct com put at ion, pursuant to said ruling, is illustrated by way of e xample as follows: P44.00 X 1/11 = P4.00 VAT P44. 00 - P4.00 = P40.00 Price without VAT = Po.OO Ad valorem tax P40. 00 x 15~ The above computation which shows that VAT is excluded from the tax base in computing for the 15" excise tax due is allegedly in accordance wi t h Section 127 <b) of the Tax Code, as amended by Executive Order No. 273, to wit: "SEC. 12 7. Pay�ent of excise taxes on do�estic products. XXX XXX XXX (b) Det er mination of gro ss selling price of goods subject to ad valo rem tax. Unless otherw ise provided, the p rice , .!? ><.�_!_ud i.D..g� --�_ib_g_ Y..~J...Y.J~~-=~fl_c;l_~_g___j~-~.~ , at wh i c h t h e g o o d s a r e s o 1d a t wholesale in the pl ac e of production or through their sa les agents to the public s hall constitute the g ross selli ng price. xxx" <Unde rscori ng supplied> XXX XXX XXX Thereafter, respondent issued BIR Ruling No. 01 7-91 on February 11, 1991 revoking BIR Ruling � No. 473-88. It included the value-added tax to the gross selling price in determining the tax base for computing the 15" ad valorem tax on native cigarettes. Cited as basis by respondent

DECISION C.T.A. CASE No. 4618 - 6- is Section 142 of the Tax Code, as amended by E.O. No. 273 quoted below: "SEC. 142. Cigar and cigarettes. )()(X ><><X XXX For purposes of this section, "manufacturer's or importer's registere d wholesale price" __ .~b.�tlL incL~fl-1?_ the ad valorem tax imposed in paragraphs <a>, <b), <c> or <d> h ere o f and ~JJ.J?._ _a_rrr_o L\J.)_t__ i n t _gn..9 e_c;:!___j;__g____�..Q..Y..e r____th e. Y_ill.\!.~���---~-c;:!.c;:!_~_c;:!__!;__~-~- i mp o s e d u n d e r T i t 1 e I V o f t h i s Code. <Underscoring supplied) Respondent sought to apply the revocation retroactive to petitioner's removals of cigarettes for the period starting from October B, 1990 to January 22, 1991 on the ground that petitioner allegedly acte d in bad fai th, which is an exception to the rule on non-retroactivity of B. I. R. rulings. Section 246 or the Tax Code �provides as follows: "SEC. 246. Non-retroactivity of rulings.- An Y.....-L.e ~UL~~_!;_l9.D..1._'1!.Q_Q_i_!)..�.~.1..!..9.1l..__q.r:_ r e v__e r ~.�!)_Q.f.....!?!.!lY.. Q..f.. -.... :t!JJL..l:.~.L~.?__.ftD.SL._t:..\'?....Q.u l .~.t.!. .9..!L~ pro mu 1gat e d i n accordance with the preceding sectio n .9.~~~-~f ~-h-~_.__J:.\!..U..D..9.a_ o_r,:______s;J.r_c;..l!l ~r_~- pro mu 1 g at e d by t h e Commissioner ~ hajl not b~ give~__retroa~t.jv~ ~P..f?..U.~ .~-t...L9.D. i f t h e r e v o cat � on , mod i f i cat i on , or reversal will be prejudicial to the taxpayers ~-~-.�.~..P.t. in the following cases: (a) where the taxpayer deliberately misstates or omits mater ial facts from his return or in any document required of him by the Bureau of Internal Revenue are material ly di fferent from the facts on which the ruling is based; or <b> wt:!.~_r:_g___.~_h ~-_ii.!~.P.�.Y_~_r.__ _~s.;-~-~-d___j..!J.._____t;?i_iQ.__f_�_!..!;_IJ.. '' <Underscoring supplied)

DECISION - C.T.A. CASE No . 4618 - 7- To be noted is the difference in the ta~able base on which the e~cise t.;1~ is to apply as mandated by the two incompatible BIR rulings. Th e deficiency e~cise ta~ assess ment can be attributed to the said difference. There i 5 no question t h at the correct computation of the e~cise ta~ on ciga rette s in the case at bar is the one provided in S ection 142 of the Ta~ Code and BIR Ruling No. 017 - 91 d a t ed February 11' 1991 and no t the computation provided in Section 127<b> of the Ta~ Code and BIR Ruling No. 473- 89 dated October 4, 1999. In fact, upon kno w ledge and infor mati on of the e~ istence and effectivity of BIR Ruling No. 017- 91, Pet itioner immediat ly implemented the method of computation mandated therein by including back. the VAT in computing for the ta~ base for purposes of the 15~ ad valorem ta~. Well -e ntrenched also is the rule that "rulings a nd circulars, rules and regulations, promulgated by the Commissioner of Internal Revenue would have no retroactive application if to 50 apply them would be prejudicial to ta~payers, e~cept in the three instances enumerated in Section 245 of the NIRC." <PLOT vs. CIR, CTA Case No. 4055, December 29, 1989

) DECISION -- C.T.A. CASE No. 4618 - 8- citing ABS-CBN Broadcasting Corporation vs. CTA and CIR, 108 SCRA 142 and CIR vs. Buroughs, Ltd. and CTA, 142 SCRA 324.) Without doubt, petitioner would be prejudiced by a retroactive application of the revocation as it would be assessed deficiency e~cise ta~. What is left to be answered is whether petitioner acted in bad faith in using BIR Ruling No. 473- 88 in computing its e~cise ta~ liabilities for the period from October 8, 1990 to January 22, 1991 to wa rrant a retroactive application of BIR Ruling No. 017-91. Respondent's allegation of bad faith is anchored on the following: (1) BIR Ruli ng No. 473 - 8 8 dat ed October 4, 1988 was alleg e dly n ever published or ci r cularized a n d even ln s ular- Yebana Tobacco Corporation wh ich requested said ruling did not implement the same and neither did the big cigarette factories availed of it. (2) Petit io ner al l eged l y, in vi olation of Sec tion 127 <c> of the NIRC, fa i led to s ubm i t it s a me n de d Ma nufa c tu r er' s Declar ation b e fore s h i f ti ng i ts manne r of c omputing the a d v alo rem ta x due on th e cigar ettes i t pr oduce d a nd did not sec ur e th e approval of the BIR unlike othe r c igar ette ma n u f ac t ur e rs wh i ch ma de o f f i cial c on su l ta tion with the BIR a nd we re duly info r med. ) On the other hand, petitioner's claim that it acted in good faith is based on the following:

DECISION - C.T.A. CASE No. 4618 - 9- (1) BIR Ruling No. 473- 88 was published on February 20, 1989 in Business World, a newspaper of general circulation in the Philippines and until BIR Ruling 017- 91 was never qualified nor disclaimed by the Bureau of Internal Revenue such that petitioner's reliance thereon for the period under review cannot be faulted. <2> The aforesaid BIR ruling was clear and categorical, leaving no room for any other interpretation that petitioner did not see the need to consult BIR before implementing the same. <3> Following the procedure it adopted through the years, petitioner found no practical reason to file an amended Manufacturer's Declaration since it is only in instances where the gro ss se lling price is adjusted that petition er files one. In the instant case, it is only the e~cise ta~ due that was changed. (4) After the subsequent rev ocation of BIR Ruling No. 473-88 by BIR Ruling No. 017- 91' petitione r immediately reverted to the pre vious method by which it computes for the e~cise ta~ due, which includes the VAT. Bad faith does not simply connote bad judgment or negligence., it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud. <Board of Liquidators vs. Kalaw. 20 SCRA 1007). It is a breach of a known duty through some motive of interest or ill will. <Lopez vs. Pan American Airways., 16 SCRA 438. >. Being a state of mind, it is indicated by acts and circumstances and is provable by circumstantial

DECISION - C.T.A. CASE No. 4618 - 10 - evidence. <La i g v s. Court of Appeals, 82 SCRA 305.) Going over the records of the case, We find no convincing evidence that petitioner's implementation of the computation mandated by BIR Ruling No. 473-88 was ill-motivated or attended with dishonest purpose that partakes of the nature of fraud. We observed that BIR Ruling No. 473- 88 was dated October 4, 1988 and published on February 20, 1989 but petitioner used the computation the~ein only for the period starting October 8, 1990 to January 22, 1991. In the intervening period after October 4, 1988 but prior to October 8, 1990, petitioner used the previou s computation but did not file a claim for r �efund of the e~cise ta~ i t overpaid. Even with the publication of B!R Ruling No. 473-88 in a newspap er of general circulation on February 20, 1989, respondent did not disclaim or bother to correct it. Only upon the issuance of BIR Ruling No. 017 -91 dated Februar y 11' 1991 that the aforesaid ruling was revoked. Upon knowledge thereof, pet it ioner immediately reverted to the computation mandated by BIR Ruling 017-91. It is an established doctrine that "a �ta~payer cannot be convicted for taking the ta~

DECISION - C.T.A. CASE No. 4618 - 11 - authorities at their word." (International Business Machines vs. u.s., 343 F 2d [ 1 955] p. 923. ) To impute bad faith and slap deficiency assessment on petitioner for merely relying on respondent's own assurance in the form of a ruling that it is the correct computation is reprehensible for it is inconsistent with justice and fair play. While it is true that the Government is never estopped from collecting taxes legally due it because of mistakes or errors on the part of its agents, this stand qualified by Section 245 of the Tax Code in the sense that rulings issued by the Commissioner of Internal Revenue would have no retroactive application if to so apply them � would be prejudicial to taxpayers, except in the three instances enumerated therein. The publication of BIR Ruling No. 473-88 in a newspaper of general circulation serves as sufficient notice to all which are similarly situated and petitioner's availment thereof cannot be taken against it. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.

DECISION C.T . A. CASE No. 4618 - 12 - <Delph er Trades Corp. vs. Intermediate Appellate Court , 157 SCRA 349. > As to the contention that petit ioner 's failu re to submit the amended Manufacturer's Dec laration for respon de nt's approval is tantamo unt to bad faith, We find sa id conclusion untenable in the l ight of the explanation given by pet itioner. The ev id ence on h an d do not warrant such infe rence. Premises considere d, We resolve that the deficiency excise tax assessment issued by respondent against petitioner in the a mount P4,553,342. 15, inclusive of increments, is without legal basis because of t h e prohibition against the retroactive application of the revocation of BIR ruli ngs in the absence of bad faith on the part of the pet it ioner. The afor em entioned deficiency excise tax assessment is hereby cancelled and withd rawn . Inasmuch as petitioner has already paid und er protest the foregoing deficiency excise tax assessment of P4,563,342. 16, as clear ly established by the evidence submitt ed, the same should b e refun ded to petitioner.

DECISION C.T.A. CASE No. 4618 - 13 - WHEREFORE, respondent Commissioner of Internal Revenue is hereby ordered to refund or issue a ta>< credit certificate to petitioner in the amount of P4,563,342. 16. SO ORDERED. Quezon City, Metro Manila, December 7, 1993. ~ p4J.._~ RAMON 0. DE VE A Associate Ju e WE CONCUR: ~Q-- ~ ERNESTO D. ACOS A Presiding Judge ~ Associa

DECISION - C.T.A. CASE No. 4618 - 14 - CERTIFICATION I hereby certif-y that this decision was reached after due consultati on among the members of the Court of Tax Appeals in accordance with Section 13, Article VI II of the Constitution. ~Q.. ~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals