CTA Case No. 4515 (Decision)

REPUbLIC OF TIE PIHLIPPINES COURT OF TAX APPEALS UUEZON CITY LA SUERTE CIGAR AND CIGARETTE l!t' C.T.A CASE NO. 4515 FACTORY, Pl~omulgated : Petitioner, JUL131li- - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - DECISION This is a case involving an assessment in the amount of P34,904,247.00 as alleged deficiency specific tax on the Petitioner's imported and locally produced stemmed-leaf tobaccof Petitioner is a domestic corporation engaged in, among others, the importation and local P'-lrchase of stemmed leaf tobacco which it uses as a raw material in the production and manufacture of cigar and cigarettes. 1990, Petitioner received a letter from the Respondent demanding payment of P34,934,827.G9 "as deficiency excise tax on your importation and local purchase of stemmed leaf tobacco covering the period from January 1, 198G to June 30, 1989, exclusive of surcharge and interest, within ten (10) days from receipt hereof." <Ex~. "H"> The demand letter was anchored on Section 141 976

.._..- DECISION �- C.T.A. Case No.451S - 2- (b) of National Internal Revenue Code of 1977. Which respondent interpreted as follows: Section 141 of the Code provides that there should be collected.a taH of P0.75 on each kilogram of the following products of tobacco: "(b) Tobacco prepared or partially-prepared with or without the use of any machine or instrument or without being pressed or sweetened. " <Underscoring supplied) Stemmed-leaf tobacco is partially- prepared tobacco as provided under Section 1 <L> of Revenue Regulations No. 17-67. Further, under the penultimate paragraph of the sa�e section, it provides that fine-cut shorts and refuse, scraps, clippings, stems and sweepings of tobacco resulting from handling and stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sqld,' without the prepayment of the specific taH when the ~ame are to be used in the manufacture of other tobacco products on which the eHcise tax will eventually be paid on the finished product. It will be noted from the above enumeration, however, that stemmed leaf tobacco is not among the products e~empted from the payment of ta~. On Jam.tal~y 15, 1990, Petitioner filed a letter of protest dated January 12, 1990 stressing "that the BIR assessment was based solely on Sec. 14 1 <b > of the NI RC without, however, applying Section 137 thereof, the more specific provision, which eHpressly allows the sale of stemmed leaf ~obacco as raw m~terial by one manufacturer d~rectly to another without payment of the <excise> La Suerte purchased stem11ed Leaf tobacco from � 977

DECISION - C.T.A. Case No.4515 - 3- manufact\.ll~e.~s (Petition, p. 3) "Moreover, La Suerte made reference to a BJR Ruling dated 12 December 1972 wherein the BJR expressly ruled that under Sec. 137 of the NIRC, the sale of partially manufactured tobacco from a wholesale leaf tobacco dealer <L-3R> to a manufacturer of tobacco products <L-7~> "for use in the manufacture of cigar and cigarettes may also be allowed without prepayment of the tax'"� (]bid., See full lettel'' in Exh. 1>. Petitioner received a letter On November 2G, 1990, from the Respondent dated August 31, 1990 denying Petitioner's protest with finality <Exh. .J) and reiteJ~ated its demand to pay the amount of P34, 904, a47. 75 computed as follows: STEMMED-LEAF TOBACCO RATE OF TAX SPECIFIC TAX Importer 13,918,465 kls. )( P0.75 P101 438,848.00 0.75 24.465.399.00 Local 321 6201 532 kls. )( P34,904,247.00 Total Amount Due <Basic Tax) . ' : :~ . :��~ .�. represent ~ng � 'C:IeJ ic.iency specific tax exclusive of .�' \ . ' .. ' ~ '� -:. ' :, . :� � � " .. . 'i1 ' !.(� . ' '� .�. : ~.~ 1 i able p\.wchased and Hence, this ippeal. ~ �' .~.. �, . . ' t T~e i~~~~ is: Whether or '\. ;!,' �� ~ to pay the alleged specific tax on ~pc~ll~ �,� 1 978

/ DECISION - C.T.A. Case No.451S - 4- imported stemmed-leaf tobacco used as a raw material in the production and manufacture of cigar and cigarettes? We answer in the negative. This is not a case of first impression. This Cour't has already ruled out in a number of cases before �involving the same question of law. ln a similar case i nvo 1 vi ng the same pat~t i es and the same issue (La St.aert e . Cigar and Cigarette Factory versus Commissioner of Internal Revenue, CTA Case No. 4617, dated September 6, 1994) We already ruled, thus: Respondent l"el ies �on the pr~ovisions of Sect ion 141 (b), 127 (a), and 128 of the Tax Code as basis for the deficiency specific tax assessment, which we quote hereunder: "SEC. 141. l"obacco Products. There shall be collected a tax of seventy- five centavos on each kilogram of the following products of tobacco: <a) XXX XXX XXX (b) Tobacco prepared or p~rtially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and (c) XXX KKK KKK ."S~C. !27�. Pdy�enl; oF eKcise taKes on do�estic products. (al Persons liable';. ti�e For pay�ent. � �~ Unless otherwise especially allo~e:d ex.:;ise taxes on do~estic products shall� be paid by the manufacturer or producer before removal from the pla~e of production: Provided, that the excise tax on locally manufactured petroleum products and indigenous 979

DECISION �-- C.T.R. Case No.4515 5- petroleum levied under Sections 145 and 151 (a) <4>, .~espectively, of this Title shall be paid within 15 days from the date of removal thereof from the place of production. Should domestic products be removed from the place of production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax due theJ~eon. XXX XXX XXX "SEC. 128. Pay�ent of' eNcise taNes on i�ported articles. taJ Persons liable. - Excise taxes on imported articles shall be paid by the owner or importer to the customs officers, conformably with the regulations of the Department of Finance and before the release of such articles from the customhouse, or by the person who is found in possession of articles which are exempt from excise taxes other than those legally entitled to exemption. ln case of tax-free articles brought or imported into the Philippines by persons, entities, or agencies exempted from tax which are subsequently sold, transferred or exchanged in the Philippines to non- exempt persons or entities, the purchasers or recipients shall be considered the importers thereof, and shall be liable for the duty and internal revenue tax due on such importation. The tax due on such article shall constitute a lien on the article itself, superior to all othel~ chat~ges o�~ 1 i ens, i .~,~espect i ve of the possessor thereof. tbJ Rate and basis of' the e:Hcise taN on i�ported articles. Unless otherwise specified, i mpm~t ed articles shall be subject to the same rates and basis of excise taxes 980

- ............ DECISION - C.T.A. Case No.4515 - .6 - applicable to locally manufactm~ed at~t icl es." and its implementing regulation Revenue Regulations No. 17-67, as amended, pet~t i nent portion of which provides: "REVENUE REGULATIONS NO. 17-67 [as a�ended by Rev. Regs. Nos. 9-72 (Sept. 27, . 1972J, 1-73 (Dec. 26, 1972J, 5-75 (Nov.11, 1975), and 1-76 <Nov. 16,1976)] SUBJECT: Tobacco Revenue Regulations on 1 eaf, scJ~ap, othel.. partially aanufactured tobacco and other tobacco products; grading, classification, inspection, shipments, e~portation, importation and the manufacturers thereof under the provisions of Act No. � 2613, as amended. To: All Internal Revenue Officers and Othel"'S Concerned: Sect i o.n 1 � ~~~ ~XX ~~)I Definitions of XXX )()()( X )IX <m> "Partially aanufactured tobacco" - includes: (1> "Stemmed leaf" tobacco, handstl~i pped partially clean, good, ft~ee fl~oll broken leaf only, 11old and dust." We shall discuss each of the items appearing in the preassessment notice issued by 981

.... ...,...- DECISION C.T.A. Case No.4515 - 7- respondent's office holding petitioner liable for deficiency specific tax. The first and third items will be discussed .jointly. In lte� No. 1, l~espondent assessed the petitioner for specific tax on locally purchased ste��ed-leaf tobacco fro� local suppliers pursuant to Section 141 (bJ of the Tax ~ Code. Petitioner's pm~cha��s of 14,703,644 kilos of local steam�d-le~f tobacco was asse&sed a specific tax at the rate of P0.75 per kilo or a total of P11,027,733.00. ln Item No.3, respondent assessed petitioner the P0.75 per kilogra� specific tax on its sale of 157,200 kilos of stemmed-leaf tobac~o from an L-7 account to Associated Anglo-A�erican Tobacco Corporation equal to P1179 900.00 plus 25~ surcharge of P29,475.00 or a total of .Pl47, 375.00. In refuting the arguments raised by respondent, petitioner insists that the applicable provision of law is Section 137 of the Tax Code, and not Section 141 (b), which Pl"'DY ides: ��sEC. 137. Rvaoval of tobacco products without prepayaent of tax. - Products of tobacco entirely unfit for chewing or s�oking may be removed free of tax for agricultural or industrial use, under such conditions as aay be prescribed in the regulations of the Department of Finance. St1�med leaf tobacco. fine cut. shorts, the r~efuse of finR-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one ~tanufactyrer directly to another. without payment of the tax under. such condit~ons as May be prescribed in the r~~~lations of the Dep~~tment of F i nani::t?. "�temmed leaf tobaJ;co", as herein used means leaf tobacco which has had the stem or midrib removgd. 982

DECISION - C.T.R. Case No.4515 8- The term does not include broken leaf tobacco." <Emphasis Ours.> There is nothing abstract in the language of the said provision. The aforequoted provision is clear and leaves no room for strained interpretation. The language is.clear and unequivocal and must be taken to mean e~actly what it says. "It is the fundamental duty of the courts to apply the law. Construction and interpretation come only after it has been demonstrated that application i� impossible or inadequate without them." CPeople v. Mapa., G.. R.� No. L-22301, August 30, 1967. > The records will show that petitioner's local purchases of stemmed-leaf tobacco were acquired from various manufacturer and the same were used as t~aw materials for the manufaC't l..n~e of cigars and cigarettes. ~~~ )(~~ By and large the term "manufacturers" as mentioned in Section 137 of the Ta~ Code can be interpreted to mean both "manufact urvr of# tobacco" and/or "manufacturer of cigars and/or cigarette" as defined in Revenue Regulations No. 17-67, as amended, to wit: "Section 2. Definition of terms ~~~ ~~)( )()()( (i) "Manufacturer of tobacco" Includes every person whose business it is to manufacture tobacco or snuff or who employs others tp ~anufacture tobacco or ~~~fi, '~B~~her such ~~ri~t~~ture ~��b~~~r ~~utting, pre~~iri~ (ntit � b~li~g>, ~~bbing grinding, or (grating> any raw or leaf tobacco, or Othet~wi se preparing raw or leaf tbbacco, or manufactured or partially manufactured tobacco and snuff, or 983

DECISION - �C.T.A. Case No.4515 - 9- putting up for consumption scraps, ~efuse, or stems or tobacco resulting from any process of handling tobacco stems, scl~aps, clippings, or waste or sifting, twisting, screening or by any other process. (j) ~Manufacturer of cigars and/or cigarettes"- lncludes those persons whose business it is to �ake or manufacture cigars and/o~ cigarettes for sale, or who employ others to make or manufacture cigars and/or cigarettes for sale; but the term does not include artisans or apprentices employed to �ake cigars and/or cigarettes from material supplied by the employer, the latter being lawfully engaged in the manufacture of cigars and/or cigarettes. XXX XXX XXX Since petitioner's purchases of local stemmed-leaf tobacco manufacturers and the sam~ were used as raw materials in the production of cigars and cigarettes it is therefore clear that it is covered by Section 137 of the Tax C~d,.. . Thus., petit i one�~' s purchases of local sie"'�ed-Jeaf : �' ~pbacco from . Vi'J--il"tJ'\.tS tobacco ~~'n�faFturllrs .�.ire ex~�.P.:~ � from �c;: th'e' :payment of thi!J"s~eci:fit:��t~,.;� ::". :-:�_,_. �� .<" '~ '.� . �. ( . Y.�::. o.r ;: ��.�.; ~:-. ;;-::~t�~ ;~I . �.. ,� . F~rfh~r~~~e;� Seciion 20 (a) of Reve;~e Regulations No. V-39 [The Tobacco Products Regulations], as amended, even bolsters the provision of Section 137 of the Tax Code considering that stemmed-leaf tobacco was .specifically mentioned as an exemption from the ~ayment of the specific tax. Section 20 (a) of said regulation provides: 984

DECISION --� C.T.A. Case No.4515 - 10 - "Section 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes. -<a> Sale of stemmed leaf tobacco, et., by one fact ol~y to another. Subject to the limitations herein established, pl~oducts of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or indu~trial use; and stemmed leaf tobacco. fine-cut shorts, the refuse of fine-cut, chewing tobacco, refuse, scraps, cuttings, clippings, and sweeping of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of the specific tax. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cutting, clippings, and sweeping of leaf tobacco or partially manufactured tobacco or other refuse of tobacco may be transferred from one factory to another under an official L-7 invoice on which shall be entered the exact weight of the tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the page for removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving th~ tobacco under heading "Refuse, et., received from other factory", showing date of .,~ecei pt, assessment and invoice numbers, name and .address of the consignor, form in which received, and the net weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another."<Emphasis Ours.> The term "manufacturer of tobacco pl~oduct s" has been defined to include all 985

DECISION -- C.T.A. Case No.4515 -��� 11 -� persons engaged in the manufacture of any of the forms of tobacco such as cigars and cigarettes [Sec.2(bJ, Revenue Regulations No. V-331. When the law and regulations enumerate and define various categories of manufacturers subject to the excise tax and thereafter exempt them if the sale of stemmed-leaf tobacco was made by one manufacturer directly to another then the term "~anufacturer" as broadly used shou 1 d be i nt et~pret ed to mean "manuf act ur~ers of tobacco" and "mant..�f act �.n~ers of tobacco pt~oducts" m~ "man~.tfacturet~s of cigar~s and cig;:wettes". The whole concept being that the stemmed- leaf tobacco will not be sold or transferred a~ is but is sold in bulk to be used as raw materials in the manufacture of tobacco products such as cigars and cigarettes wherein the corresponding excise tax will eventually be paid on these finished products. The t~ationale, is that the tax incidence is merely postponed for it will later be collected as part of the excise tax on the finished product <cigar and cigarettes>. Thus, the purchase of stemmed-leaf tobacco to be used as raw. materials by petitioner in its manufacture of cigar and cigarettes is therefore exempt from the payment of the specific tax. With respect to its sale of stemmed-leaf tobacco with Associated Anglo-American Tobacco Corporation <Item No.3), petitioner also maintains that it need not pay the specific tax thereon pursuant to Section 137 of the Tax Code. Petitioner has proven that it is a manufacturer of cigars and cigarettes as evidenced by its Mayor's Permit issued by the Mayor of Para~aQue, Metro Manila for the years 1~89: <Exh. CWi p.231, CTR record> and 1990 (EHh �. c~-1' P� 232, CTA eficord)' stating that it is~�; �~rge~aed � in .Pt!��-~h~ss ::,, i"S a Cigarette Manuf~ctu~~~-� Theret~r;, ste~~~~~1~af tobacco sold in bulk by petitioner, a m~nuf~~turer of cigars and cigarettes, to another manufacturer, Associated Anglo-American Tobacco Corporation, is exempt from the payment of the specific tax. The stemmed-leaf tobacco sold can thus be removed without the prepayment of the specific tax. 9, 86

DECISION C.T.n. Case No.4515 -- 12 -- This Court has observed that while Section 127 of the Tax Code requires that excise taxes on domestic products shall be paid by the manufacturer or producer before removal from the place of production, the bulk of the assessment herein imposed against the petitioner is on the basis that it is a possessor, having bought the stemmed-leaf tobacco from other tobacco manufacturers or local suppliers. In other words, ~he law identifies the person or taxpayer primarily liable and yet respondent failed to enforce its collection against them although they are known to the respondent. To show her inconsistency in enforcing the procedure to collect, petitioner is likewise being asses~ed not as buyer-possesor but this time as manufacturer- seller of stemmed leaf tobacco to R~soci~ted Anglo-American Tobacco Corporation. We do not wish to question the way respondent enforces the law, but for the guidance of taHpayers a uniform enforcement of tax laws may be suggested. While it is true that the respondent may collect excise taxes even against a mere possessor, she is first required to collect the same from the manufacturer o~ producer, as the entity primarily liabl~ to the said tax. To interpret otherwise would render the first portion of Section 121 a mere surplusage which could not have been the intention of the lawmaker. It is only after there is a clear showing that the manufacturer or producer could not pay or failed to pay the excise tax for some valid or justifiable reasons could the respondent run after the possessor. The way respondent enforces the law may not hav~ been the intention of the lawmaken~. While it is true that stemmed-leaf tobacco at~e cla5sified as "pal~tially manufactured tobacco" undeJ~ Section 2(m) of Revetlue Reg�.ll�atio-ns No. 17-E�7, as am~:rJded, still it will be ob~frved that in Sectiori~43 of the same Revenue Regulation, falling u~der Chapter XI entitled ��"Pat~tially manufactured tobacco and tobacco products for export", it prov~des: 987 /

DECISION ���� C.T.A. Case No.4515 .. 13 .. Section .1�3- Tobacco exe�pt ed fro� specific tax. No specific tax s h a 1 1 be co 1 lo.;e~c~t~e=-d~~o~n:u.-.~t...:h~e..__f~o~l~l~0~\.'!...ll!':-.1-ln~g'-':=- <a> Leaf tobacco and partially manufactured tobacco, except imported leaf tobacco, unless entered in the L-7 official register book. (b) Manufactured products of tobacco for export and/or use by the ~rmed Forces of the Philippines or the United Stat~s "Armed Forces, and other entities specifically exempted by law." (Emphasis Out~s.} It is clear from the above-quoted provision that no specific tax shall be collected on partially manufactured tobacco including stemmed-leaf tobacco. Thus, even assuming arguendo that stemmed- leaf tobacco falls under the cat~~ory of partially manufactured tobacco still the same is exempted from the payment of the specific tax under Sec. 43Ca) of Revenue Regulations No. 17-67, as amended. There is no showing that the provision of Section 43(a) has been repealed or superseded by another regulation. The respondent has no right to rule otherwise because a revenue regulation issued pursuant to law has the force and effect of law unless found to be contrary to law. XXX }()()( )( )( )( Fl.wthet~mOJ~e, :it is an el ementar~y r�.ll e in statutory construction that a statute must bE? read or construed as a whole or in its entir~ety. All p.owts, provisions, or~ sections, must. be t~ead,, considet~ed ot~ "constt~ued togethe>r, an~ ~~ch mtis~ be consjder~d with,irespect to all the other~s, ailC:J .. an J1i:'ir.~o,ny with the whole. <Ht. Martin,. t?tp � ~~- � v. Ibervill�> Parish,. et. al., 212 La. 886,. cited in MARTIN's Statutory Construction, p. 132.) Under this rule, that construction is favored which will render e>very wot~d opE"t~at i VP rathet~ than one> which makes some wo,~ds idle and nugat.ot~y. (Shillloneh v. Ti llanan, 1 P. 2d 7 154; ibid.) Thus, cow~t s 988

DECISION -- C.T.A. Case No.4515 - 14 - are duty bound to adopt a construction that will give effect to evet~y pat~t of a statute, if at all possible, follPwing the maxim nut magis valeat quam pereatu <that construction is to be sought which gives effect to the whole statute). <Al�eda v. Florentino, 6.R. No~ L- 23800, Dece�ber 21, 19G5.> I~ the case at bar, there being no conflict with the provisions of Section 2<m> and 43 <a> of Revenue Regulations No. 17-67, as amended, the local purchases of stemmed-leaf tobacco classified as partially manufactu~ed tobacco are therefore exempt from the specific tax. Anent the second item, regarding the alleged deficiency specific tax on imported stemmed-leaf tobacco in the amount of P582,167.25, respondent applied the provisions of Sections 128 and 141(b} of the Tax Code. At this j1.mcture, petitioner pointed that it imported foreign leaf tobacco from various manufacturers of tobacco from the United States of America. These were properly recorded in its L-7 <see Exhs. DA up to DS-4, inclusive; and Exhs. DA-01 through DS-31, inclusive) and ~-7-1/2 <see Exhs. FA to FP, inclusive> reg i st et~s. Section 137 of the Tax Code does not make any distinctibn whether the sale of stemmed- leaf tobacco by a manufacturer to another is imported or local. What is essential is that t~e sale of stemmed-leaf was made by a manufacture~ directly to another to be used as raw . !'Jat el~i al in its produc;t i on';t:ln ot~der that th~ ~ame maY. b~ .~emoveJJ wit.ho�..,~ �the payment of ttl~ exci s~''tax: . . ,::�:~ . .. ' . '; '.�. <'�:� �. ( ,. . .. . �;� ..�..'J._.~\~;>:� :<��~.'-':;�: ~ _�: -~,;->/. . ��.-:-~- �� . ��<~>,..-.~~- �. ' ��� :.~:f.. .. �'� appea�~s d~sfi~~f'ion._':~~, t~ There tq be. t:W th~ t~~~ ~~~nu~a~tu~i~~ as �meritioned i~�se~tion 137 of the Tax Code. The manufacturer that supplies stemmed-leaf tobacco may either be foreign or local suppliers. Where the law does not distinguish we should not distinguish. There is nothing cryptic nor abstract in the language of the said provision as would _pose an ambiguity in its application. We should ensure 989

DECISION �- C.T.A. Case No.4515 - 15 - the continued application of said provision as it is in all fours with the case at bar. )()()( )()()( )()()( As a rule no specific tax shall be collected on leaf tobacco and partially �anufactured tobacco <which includes stem�ed- leaf tobacco), except imported leaf tobacco, unless entered in the L-7 official register book [Sec. 43 (a) of Rev. Regs. No. 17-67, as amended]. Thus, while it is true that i�ported leaf tobacco is subjected to the specific tax still the same is exempted if entered in the L- 7 official register book. For its part, petitioner has amply proven that the imported tobacco were properly recorded in it~ L-7 and L-7 1/2 official register book <see Exhs. DA to DS-4; DA-01 to DS-31; FA to FP, all inclusive). Having complied with the requirement of Section 43<a> of Revem.1e Regulations No. 17-G7, a~ a�ended, we see no reason why petitioner should not be exempted from. the payment of the specific tax in question. WHEREFORE, in view of the foregbi ng, W& find the petition for review �eritorious and the same is hereby GRANTED. Respondent's decision dated April 29, 1991 is hereby set aside and the formal assessment for deficiency specific tax in the sum of P11,757,275.25 subject of respondent's letter, dated January 30, 1991, is deemed cancelled. And in a separate concurring opinion, this Ponente opined that: As ~~in\ed ~ut�by the majority opinion '\;ax while i.lit~or:t;ed leaf 1::R!Jacco ~~: subjected to specific. still the� same _'::i~ exempted if intered ~n~.the L-7 official rej~�ter book. On this poin.;~petitioner has prq~eri b~ sufficient .evidence that the imported le~f tobacco were properly; r~corded in its L-7 ~bd~~~~j 1/2 � officiaJ.. rE'~ister books. �� � �.�__ � The above provision must haVt' �. <H"(''P the reason why for a long period of time unt:il 1990 990

DECISION - C.T.A. Case No.4515 - 16 - when assessment was reported by the respondent revenue examiners, the BIR has not been requiring payment of specific tax on leaf tobacco whenever used as raw material in ~he manufacture of tobacco finished products. This situation is confirmed by Atty. Ricardo Aquino, Chief of the Field Operation Division of the BlR, that prior to 1989 the BIR did not enforce the P0.75 tax on partially manufactured tobacco <T.S.N. June 23, 1993, p. 10>. This court would like to take note that the same situation confronts the other cigarette manufacturers as similar cases involving these manufacturers are also pending with this court. Granting that error may have been committed in the interpretation of the law, the situation may not be corrected by just i~suing an assessment but more equitably by amending the aforequoted provision of Revenue Regulation No. 17-67. As pointed otlt by the majority opinion, the Commissioner of Internal Revenue alone may not supersede a regulation issued by her superior. This will be a violation of the provision of Section 245 of the Tax Code which grants the Secretary of Finance the ~uthority to issue rules and regulations. Th� proper thing that the Commissioner should have done under the circumstances is to amend the subject revenue regulation but the same may not also be given retroactive effect pursuant to Section 246 of the same Code, providing for the non- retroactivity of any change in rules and regulations if it will prejudice the taxpayer. Administrative agencies should likewise adhere to administrative due process and orderly change in the administt~ative regulations, for the public especially businessmen are guided by what the administrative agencies promulgate in the conduct of their business. Had petitioner been aware that the imported leaf tobacco would be subjected to specific tax it could have incorporated the said tax as part of its cost which it could pass on to its consumer. In this particular case, petitioner has no hope of .recovering the same for no fault of its own but relying faithfully on an existing regulation. 991

DECISION - C.T.A. Case No.4515 - 17 - Not only that. In a later case, <Fortune Tobacco Corporation vs. Co��issioner of Internal Revenue, CTA Case No. 4587, dated November 23, 1994) involving th� same issue, We again ruled for the assessment's dismissal. Said We: The is s1.1e is not new. The question har. already been passed upon in C.T.A. Ca~e No. 4G1G, pl"omulgated October 6, 1994, involving the same parties herein and the analogous issue, where this Court set aside respondent's assessment of deficiency eMcise taM on stemmed leaf tobacco principally because under Section 1-b of Republic Act No. 690 entitled "An Act to Limit the Importation of Foreign Leaf Tobacco~ . as a�ended by R.A. 1194, stemmed leaf tobacco is specifically eMcluded from the definition of processed tobacco. In the absence of a statutory definition of what is the meaning of "tobacco prepared or partially prepared" we may adopt the definition of law on "processed tobacco" because �its definition clearly refer,.s to tobacco being prepared for manufacturing purposes which for ready reference is being q\.1oted below: "Section 1-b. By processed tobacco is meant leaf tobacco which is either blended, cased, flavored, ready-cut or cut fillers ready for manufacturing purposes and shall not include tobacco leaf only the stem of which is removed. MMM" In accordance with the above definition, "processed tobacco" cannot possibly refer to finished tobacco products but to tobacco� leaf being prepar~d so that it will be ready for manufactm~ing pm"poses similar to "prepared or partially prepared tobacco". In fact, under Section 2<m> of Revenue Regulation No. 17-G7 defining what is partially manufactured tobacco, "ready-cut Ol" cut fillel"s" included in the phrase "processed tobacco" is also specifically enumerated, among others, as one 982

DECISION - C.T.A. Case No.4515 18 - type of partially manufactured tobacco. HoweveJ~, the same revenue regulation � 1 i kewi se incl\.aded "stemmed leaf tobacco" as a type of partially manufactured tobacco which by definition of law is specifically ~xcluded. ln case of this conflict, the rule in statutory construction is very clear that said provision of the implementing regulation which is contrary to law is considered null and void and of no effect. This construction is specifically true in the case of tax statutes because statutes imposing tax are strictly construed against the state and liberally in favor of the ta~payer. This is b~cause tax laws operate to impose tax burdens on the public or to restrict them in the enjoyment of their property and the pursuit of their occupation. Thus, in the interpretation of such statutes it is the established rule not to extend their provi~ions by implication, beyond the clear import of the language employed, or to enlarge their scope as to include matters not specifically pointed out. ln case of doubt, they are construed most strongly against the government. <Gould vs�� Gould, 62 L. ed. p. 211, cited in the Handbook on Statutory Construction by Ruperta Martin, 1972 ed. p. 193.) This stJ~ict interpt~etation is especially true in the case of specific taxes because these taxes are those imposed on specified articles, such as the ta~i'!> � on articles mentioned in Sections 123 to 148 of the National Internal Revenue Code (now Sections 126 to 151> <Shell Co. vs. Vano, 94 Phi 1. 389). Concerning the argument of the respondent that unlike in Section 137 of the Tax Code, stemmed leaf tobacco is not specifically mentioned in .the. penultimat,"e:' 'pa,..;;.,graph a�f���, Section 141 as among thosfi' not-::'_-~ubject �.to specific ~ax when used in the m~~uf~cture of other tobacco products on which the excise tax will eventually be paid on the finished product and therefore subject to specific tax. This court believes that the legislature has to provide the said exemption in Section 141 because the same section imposes specific tax on those specified items under subletter<c>, 993

DECISION - C.T.A. Case No.4515 - 19 name 1 y: fin e--ct.lt shorts and l~e fuse, scl-ap, clippings, cuttings, stFms and sw~epings of tobacco. Stemmed leaf tobacco is not included because in the fi,~st plac:e, it i~ not be-ing taMed specifically under said section. Respondent merely expanded the meaning of "pen"'t i ell 1 y mant..t fact t..wed tobacco" to inc 1 t..tde within the &cope of stemmed leaf tobacco by implication contrary to the aforementioned rule on statutory ~onstruction. On th~ other hand, Section 137 bf the Tax Code mention5 stemmed leaf tobacco among those not subject to specific tax when sold by one manuf~cturer directly to another manufacturer. Does i t mean when those items mention~d are not sold by one manufacturer to another, these items are already taxable~ If our answer i~ yes, why then cH~e impol-ted leaf ttd~H\\cco not taxable? Maybe your answer would be because no proYi&ion in the Tax Code imposes specific tax on leaf tobacco. Rnd further because it is being used as raw materials in the manufacture of other tobacco products on which the e~c:ise tax will evPntually be paid. But is it not ~ fact that 5temmed leaf tobacco lik~ lea~ tobacco is not also taxable under any provision of the Tax Code and likewise being us~d as raw materials in the manufacture of oth~r tobacco products on which the excise taM will eventually be paid. Why then will there be a different tax treatment just becau~e one provision of the Tax Code exempts stemmed leaf tobacco from spPcific tax under certain conditions. Following, the strict rule ag~inst taxation as explained above, we cannot imply that stemmed leaf tobacco will be taxable if it failed to meet the condition set forth under said ~ection in the absence of a clear provision taxing the same. The obviou~ intention of Sections 137 and the penultimate pa;agr~ph of Section i4t is ntit to taM the articles� enumerated ther~in but; to exempt th~m from being taxed when those a~ticles will be utilized i~ the manufacture of~f~nished tob~cco products op which the specific . taM will eventually be paid, otherwise, it~~ill lead to double taxation. Although double� ~~~ation is not prohibited in this jt.n-isdict~on, Z�qje same is however bFing discouraged be~~~~F of its 994

DECISION -- C.T.A. Case No.4515 20 - disinc~ntiv~ ~ff~ct. ln accordanc~ with th~ cardinal rul~ on statutory construction, l~gislativ~ int~nt must be ascertained from a consideration of th~ statute as a whol~ and not of an isolated part or a particular provision abov~ <Aboitiz Shipping Corporation, et al vs. The City of Cebu, ~t al., G.R. No. L-145&&, March 31, 1965, cited in th~ Handbook on Statutory Constt~uction by Rltp~rto Martin, pp. 42-43>. Th~ rule has b~en to e~empt raw mat~rials or even semi-finished products from ta~es if it will be utilized in the manufactur~ of articles subj~ct to specific ta~. So that under Se~tion 103Ce> sal~ or importation of raw materials to b~ used by the buy~r or importer hims~lf in the manufactur~ of petroleum products Ce~c~pt lubricating oil and gr~as~> subject to e~cise ta~ is not subj~ct to value added ta~. Even finish~d products such as wines and distilled spirits for treat�~nt of tobacco l~af to be used in th~ manufacture of cigars and cigarettes may be withdrawn from bond free of e~cise ta~ pursuant to Section 130 of the Ta~ Code. R~moval of spirits for rectification need not pay e~cise ta~ under Section 134 of the same Code and under Section; 145<1> & <13>, ta~ credit is granted on feedstock utilized in the manufacture of e~ciseable articles and naptha shall be subject to zero rating if utilized as raw material in the production of petrochemical products, t"'espectively. Similarly, s;te~tmed leaf tobacco which is basically a raw material in the manufacture of other tobacco products such as cigars and cigarettes on which the specific ta~ will eventually be paid will have to be e~empted also from specific ta~. The construction is done pursuant to the spirit of the law dr the reason for it. The spirit or intention of th~ law prevails over the l~tter thereof. <U.S. vs. Vee Ngee, How, D.C. Cal. 105, F. s1..1pp. 577, Martin, op cit;': p!&4>. ~� - t .. Gt"'ant ing for purposes of at7gli.tinent that the tet"'m "pat"'tially man\.tfactm.. ed to~~cco" includes "stemmed le~f tobacco", the Bu~~ju of Internal Revenue i~~elf pursuant to Se~tipn 43<a> of Revenue R~gulation No. 17-67, tob~~c~ �~8roduct r�egulation; �which pl"'ovides: � ' ��� 995

DECISION - C.T.A.�Case No.4515 - 21 �Section 43. Tobacco exempted ft-om speci fie tax. - No specific tax shall be collected on the following: (a) Leaf tobacco and oartially manufactured tobacco, except imported leaf tobacco, unless entered in the L-7 official register book. XXX XXX XXX <Undel~scori ng supplied, See Revenue Regulations Updated Pl~of. Eustaqui o 0. Ol~dono, by 801). p. Pursuant to said provision, partially manufactured tobacco including local and imported leaf tobacco shall not be subject to specific tax if entered in the L-7 official register book. This is the book of manufacturer of tobacco. There is no showing that the provisions of Section 43(a) has been superseded by any other regulation. The. respondent has no right to rule otherwise because the revenue regulation issued pursuant to law has the force and effect of law unles~ found to be contrary to law. Furthermore, when a particular construction has been operative over a long period and has acquired the sanction of usage, it is entitled to �l~espectful considel~ation� e s p e c i a l l y i f l~ights have been adjusted and determined by it for many years, as a change may result in inequitable treatment of similarly situated taxpayers and may occur after many persons have is acted upon th, faith of the ReQ~l~tion. The rule .. alsci;,�p~rhaps, pai--f\c~l~~~_l,y: 'aj:ip"ilcable ~~~yq~ .. a > .cfjarjgl? �:�:ip/'' �~~e ;'�:'~ii!!Jinistra:tiv' F_Pn~~r}Act~P.O. wl,lulp pro~\.~~~- ~gre~~,.'i'dnlinjstr~tive l nconvt?h i ence ot' .� i nequal i"t Y� � ~law of Fedel~a) Income Taxation, 1'-lertens Vol. �1, 1978, Sec. 3.20, p. 40). Long and continuous construction given by government officials entitled to consideration <Phil. Sugar Central vs. _Collector, 51 Phil. 131). This provision in the regulation may have been the reason why for a long time the BIR has not been cdllecting 988

DECISION - C.T.A. Case No.4515 - 22 - specific tax on stemmed leaf tobacco and other partially manufactured tobacco if these articles will be utilized in the manufacture of other tobacco products on which the corresponding specific tax will eventually be paid. WHEREFORE, in all the foregoing, the assest>m~tnt of alleged deficiency specific tax in the amo ..mt of P34,904,247.00 issued by the Respondent is hlfreby CANCELLED for lack of merit. SO ORDERED. ~U:;~Q~ ERNESTO D. ACOSTA Pr�siding Judge ~o.I'n~ :~/. ~ Associate Judge 997

. .. - DECISION - � C.T.R. Case No.4515 - 23 - CERTIFIC~TICJN I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13 1 Article VIII of the Constitution. ~<A-J.- ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 998