CTA Case No. 5482 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY LA SUERTE CIGAR AND CIGARETTE FACTORY, INC., - vet's us -- C.T.A. CASE NO . 5482 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This case involves a claim for refund of alleged erroneously or illegally collected specific taxe s in th e amount of P175,909.50 during the mon t h of Apr il 1995. Pet it ionet' is a corporation duly e:-<istin~1 und et' Phi 1 i pp in e l a~-11s. It i s eng<:1.gecl in the manufacture of cigarettes out of stemmed-leaf tobacco which it purchases in bulk from bo t h local and foreign tobacco manufacturers. This case started when the Commissioner of Intet'nal Revenue collected from the Petitioner the amount of One Hundred Seventy Five Thousand Nine Hundre d Nin e Pe s os a nd Fifty Ce ntavos CP175,909.50) for specific taxes allegedly due on the Petitioner's bulk purchases of stemmed-leaf tobacco from foreign tobacc o manufacture rs whi c h the company paid under protest.

DECISION - C.T.A. CASE NO. 5482 -� 2 On Sept em bet~ 27, 1995 and c: , Oct ohe1�~ 1 9'36' Petitioner, through counsel, f ile d a claim for refund of specific taxes with the BIR, invoking Section 137 of the National Internal Revenue Code, which provides that the sale of stemmed-leaf tobacco by one manufactur er directly t o a nothet~ is exempt ft~o m the payment of excise (specific) taxes. In defense of its assessments, Respondent advanced the arguments, among others, that under Section 141Cb) of the Tax Code, partially prepared tobacco is subject to specific tax; that stemmed leaf tobacco is classified as partially prepared tobacco under Section 2<m) (1) of Revenue Regulations No. 17-67, a nd such being the case, it is subject to a tax of P0.75 for each kilogram (Se cti on 1\!at ion a l Int et~nal Revenue Code) . Respondent further averred that under Section 137 of the Tax Code, as implemented by Revenu e Regulations No. V-39, stemmed-leaf tobacco may be sold in bulk as raw materia ls without prepayment of the specific tax only if the sale thereof is by one L-7 permittee directly to another L-7 p e t~ mi t t e e . The sole issue in this case is wheth er or not imported stemmed leaf tobacco 1. �.-, e><empt ft"'Dm (specific) tax, thus, entitling Petitioner to the refund of the amount of P175,909.50.

DECISION - C.T.A. CASE NO. 5482 3 to the of th i<; case a1�~(~ Sections 137 and 141 of the 1'395 l\lational Intet�nal Revenue Code 1�'e 1 i ed upon by Pet i t i on e t~ ;:m d Respondent, respectivel y , to wi t : "Section 137. Removal of tobacco products without pt'epayment of t a x . P1��oducts of tobacco entire ly unfit for chewing or smoking may be removed free of tax for agricultural or industt~ial use, undet' such conditions as may be prescribed in the regulations of the Department of Finance. Ste mm ed leaf tobacco, fine cut shorts, the refuse of fin~-cut chewing tobacco, sct~aps, cuttings, clippings, stem s o1�' miclt�ihs, and sweepings of tobacco may be solei i n bulk a s raw mate r ial by one manufacturer directly to another, without payment of the tax under s uc h conditions as maybe prescribed in the re gul ati on s of the Department of Fin a n c e. " Ste mm ed leaf t obacco" as het�ein used means leaf tobacco which has had the s tem 01�' midrib removed. The term does not inclucle bt�oken leaf tobacco." "Sect ion 141. Toba cco P t'oducts. Th e1�'e shall be c o llected a t a x of s eventy-five centavos on each kilogram of the f o llowing products of tobacco: (a) X X >< (b) Tobacco prepared o 1�� p a 1�' t i a 1 1 y prepared with or without the use of any mach i ne or i n str um ents or without being pt�e s sed Ot' sweetened; and ( c ) F i n e - c u t s h o t~ t s an d t' e f u s e .1 ~.; c 1�' a. p s , clippings, cuttings, stems and sw ee pin g s o f tobacco. Fine-cut shorts and t~efuse, sct~aps, clippings, cuttings, stems and sw e epings of tobacco resu l ting f1�~om the h a ndling or stripping of whole leaf tobacco may be t ran sferred, disposed 0 f' or otherwis e sold, without prepayment of the specific tax herein @)

DECISION - C.T.A. CASE NO. 5482 - Lj. - provided for under such conditions as may be prescribed in t h e regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. XXX XXX X X>< Petitioner stresses in its Petition for Review that !:.1ection 137 bt~oad 1 y gt~ant s specific tax ~?xemption fat~ tobacco sold as II by one manu fact Ut'el�~ I '--..... d i t~ect 1 y to anothet��" without distinction, thus, its impot'tation of stemmed leaf tobacco should not be subjecte d to specific taxes. Respondent, on the hand, buttl�~essed the view that stemmed leaf tobacco is prepared tobacco, hence, it falls within the ambit of Section 141Cb), thus, mal-<ing it subject to an excise tax of P0.75 on each kilogram thereof. We find for the Petitioner. It is to be admitted that this Petition for Review filed by the Petitioner is without an element of novelty. The issue at bar has been settled of Appeals in the case entitled Commissioner of Internal vs. Fortune Tobacco Corporation, CA-G.R. SP Nos. 38219 and 40313, dated January 30, 1998, the said Cour�t emphatically ruled, thus: "Thet~e is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. The issue, t h et��efot~e, is whet h et' Ot' not R<�:> venue Regulations No. 17-67 is valid i nso@)s it

DECI S ION - C.T.A. CASE NO. 5482 5 inter~pr~ets the s t a t u t or�' y t e r~ m "par�'t :i.a lly pt~epc:wed tobacco" so as to include !5temmed leaf tobacco. It i s an elementary principle of Administrative Law that in interpreting or implementing a provision of law, a government agency cannot go beyond the terms and provisions of the basic law. Much less can it go against the law itself. r:idministJ�~CJ.tive rules and regulations is sue d by a particular department or agency must be i n harmony wit h the provision of law and should be for the sole purpose of carrying into effect the statutory provisions which it is con str u i n g or implementing. I '-...._ XXX XXX X><X In case of discrepancy betwe e n the basic l aw and a rule or regulation issued to implement it, the basic law preva ils. The regulation cannot go beyond the provisions and terms of the basic law (Shell Philippines Inc. vs. Centr~al Bank~ 152 SCRA 528 [1SJ88J). After a careful study of all aspects of the law and the revenue regul ati on involved in this case, We come to the conclusion that the Commissioner of Internal Revenue ha s not engaged in mere interpretation but h as gone into unauthorized modification or amendment of the law. x >< x Section 137 of the Ta x Code, earlier cited, e><pt~essly defines " ste mmed lea f to bacco " and excludes it from payment of the tax when sold in bulk as r aw mater ial by on e manufacturer directly to another. While this particular secti on provid es for rem oval of tobacco products without prepayment of ta ><, it is significant that the Ta >< Code defines an d classifies stemmed leaf tobacco unde r its Section 137. When Revenue Re gu l atio ns No. 17- 67 undertakes to classify stemmed leaf tobacco under Section 141 i n a manne r different from the way it is treated in Section 137, it is no long e r engaged in mere classification. It is already adding something to the law not in consonance with what t h e law itself specifically provides but contrary to it. ><XX Xl<X ><><X I

DECISION - C.T.A. CASE NO. 5482 �- 5 Section 141 of the Tax Code spec if ical ly excludes "fine cut s h o t't s .:~ n d t' e f u s e , clippings, cuttings stems and sweepings of tobacco resulting from the h andling or stt'ipping of ~r~hole leaf tobacco" fl�'om the 7:=:5 centavos per kilogram tax when disposed of or sold. The condition in the statute is that the above must be exported or u se d in the manufacture of other tobacco pro ducts. The reason for the exclusion is that the excise tax will eventually be paid on the finished pt'oduct. The same reason appli es to stemmed leaf tobacco which is intended solely as a raw material in the manufacture of cigarettes and other tobacco products. After the cigarettes iH'e manufactut'ed, excise taxes wi 11 be paic:l. In effect, what the Petitioner has provided in the disputed regulation is double taxation the payment of excise taxes on the raw material and later, the payment of excise taxes on the manufactured product. Double taxation must be specifically and clearly provided by law. It cannot be imposed by administrative rule - making body. X>< X XXX XXX The argument that stemmed leaf tobacco used as raw material is exempt from taxation only when it is from one L- 7 ma nufactur er to ~� another L-7 manufacturer suffers from the same infit'mity. It is based on the BIFPs own Revenue Regulations V-39 which add to the law something which is not there. x x x Section 141 taxes fine cut shorts and t~efuse, scr~aps, clippings, stems and Sh'eeping<; but the un n umbered paragraph after Section 14�1 (c) exempts these i.tems if they at'e us~?cl in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. XXX XXX X X>< The Petitioner's contention that the classification of stemmed leaf tobacco as "par~t i a l l y manu fact ur~ed tobacco" unde1�~ Rc,?venue Regulations No 17-57 prevails over the definition of processed tobacco under~ Rep. Act 598 is fanciful to say the least. Revenue

DECISIOI\1 - C.T.A. CASE NO. 5482 7- Regulations No. 17- 67 is not a bas i c l aw . It i s s i mp l y an i mp l e men t at i on � o f t h e s t ~d~ u t C! 1�' y provision of the Tax Code. A mere regulation of a quasi-legislative agency cannot prevail over the express definition under a law passed by Congress itself. It is elementary that an administrative regulation cannot am e nd or repeal the express provisions of s tatutes enacted by Congress. How can the Petitioner argue that an administrative regulation prevails over a statute or law? The Petitioner states th a t Se c tions 141 and 137 of the Tax Code must be read and construed together. It explains that under Section 141 stemmed leaf tobacco, being partially prepared tobacco is subject to specific t a><. Howe vet', u n de t' Sect i on :1.37 i f the stemmed leaf tobacco is sold in bulk directly from one manufacturer to another in accordance with the conditions prescribed in Section 20(a) of Revenue Regulation No. V- 39, i t i s e x e mp t f t' o m s p e c i f i c t a >< � I t i s v e t' y obvious that it is not the Tax Code wh ich taxes on one hand and exempts from t a xe s on the other hand the tobacco involved. It is the addition of a definition of partially manufa ctured tobacco which clashes with the law i tself and the regulatory conditions of BIR which r e strict the application of the law to an extremely limited class that form the basis of BIR action. The Petitioner eng a ges in le g i s lation and then uses its own administrative or quasi- legislative powers to add a c ertain cla ss of tax which is neither expressed nor contemplated in the basic law. We are aware of the ruling in Commis s ioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. SP No. 38107 is s ued on Decem bet~ 29, 1995. We note, however, that this Court in the case of La Suerte Cigar failed to t a ke into account the limitation s in the exerc i s e of quasi-legislative powers by admini st r a tive agencies. True, the law in Sections 141 and 137 of the Tax Code contains the phl�~ase "undet' such conditions as may be pr escribed in the t' e g u 1at i on s o f t h e De p ;:.n' t men t o f F i nan c e . " However, the power to prescribe regulations is not a carte blanche giving the BIR full discretionary authority to add to the law. It

DECISION - C.T.A. CASE NO. 5482 -- 8 -- is not a t~ovi n g commission . I t is subject to established a nd basic principles of Administrati v e Law enunciated in s c ores of Supre me Court decisions. There i s no discrepancy between the principles enunciated in this decisio n and in the La Suerte decision except that the latter stopped short and did not go i n to t h e powers of administrative agencies. If it had gone fully and far enough into the quasi-legislati v e powers of Bureau of Intern al Reve n ue, it would have arrived at concl u sions fu l ly consonant with out~ findings." In the light of th e fot��et;Joing pronouncements and factual background of thi s case, this fi n ds no reason to deviate from, much less to disregard settled doctrine, to which We have consistentl y a n d repeatedly adhe r ed to. IN VIEW THEREOF, Res pond E!nt is hereby ORDERED to REFUND to herein Petitioner the total amount of ONE HUNDRE D SE VENT Y FI VE THOUSAND NINE HUNDRED NINE PESOS AND FIFTY CENTAVOS <P1.75, 909. ~50), its erroneously paid specific taxes for the month of Apr il l '3'35. SO ORDERED. WE CONCUR: ~Lo.o~ ERNESTO D. ACOSTA P t~ e s i d i n g J u d g e -~~ ............"ci u. r ; / Associate

DECISION - C.T.A . CASE NO. 5482 - 9- CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~~ -Q~ ERNESTO D. ACOSTA Pl�'e s id:i. lli;I Judqe