Commissioner of Internal Revenue v.

Court of Appeals
[G.R. No. 117982. February 6, 1997]
PONENTE: BELLOSILLO, J.:
FACTS:
The present case arose from the discrepancy in the taxable base on which the excise tax is to apply on
account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the
VAT from the tax base in computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91
dated 11 February 1991 which included back the VAT in computing the tax base for purposes of the
fifteen percent (15%) ad valorem tax.
Alhambra industries, Inc. (Alhambra) is a domestic corporation engaged in the manufacture and sale of
cigar and cigarette products. On May 7, 1991 private respondent received a letter dated April 26, 1991
from the Commissioner of Internal Revenue assessing its deficiency Ad Valorem Tax (AVT) in the total
amount of P488,396.62, inclusive of increments, on the removals of cigarette products from their place of
production during the period Nov. 2, 1990 to January 22, 1991.
Alhambra filed protest against amount assessed by the CIR, however, it was denied by the latter at the
same time increasing the amount assessed to P520,835.29. Alhambra filed a petition for review with the
CTA, despite payment under protest the amount of P520,835.29. On December 1, 1993, CTA ordered
petitioner to refund said amount to Alhambra.
ISSUE:
The main contention is whether the new ruling should be given retroactive effect thus, in effect revoking
the tax exemption given to the petitioner in the first BIR ruling.
HELD:
The court held in the negative. In its ruling, it states that well-entrenched is the rule that rulings and
circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no
retroactive application if to so apply them would be prejudicial to the taxpayers.
Section 246 provides for the Non-retroactivity of rulings.- Any revocation,
modification, or reversal of any rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not
be given retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based; or c) where the taxpayer acted in bad faith.

FIRST DIVISION
[G.R. No. 117982. February 6, 1997.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. COURT OF APPEALS, COURT
OF TAX APPEALS and ALHAMBRA INDUSTRIES, INC., Respondents.
The Solicitor General for Petitioner.
William L. Inchoco, Jr., for Private Respondent.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; DEFICIENCY TAX

.ASSESSMENT BASED ON THE RETROACTIVE APPLICATION OF BIR RULING, WITHOUT
LEGAL BASIS. We cannot sustain petitioner. The deficiency tax assessment issued by
petitioner against private respondent is without legal basis because of the prohibition
against the retroactive application of the revocation of BIR rulings in the absence of bad
faith on the part of private Respondent. The present dispute arose from the discrepancy in
the taxable base on which the excise tax is to apply on account of two incongruous BIR
Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax
base in computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91
dated 11 February 1991 which included back the VAT in computing the tax base for
purposes of the fifteen percent (15%) ad valorem tax. The question as to the correct
computation of the excise tax on cigarettes in the case at bar has been sufficiently
addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88
dated 4 October 1988.
2. ID.; BUREAU OF INTERNAL REVENUE; COMMISSIONER; RULINGS, CIRCULARS, RULES
AND REGULATIONS PROMULGATED, WITHOUT RETROACTIVE APPLICATION. Wellentrenched is the rule that rulings and circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive application if to so apply them

would be prejudicial to the taxpayers.

3. ID.; TAXES; BAD FAITH, CONSTRUED; CASE AT BAR. Bad faith imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of
fraud a breach of a known duty through some motive of interest or ill will. We find no
convincing evidence that private respondents implementation of the computation mandated
by BIR Ruling 473- 88 was ill-motivated or attended with a dishonest purpose. To the
contrary, as a sign of good faith, private respondent immediately reverted to the
computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11
February 1991.
4. ID.; BUREAU OF INTERNAL REVENUE; BIR RULING 473- 88, CLEAR AND CATEGORICAL;
CONSULTATION WITH COMMISSION, NOT NECESSARY. As regards petitioners argument
that private respondent should have made consultations with it before private respondent
used the computation mandated by BIR Ruling 473-88, suffice it to state that the aforesaid
BIR Ruling was clear and categorical thus leaving no room for interpretation. The failure of
private respondent to consult petitioner does not imply bad faith on the part of the former.
5. REMEDIAL LAW; ACTIONS; ESTOPPEL; GOVERNMENT NOT ESTOPPED FROM COLLECTING
TAXES ERRONEOUSLY ASSESSED BY ITS AGENTS; EXCEPTION. Admittedly the
government is not estopped from collecting taxes legally due because of mistakes or errors
of its agents. But like other principles of law, this admits of exceptions in the interest of
justice and fair play, as where injustice will result to the taxpayer. Petitioner Commissioner
of Internal Revenue is ordered to refund private respondent Alhambra Industries, Inc., the
amount of P520,835.29 upon finality of this Decision.

DECISION

BELLOSILLO, J.:

ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and

sale of cigar and cigarette products. On 7 May 1991 private respondent received a letter
dated 26 April 1991 from the Commissioner of Internal Revenue assessing it deficiency Ad
Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight Thousand Three
Hundred Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62), inclusive of increments,
on the removals of cigarette products from their place of production during the period 2
November 1990 to 22 January 1991. 1 Petitioner computes the deficiency thus

Total AVT due per manufacturers declaration P4,279,042.33

Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85
Deficiency AVT 373,693.48
Add: Penalties:

chan rob1es v irt ual 1aw l ibra ry

25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37

20% Interest (P467,116.85x82/360 days) 21.279.77
Total Amount Due P488,396.62
In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru
counsel filed a protest against the proposed assessment with a request that the same be
withdrawn and cancelled. On 31 May 1991 private respondent received petitioners reply
dated 27 May 1991 denying its protest and request for cancellation stating that the decision
was final, and at the same time requesting payment of the revised amount of Five Hundred
Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos
(P520,835.29), with interest updated, within ten (10) days from receipt thereof. In a letter
dated 10 June 1991 which petitioner received on the same day, private respondent
requested for the reconsideration of petitioners denial of its protest. Without waiting for
petitioners reply to its request for reconsideration, private respondent filed on 19 June 1991
a petition for review with the Court of Tax Appeals. On 25 June 1991 private respondent
received from petitioner a letter dated 21 June 1991 denying its request for reconsideration
declaring again that its decision was final. On 8 July 1991 private respondent paid under
protest the disputed ad valorem tax in the sum of P520,835.29. 2
In its Decision 3 of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund
to private respondent the amount of Five Hundred Twenty Thousand Eight Hundred ThirtyFive Pesos and Twenty-Nine Centavos (P520,835.29) representing erroneously paid ad
valorem tax for the period 2 November 1990 to 22 January 1991.

chan roble svi rtual lawlib rary

The Court of Tax Appeals explained that the subject deficiency excise tax assessment
resulted from private respondents use of the computation mandated by BIR Ruling 473-88
dated 4 October 1988 as basis for computing the fifteen percent (15%) ad valorem tax due

on its removals of cigarettes from 2 November 1990 to 22 January 1991. BIR Circular 47388 was issued by Deputy Commissioner Eufracio D. Santos to Insular-Yebana Tobacco
Corporation allowing the latter to exclude the value-added tax (VAT) in the determination of
the gross selling price for purposes of computing the ad valorem tax of its cigar and
cigarette products in accordance with Sec. 127 of the Tax Code as amended by Executive
Order No. 273 which provides as follows:

chan rob 1es vi rtual 1aw lib rary

Sec. 127. Payment of excise taxes on domestic products. (b) Determination of gross
selling price of goods subject to ad valorem tax. Unless otherwise provided, the price,
excluding the value-added tax, at which the goods are sold at wholesale in the place of
production or through their sales agents to the public shall constitute the gross selling price.
The computation, pursuant to the ruling, is illustrated by way of example thus
P44.00 x 1/11 = P 4.00 VAT
P44.00 - P 4.00 = P 40.00 price without VAT
P40.00 x 15% = P 6.00 Ad Valorem Tax
For the period 2 November 1990 to 22 January 1991 private respondent paid P3,905,348.85
ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted by BIR Ruling 473-88 by
excluding the VAT in the determination of the gross selling price.
Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana
Tobacco Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the Tax
Code. It included back the VAT to the gross selling price in determining the tax base for
computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the
Tax Code, as amended by E.O. No. 273
Sec. 142. Cigar and cigarettes . . . For purposes of this section, manufacturers or
importers registered wholesale price shall include the ad valorem tax imposed in
paragraphs (a), (b), (c) or (d) hereof and the amount intended to cover the value added tax
imposed under Title IV of this Code.
Petitioner sought to apply the revocation retroactively to private respondents removals of
cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground that
private respondent allegedly acted in bad faith which is an exception to the rule on non-

retroactivity of BIR Rulings. 4

On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the
retroactive application of BIR Ruling 017-91 cannot be allowed since private respondent did
not act in bad faith; private respondents computation under BIR Ruling 473-88 was not
shown to be motivated by ill will or dishonesty partaking the nature of fraud; hence, this
petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private
respondents reliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code does
not confer vested rights to private respondent in the computation of its ad valorem tax; (2)
in failing to consider that good faith and prejudice to the taxpayer in cases of reliance on a
void BIR Ruling is immaterial and irrelevant and does not place the government in estoppel
in collecting taxes legally due; (3) in holding that private respondent acted in good faith in
applying BIR Ruling 473-88; and, (4) in failing to consider that the assessment of petitioner
is presumed to be regular and the claim for tax refund must be strictly construed against
private respondent for being in derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private respondents reliance on a
void BIR ruling conferred upon the latter a vested right to apply the same in the
computation of its ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax Code,
which provides for the inclusion of the VAT in the tax base for purposes of computing the
15% ad valorem tax, is the applicable law in the instant case as it specifically applies to the
manufacturers wholesale price of cigar and cigarette products and not Sec. 127 (b) of the
Tax Code which applies in general to the wholesale of goods or domestic products. Sec. 142
being a specific provision applicable to cigar and cigarettes must perforce prevail over Sec.
127 (b), a general provision of law insofar as the imposition of the ad valorem tax on cigar
and cigarettes is concerned. 5 Consequently, the application of Sec. 127 (b) to the
wholesale price of cigar and cigarette products for purposes of computing the ad valorem
tax is patently erroneous. Accordingly, BIR Ruling 473-88 is void ab initio as it contravenes
the express provisions of Sec. 142 (d) of the Tax Code. 6
Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142
(b) of the Tax Code does not confer any vested right to private respondent as to exempt it
from the retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the New Civil Code
is explicit that" (n)o vested or acquired right can arise from acts or omissions which are
against the law . . ." 7 It is argued that the Court of Appeals erred in ruling that retroactive
application cannot be made since private respondent acted in good faith. The following

circumstances would show that private respondents reliance on BIR Ruling 473-88 was
induced by ill will: first, private respondent despite knowledge that Sec. 142 of the Tax Code
was the specific provision applicable still shifted its accounting method pursuant to Sec. 127
(b) of the Tax Code; and, second, the shift in accounting method was made without any
prior consultation with the BIR.8
It is further contended by petitioner that claims for tax refund must be construed against
private Respondent. A tax refund being in the nature of a tax exemption is regarded as in
derogation of the sovereign authority and is strictly construed against private respondent as
the same partakes the nature of a tax exemption. Tax exemptions cannot merely be implied
but must be categorically and unmistakably expressed. 9
We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against
private respondent is without legal basis because of the prohibition against the retroactive
application of the revocation of BIR rulings in the absence of bad faith on the part of
private Respondent.
The present dispute arose from the discrepancy in the taxable base on which the excise tax
is to apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4
October 1988 which excluded the VAT from the tax base in computing the fifteen percent
(15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11 February 1991 which included
back the VAT in computing the tax base for purposes of the fifteen percent (15%) ad
valorem tax.
The question as to the correct computation of the excise tax on cigarettes in the case at bar
has been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which
revoked BIR Ruling 473-88 dated 4 October 1988
It is to be noted that Section 127 (b) of the Tax Code as amended applies in general to
domestic products and excludes the value-added tax in the determination of the gross
selling price, which is the tax base for purposes of the imposition of ad valorem tax. On the
other hand, the last paragraph of Section 142 of the same Code which includes the valueadded tax in the computation of the ad valorem tax, refers specifically to cigar and
cigarettes only. It does not include/apply to any other articles or goods subject to the ad
valorem tax. Accordingly, Section 142 must perforce prevail over Section 127 (b) which is a
general provision of law insofar as the imposition of the ad valorem tax on cigar and
cigarettes is concerned.

Moreover, the phrase unless otherwise provided in Section 127 (b) purports of exceptions to
the general rule contained therein, such as that of Section 142, last paragraph thereof
which explicitly provides that in the case of cigarettes, the tax base for purposes of the ad
valorem tax shall include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact, upon
knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately
implemented the method of computation mandated therein by restoring the VAT in
computing the tax base for purposes of the 15% ad valorem tax.
However, well-entrenched is the rule that rulings and circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue would have no retroactive
application if to so apply them would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides
Sec. 246. Non-retroactivity of rulings. Any revocation, modification, or reversal of any
rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given
retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayers except in the following cases: a) where the taxpayer deliberately misstates or
omits material facts from his return or in any document required of him by the Bureau of
Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling is based; or c) where the
taxpayer acted in bad faith.
Without doubt, private respondent would be prejudiced by the retroactive application of the
revocation as it would be assessed deficiency excise tax.
What is left to be resolved is petitioners claim that private respondent falls under the third
exception in Sec. 246, i.e., that the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of
wrong. It partakes of the nature of fraud; a breach of a known duty through some motive of
interest or ill will. 11 We find no convincing evidence that private respondents
implementation of the computation mandated by BIR Ruling 473-88 was ill-motivated or
attended with a dishonest purpose. To the contrary, as a sign of good faith, private
respondent immediately reverted to the computation mandated by BIR Ruling 017-91 upon

knowledge of its issuance on 11 February 1991.

As regards petitioners argument that private respondent should have made consultations
with it before private respondent used the computation mandated by BIR Ruling 473-88,
suffice it to state that the aforesaid BIR Ruling was clear and categorical thus leaving no
room for interpretation. The failure of private respondent to consult petitioner does not
imply bad faith on the part of the former.
Admittedly the government is not estopped from collecting taxes legally due because of
mistakes or errors of its agents. But like other principles of law, this admits of exceptions in
the interest of justice and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by respondent Court of Appeals,
the petition is DENIED and petitioner COMMISSIONER OF INTERNAL REVENUE is ordered to
refund private respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29 upon
finality of this Decision.
SO ORDERED.
Padilla, Kapunan and Hermosisima, Jr., JJ., concur.
Separate Opinions

VITUG, J., concurring:

chanro b1es vi rtua l 1 aw libra ry

I concur in the ponencia written by my esteemed colleague, Mr. Justice Josue N. Bellosillo. I
only would like to stress that the 1988 opinion of the Commissioner of Internal Revenue
cannot be considered void, considering that it evinces what the former Commissioner must
have felt to be a real inconsistency between Section 127 and Section 142 of the Tax Code.
The non-retroactivity proscription under Section 246 of the Tax Code can thus aptly apply. I
reserve my vote, however, in a situation where, as the Solicitor General so points out, the
revoked ruling is patently null and void in which case it could possibly be disregarded as
being inexistent from the very beginning.