CTA Case No. 5447 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY LA SUERTE CIGAR AND C.T.A. CASE NO. 5447 CIGARETTE FACTORY, INC., X Petitioner, versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - DECISION This case involves a claim for refund of alleged erroneously or illegally paid specific taxes in the amount of P252,018.75 during the month of December~ 1994. Petitioner is a domestic corporation engaged in the manufacture of cigar and cigarettes out of stemmed leaf tobacco as raw materials which it purchases in bulk from both local and foreign manufacturers. It is thus a manufacturer of tobacco. During the month of 1994, Petition et~ purchas e d and imported stemmed leaf tobacco from various s e 11 ers abt~oad on five ( 5) occasions whereby the aggregate amount of P252,018.75 for specific taxes were subsequently collected. Petitioner allegedly paid said amounts under protest. On October 2, 1996, Petit i onet~, through counsel, filed a claim for refund of specific taxes allegedly paid by it on i ts importations of stemmed leaf tobacco

DECISION C.T.A. CASE NO. 5447 - 2- <Exhibit "C"). In t hi s l e t t e r~, Pet it ion e t~ pY' o test e d the assessments and subsequent collections, invoking Section 137 of the National I nt et~na l Revenue Code where it provides that the sale of stemmed leaf tobacco "by one t o manufacttn~e.,.~ dir~ectly another~" is exempt payment of excise taxes. As the claim for the said refund has not been acted upon, Petitioner was compelled to file a Petition for Review befor~e this Cout~t on December~ 3, 1996. In his Answer to the Petition, Respondent considered stemmed leaf tobacco as "par~t i a 11 y manu fact tn�~ed p�r~epat~ed tobacco" as pt'ovided fat~ in Revenue Regulations No. 17-67 <Sec. 1 (1), and as such, subject to a tax of P0.75 for each kilogram in accordance with Section 141 of the National I nt et~na 1 Revenue Code, as amended. He further avers that Section 137 of the Tax Code pertains to the transfer from one L-7 directly to another L-7 but not from L-6 <stripper or thresher) to L-7. He claims that while imported leaf tobacco has never been subject to tax, partially manufactured tobacco is subject to the specific tax of P0.75/Kg. Thus, according to him, whet h et~ or�' not the ste mm ed leaf tobacco i mpor~t ed by Petitioner is liable to tax, depends upon compliance with such conditions. The sole issue in this case is whether or not imported stemmed leaf tobacco is exempt

DECISION C.T.A. CASE NO. 5447 - 3- (specific) tax, hence, paving the way to Petitioner's entitlement to the refund of the amounts mentioned in the fOJ�~ego i ng facts. Resolution of the issue centers on sections 137 and 141(b) of the National Internal Revenue Code relied upon by Petitioner and Respondent, respectively, to wit: "Section 137.-x x x Stemmed leaf tobacco, fine cut shorts, the refuse of fine cut chewing tobacco, sc~~aps, cuttings, clippings, stems or~ midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Department of Finance. <Underscoring supplied) "Stemmed leaf tobacco" as he-r~ein used means leaf tobacco which has had the stem o-r~ midrib removed. The term does not include bt~oken leaf tobacco." "Section 141.-There shall be collected a tax of seventy-five centavos on each kilogram of the following products of tobacco: (a) X X X (b) Tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened." XXX X >< X X >< X Fine cut shorts and refuse, scraps, clippings, cuttings, stems, and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be tl�~,:msfen�~ed, disposed of, or~ othe-r~wise sold, without prepayment of the specific tax herein provided for under conditions as may be prescribed in the 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

DECISION C.T.A. CASE NO. 5447 - 4- tobacco products on which the excise tax will eventually be paid on the finished pr�'oduct." Petitioner contends that to tax stemmed leaf tobacco under~ Section 141 of the Tax Code simply because it is "pat~tially manufactur~ed tobacco" would r~endet~ useless the express grant of exemption to stemmed lea f tobacco under Section 137 of the Tax Code; besides, Section 141 does not purport to be the exclusive law on deferment of (?.Xcise taxes. This is not a case of first impr~ession. The Honor~i:l.ble Cour~t of Appeals had occasion to rule on this in the case of Co�missioner oF internal r evenue vs . Fot~tune Tobacco Corpo t~ation , docketed as CA- SP Nos .. 38219 and 40313 promulgated on January 30, 1998 thereby affirming t h e decisions of this Court in CTA Case l\lo. 4616 and 4587 promulgated on October 6, 199'+ and November 23, 1994, r~espect i ve 1 y. The per~tinent por~t ions of the decision the Court of Appeals in said consolidated case read as follows: "Ther~e is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. XXX XXX XXX Section 137 or the Tax Code, ear~J.ier~ cited, expr~essly defines "stemmed leaf tobacco" and excludes it from payment of the tax when sold in bulk as raw material by one manufacturer directly to another. While this particular section provides for removal of tobacco pr~oducts ~->~ithout pr~epayment of tax, it is significant that the Tax Code defines and

DEC I SION C.T.A. CASE NO. 5447 - 5- classifies stemmed leaf tobacco under its Section 137. When Revenue Regulations No. 17- 67 undertakes to classify stemmed leaf tobacco under Section 141 in a manner different from the way it is treated in Section 137, it is no longer engaged in mere classification. It is already adding something to the law not in consonance with what the law itself specifically provides but contrary to it. It is not only engaged in amendment but in amendment contrary to a specific provision of the same law. The petitioner argues that Section 137 is for one tax purpose while Section 141 is for another. The fact is that provision is also present the reason for one must, thet�efm�e, be tt�eated in the other and in the same light. Section 141 of the Tax Code specifically excludes "fine cut shot��ts and t'efuse, clippings, cuttings stems and sweepings of tobacco resulting from the handling or stt�ipping of whole leaf tobacco" f"r�om the 75 centavos per kilogram tax when disposed of or sold. The condition in the statute is that the above must be exported or used in the manufacture of other tobacco products. The reason for the exclusion is that the excise tax will eventually be paid on the finished pt�oduct. The same reason applies to stemmed leaf tobacco which is intended solely as a raw material in the manufacture of cigarettes and other tobacco products. After the cigarettes at'e manufactut'ed, excise taxes will be paid. 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. If specifically excluded under the last paragraph of Section 141, taxes cannot be included under paragraph 2 of the same section by a mere interpretation of the petitioner. It is elementary that any taxes not specifically imposed by law cannot be mandated on the strength of an administrative regulation which purports to implement the said law. Only

DECISION C.T.A. CASE NO. 5 447 6- Cong~~ess, not the BIF~~ can pt~ovide fo~~ additional taxes. Revenue Regulations No. 17- 67 is correct when it provides for the procedure in enforcing the statute. It can state the J�~ules, taxation-wise, on sectwing permits, putting up factories and machineries, procuring raw materials, recording production, and disposing of the finished product. But the petitioner's powers are limited to procedure and implementation and not substantive law which seeks to add new taxes in addition to those specifically taxed under the law. This is especially true when the particular product being taxed by regulation is expressly excluded from taxes in another section of the same law and also in another law. The petitioner is arrogating powers to itself which it does not possess. The argument that stemmed leaf tobacco used as raw material is exempt from taxation only when it is from one L-7 manufacturer to another L-7 manufacturer suffers from the same infiJ-~mity. It is based on the BIR' s own Revenue Regulations V-39 which add to the law something which is not there. Using its power of classification, the petitioner has ventured into an amendment and amplification of the basic law. Section 141 taxes fine cut shorts and ~~efuse, scr~aps, clippings, stems and sweepings but the unnumbered paragraph after Section 141 (c) ex(~mpts these items if they at~e used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. The law defines and exempts certain raw materials on condition that excise taxes will eventually be paid on the finished manufactured product. The BIR has classified these raw materials in a restrictive manner-only from one L-7 to another L-7 when all that the law requires is that the excise taxes not collected at the start will eventually be paid once the tobacco product comes out in final form. For a wide variety of raw materials, there is double imposition by the BIR of excise taxes when the law obviously removes taxes at the start of the manufacturing process and imposes them only once-when the process is completed. Again,

DECISION C. T.A. CASE NO. 5447 - 7- double taxation is valid but only when it is provided by statute. It cannot be imposed through an interpretative rule. The petitioner's contention that the classification of stemmed leaf tobacco as "pal�~tially manufacttn~ed tobacco" under~ Reve nue Regulations No. 17-67 prevails over the definition of processed tobacco under Rep. Act 698 is fanciful to say the least. Revenue Regulations No. 17-67 is not a basic law. It is simply an implementation of the statutory 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 amend or repeal the express provisions of statutes enacted by Congress. How can the petitioner argue that an administrative regulation prevails over a statute or law? The petitioner states that Sections 141 and 137 of the Tax Code must be read and construed together. It explains that under Section 141 stemmed leaf tobacco is subject to specific tax. However~, '.mder�' Section 137 if 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, it is exempt from specific tax. It is very obvious that it is not the Tax Code which taxes on one hand and exempts from taxes on the other hand the tobacco involved. It is the addition of a definition of partially manufactured tobacco which clashes with the law itself and the regulatory conditions of BIR which restrict the application of the law to an extremely limited class that form the basis of BIR action. The petitioner engages in legislation and then uses its own administrative or quasi- legislative powers to add a certain class of tax which is neither expressed nor contemplated in the basic law. XXX X X }( XXX It appears that the case at bear~s similar~ facts and circums~ances as the aforequoted For~t une

DECISION C.T.A. CASE NO. 5447 - 8- Tobacco Corporation case. We therefore adopt the aforesaid ruling. Being similarly situated, Petitioner~ is entitled to the same interpretation given by the Court of Appeals because it is this Court's bounden duty to recognize and subserve itself to the wisdom arrived at by a superior appellate court. And since both parties have stipulated in open court that the amount of P252,018.75 has been paid to the BIR, (f'r1inutes of the Session: November~ 18, 1997' p. 48, this Cow~t has nothing more to do except to grant Petitioner's claim. WHEREFORE, premises considered, finding the petition mer~itor~ious and in accordance with law, the same is hereby GRANTED and Respondent is ORDERED to REFUND in favol�~ of La Suer~te Cigar~ and Cigar~ette Factor��y, Inc., the total amount of P252,018.75 representing erroneously or illegally paid specific taxes for the month of December, 1994. SO ORDERED. WE CONCUR: Ll9.~ ERNESTO D. ACOSTA Pr~esiding Jud~1e Associate~

DECISION C.T.A. CASE NO. 5447 - 9- CERTIFICATION I hereby certify that this 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. G--v,O~ ERNESTO D. ACOSTA Pr~esiding Judge Court of Tax Appeals