CTA Case No. 2486 (Decision)

- R F.:P l lRUC OF THE PHILJP P(N& / CO'JRT OF TAX APPEALS ot_'J.70N CITY LOREMAN I INC. I / Petitioner , - versus - C.T .A. CASE NO. 2486 CO~~ISSIONER OF INTERNAL REVENUE , Respondent. X- - - - - - - - - - - X DECI S I 0 N This has reference to an appeal from the decisi9n of re spondent Commissi oner of Inter- nal Revenue holding petitioner Loreman, Inc. liable for the payment of the aggregate amount of P552,000.00 as deficiency speci- fie taxes on its impo rtation of 11 Loreman 11 brand cigarettes on various dates during the early part of the year 1968. The facts as stipulated by the parties are, as follows: 1. The legal personalities and capacities of each of the parties are admitted; 2. Petitioner is a corporation organized and existing under t he laws 1~5

... -- DECISION - CTA CASE. NO. 2486 - 2- of the Philippines; 3. Petitioner , who was engaged in the business of importation of cigar- ettes, imported from Hongkong several shipments of "Loreman" brand of cigar- ettes at various dates during the early part of the year 1968 and paid the import duties and specific taxes levied on such shipments, as follows: CUstoms Official Date Arrount Receipts No. 2515929 2/13/68 1:% 16,000.00 24,000.00 2520357 3/04/68 40,000.00 40,000.00 335495 4/28/68 24,000.00 24,000.00 363143 5/24/68 32,000.00 40,000.00 347547 5/25/68 p 240,000.00 347695 3/25/68 349865 4/02/68 352196 4/15/68 TOTAL . . . . . . . . . . and as a result, the said shipments of cigarettes were released from Customs custody; 4. After aforesaid importations, respondent demanded the payment of def i- ciency specific taxes in the total amount of 1:%552,000.00 on the aforesai d shipments as follows: Derrand No. Date of DEmand Arrount 1. SID - 68 - 1 (P. 111, BIR rec.) July 3 1 1968 P 92,000.00 2. S'ID - 68 - 2 (P. 104, BIR rec.) July 9, 1968 184,000.00 3. S'ID - 68 - 3 (P. 103, BIR rec.) July 11, 1968 55,200.00 4. SID - 68 - 6 (P. 269, BIR rec.) Oct. 18, 1968 220,800.00 1:%552,000.00 1D 8

- - .. - DECISION - CTA CASE NO. 2486 - 3- 5. Warrants of Distraint and Levy and Warrant of Levy on Real Property were duly served on petitioner's officers on January 17, 1969 (pp. 138 and 139, BIR rec.), and petitioner requested a recon- sideration of the above-mentioned defi- ciency assessments in the letter dated January 21, 1969 (Pp. 146-147, BIR rec.); 6. In his letter dated September 26, 1968, respondent recommended to the Provin- cial Fiscal of Rizal the filing of criminal charge against petitioner 's President and Secretary/Treasurer, Manuel P. Gancayco and Lorelli L. Gancayco, respectively, for violation o f Section 125 in relation to Section i37 (b) (4) of the � National Internal Revenue Code, penalized under Section 352 thereof, insofar as aforesaid Demand Nos. STD-68-1, 68-2, 68-3 aggregating ;331,200.00 were concerned (Pp. 82-86, BIR rec.). The charge, a fter preliminary investigation by the Provin i al Fiscal of Rizal in I.S. Nos. 69-060 - 69-061 , was however, dismissed. (Pp. 157- 161, BIR rec.) ; 7. After the dismissal of the afore- said criminal charge, the respondent, in his letter dated January 5, 1973, and received by petitioner on January 26, 1973 denied peti- tioner's request for reconsideration and refused to set aside the above assessments for deficiency specific taxes (pp. 284~2871 BIR rec.) ; 8. The parties submit that the main issue in this case is whether or not the cigarettes imported by petitioner fall under the category of cigarettes wrapped in tin foil or cellophane or packed cartons covered with paraffin or wax, and mechanically packed, thereby justifying the respondent's assessment of deficiency specific taxes; and 9. The parties reserve the right to present additional evidence in support of their respective contentions. (Stipulation of Facts, pp. 59-61, CTA rec.) The records show that petitioner paid specific taxes on its importation of cigarettes under Section i 187

- -- DECISION - CTA CASE NO. 2486 - 4- 137 (b) (1) of the Tax Code. The deficiency spe- cific taxes demanded by respondent against peti- tioner is based under Section 137 (b) (2) (4) of the said Tax Code. (Pp. 103. 104, 111 & 269, BIR rec.} The sole issue to be resolved, as stipulated by the parties, is whether or not the cigarettes imported fall under the category of cigarettes wrapped in tinfoil o r cellophane or packed car- tons covered with paraffin or wax paper or in tin cans and mechan ically packed so as to fall under Section 137 (b) (2) (4} of the National Internal Revenue Code, thereby justifying the respondent's assessment of deficiency specific taxes against petitioner. The law involved is Section 137 (b) (2} (4) of the National Internal Revenue Code, prior to its amendment by Republic Act 6110, the perti- nent portion of which is hereby quoted for ready reference, as follows: "Section 137. Specific Tax On Cigars and Cigarettes . On cigars and cigarettes there shall be collected the following taxes: (a) Cigars XXX XXX XXX (b) Cigarett es. (l} On cigarettes containing Virginia type tobacco and/or flue-cured tobacco of ~eventy-one millimeters or less in length 19 3

DECISION - CTA CASE .NO. 2486 - 5- weighing one and one-fourth kilos or less per thousand, not wrapped in tin- foil or cellophane nor packed in car- tons or in tin cans, on each thousand, eight pesos: Provided, That if the length exceeds one and one-fourth kilos, the tax shall be increased by one hundred per centum. (2) On cigarettes containing Vir- ginia type tobacco and/or flue-cured tobacco of seventy-one millimeters or less in length weighing one and one- fourth kilos or less per thousand, wrapped in tin foil or cellophane or packed in cartons covered with paraffin or wax paper or in tin cans, on each thousand, twelve pesos: Provided, That, if the_length exceeds seventy-one milli- meters or if the weight per thousand ex- ceeds one and one-fourth kilos, the tax shall be increased by one hundred per centum. XXX XX XX XXX XX XXX (4) If the cigarettes taxable under sub-par agraphs (1), (2) and (3) hereof are mechanically wrapped or packed, the tax s hal l be increased by one hundred � and twenty per centum per thousand cigar- ettes. Cigarettes shall be considered as mechanically wrapped or packed when at any stage of the wrapping or packing, a machine or any mechanical contrivance shall have been used. XX XXX XXX XX XXX XX Every manufacturer or importer of cigarettes shall file with the Commissioner of Internal Revenue, on the date or dates designated by the latter, a sowrn statement showing the brand or brands of cigarettes manufactured or imported, their correspond- ing length in millimeters and weight in kilos per thousand cigarettes, whether con- taining flue-cured tobacco, wrapped in

-- DECISION- eTA CASE .NO. 2486 - 6- cellophane or tin foil, or packed in cartons with paraffin or wax paper, or in tin cans, and whether the cigarettes are mechanical- ly wrapped or packed. In the case of imported cigarettes, the sworn statement required here- in shall, in addition to the above information, be accompanied by a verified commercial in- voice of the manufacturer of the cigarettes as well as the consular invoice issued by a Philippine Consul, if any , containing the information that Philippine Internal Revenue strip stamps have been affixed to each and every pack of cigarettes qnd that each pack bears the inscription "For export to the Philippines." (Underlining ours.) Petitioner maintains that the importations in question was rightly assessed by respondent at ~8.00 per one thousand sticks under Section 137 (b) (l) of the Tax Code since the cigarettes , subject m9tter of the importations were "mecha- nically made", but not mechanically packed or wrapped, so that the assessment for deficiency specific taxes in question is not justified . (Memo. of Petitioner, pp. 114-119, CTA rec.) Respondent, on the other hand, maintains that the deficiency specific tax assessment against petitioner is justified in accordance with Section 13 7 (b) (4) of the Tax Code (should be Section 137 (b) (2) (4)), the imported cigarettes having been "mechanically made" and are, therefore, mechanically packed or wrapped . (Memo. of Res- pendent, pp. 149-150, CTA re c.) 20 0

- -- DECISION-: CTA CASE NO. 2486 - 7- The stand of respondent is not tenable. The records of this case show that when the various shipments of cigarettes imported by petitioner were landed in the Philippines, the necessary documents required for said importation were sub- mitted to the proper authorities and predominant in these documents was the description that the cigarette sticks were"Mechan ically made" and wrapped "in aluminum foil without cellophane" and "placed in corrugated cartons " (Exh. E, 12 and 12-A p. 121; Exh. J, 13 an~ 13-A, p. 122; Exh. 14 and 14-A, p. 123; Exh. U, 16 and 16-A, p. 196; Exh. P1 17 and 1 7-A,� p. 303; Exh. AA-1, p. 42; Exh. BB-a, p. 62; Exh. N-1, p. 55; Exh. F-1, p. 118; Exh. K-1, p. 119; Exh. D-1, p. 127; Exh. I-1, p � .129; Exh. V-1, p. 197; Exh. 0-l, p. 202; Exh. Q-1, p. 204; Exh. T-1, p. 207 and Exh. Y-1, p. 208, BIR rec.) Section 137 (b) (1) provides that if the cigarettes are not wrapped in tin foil or cello- phane or packed in cartons, the tax due is PB~OO per thousand sticks; if wra pped with tin foil or cellophane or packed in cartons covered with paraffin or wax paper or in ti n cans, the tax due pursuant to sub-paragraph (2) of Section .'\ 2 0 l

-- DECISION - CTA CASE NO. 2486 - 8- 137 (b) is ~12.00 per thousand cigarettes. If the cigarettes are mechanically wrapped or packed, the tax imposed under said sub-paragraphs (1)& (2) shall be increased by 120 percent. In other words, if the cigarettes under the ~8.00 class are mechanical- ly packed or wrapped, the tax becomes Pl7.60, and under t h e ~12.00 class the tax would be increased to ~26.40. The deficiency specific tax assessment against petitioner is based in this later classi- fication, that is under Section 137 (b) (2) (4). The records show, however, that the cigarettes imported by petitioner were "mechanically made", (Exhs. ul2-A", "13-A", "14-A", "16-A", and "17-A", Pp. 121, 122, 123, 196 & 303, BIR rec., respect- ively), but the "cigarettes were handpacked and were wrapped in aluminum foil without cellophane and packed in corrugated cartons." (ITALIC OURS; Resolution, Provincial Fiscal of RizaJ~, pp. 5-8, CTA rec.; pp. 6-7, Memorandum of Petitioner, pp. 115-116, CTA rec.) The cigarettes most cer- tainly, under this circumstance, could not be classified under sub-paragraph (b) (2) and (4) of Section 137. As correctly ass~rted by petitioner, the mechanical packing or wrapping stated in Sec- tion 137 (b) (4) of the National Internal Revenue Code cannot be equated with the making '..).. 0 ') (-..

DECISION - CTA CASE NO. 3011 - 9- of the cigarettes since Section 137 (b) (4) makes reference to the cigarettes taxable under sub-paragraphs (l) ( 2) and (3) and providing the words "wrapped" or "packed". To do other- wise would then be to substitute the words "wrapped" and "packed" stated in sub-paragraph (l) (2) and (3), with the wor:d "make" or "made" (or the act in which cut tobacco is rolled in the paper bobbins), and we would come out with a not to very sensible provision. But what truly happens when we make the substitution of terms? We come out , f o r example, with the uncalled for provision "(l) on cigarettes x x x x, not "made" or"rolled" in tin foil or cellophane nor "made" or "rolled" in cartons or in tin cans x x x." Who ever heard of cut tobacco "made" or "rolled" in tin foil, or "made" in cellophane or "made" or "rolled" in cartons or in tin cans? In other words, to interpret the cited provisions thus would only result to absurdity. The most logical interpretation should be that, the word "wrapped" or "packed" found in said Section 137 (b) (2) (3) and (4) refers to the act of placing ci9arettes, made or already rolled in paper bobbins, in cellophane or in tin foil, or packed in cartons with paraffin or �~ ...: . 203

DECISION - CTA CASE NO. 2486 - 10 - wax paper, or in tin cans mechanically. The cigarettes imported by petitioner cannot, there- fore, fall under the category of cigarettes "wrapped in tin foil or cellophane" or packed in cartons with paraffin or wax paper or in tin cans (Sec.l37 (b) (2) (4) NIRC) and "mechanical- ly wrapped or packed" because there is a great difference in the making of cigarettes and the wrappi ng and packing of the same. IN VIEW OF THE FOREGOING, the decision of respondent Commissioner of Internal Revenue appealed from is hereby set aside. Respondent's deficiency tax assessment in the total amount of P552,000.00 is hereby cancelled and declared to be without legal force and effect. Without pronouncement as to costs. SO ORDERED. Quezon City, ,-- . ROAQUIN ssociate Judge I CONCUR: ~~~ Presiding Judge -n;;r;,/c /LP btlff I ALEX z. REY d - - � Associate Judge 2 0 �1