CIR v.

CTA

The judicial proceedings over the present controversy commenced with CTA Case No.
4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of
Internal Revenue to grant a refund to herein private respondent Citytrust Banking
Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount
reflected in its 1983 income tax return on the ground of prescription. 1 That judgment of
the tax court was affirmed by respondent Court of Appeals in its judgment in CA-G.R.
SP
No. 26839. 2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified and/or
set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation
filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over
total quarterly payments over the actual income tax due, plus carried-over withholding
tax payments on government securities and rental income, as computed in its final
income tax return for the calendar year ending December 31, 1985. 3

Two days later, or on August 28, 1986, in order to interrupt the running of the
prescriptive period, Citytrust filed a petition with the Court of Tax Appeals, docketed
therein as CTA Case No. 4099, claiming the refund of its income tax overpayments for
the years 1983, 1984 and 1985 in the total amount of P19,971,745.00. 4

In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust
incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of
P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax
overpayment, taxes withheld on proceeds of government securities investments, as well
as on rental income, respectively, are not properly documented; that
assuming arguendo that petitioner is entitled to refund, the right to claim the same has
prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292
and 295 of the National Internal Revenue Code of 1977, as amended, since the petition
was filed only on August 28, 1986. 5

On February 20, 1991, the case was submitted for decision based solely on the
pleadings and evidence submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the repeated failure of the Tax
Credit/Refund Division of the BIR to transmit the records of the case, as well as the
investigation report thereon, to the Solicitor General. 6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and
motion praying for the suspension of the proceedings in the said case on the ground
that the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already
being processed by the Tax Credit/Refund Division of the BIR, and that said bureau was
only awaiting the submission by Citytrust of the required confirmation receipts which
would show whether or not the aforestated amount was actually paid and remitted to the
BIR. 7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals
already acquired jurisdiction over the case, it could no longer be divested of the same;
and, further, that the proceedings therein could not be suspended by the mere fact that
the claim for refund was being administratively processed, especially where the case
had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-
1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an
overpayment of income taxes and for which a tax credit or refund was due to Citytrust.
The Foregoing exhibits are allegedly conclusive proof of and an admission by herein
petitioner that there had been an overpayment of income taxes. 8

The tax court denied the motion to suspend proceedings on the ground that the case
had already been submitted for decision since February 20, 1991. 9

Thereafter, said court rendered its decision in the case, the decretal portion of which
declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund

but only for the overpaid taxes incurred in 1984 and 1985. The refundable
amount as shown in its 1983 income tax return is hereby denied on the
ground of prescription. Respondent is hereby ordered to grant a refund to
petitioner Citytrust Banking Corp. in the amount of P13,314,506.14
representing the overpaid income taxes for 1984 and 1985, recomputed
as follows:

1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67

Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00

Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P 0

Less: W/T on rentals 36,716.47*

Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00

Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because

only the above figures are well supported by the various
exhibits presented during the hearing.

No pronouncement as to costs.

SO ORDERED. 10

The order for refund was based on the following findings of the Court of Tax Appeals: (1)
the fact of withholding has been established by the statements and certificates of
withholding taxes accomplished by herein private respondent's withholding agents, the
authenticity of which were neither disputed nor controverted by herein petitioner; (2) no
evidence was presented which could effectively dispute the correctness of the income
tax return filed by herein respondent corporation and other material facts stated therein;
(3) no deficiency assessment was issued by herein petitioner; and (4) there was an
audit report submitted by the BIR Assessment Branch, recommending the refund of
overpaid taxes for the years concerned (Exhibits Y to Y-3), which enjoys the
presumption of regularity in the performance of official duty. 11

A motion for the reconsideration of said decision was initially filed by the Solicitor
General on the sole ground that the statements and certificates of taxes allegedly
withheld are not conclusive evidence of actual payment and remittance of the taxes
withheld to the BIR. 12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private respondent had
outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-
office memorandum of the Tax Credit/Refund Division, dated August 8, 1991, he came
to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by
Demand/Assessment Notice No. FAS-1-84-003291-003296. 13

Oppositions to both the basic and supplemental motions for reconsideration were filed
by private respondent Citytrust. 14 Thereafter, the Court of Tax Appeals issued a
resolution denying both motions for the reason that Section 52 (b) of the Tax Code, as
implemented by Revenue Regulation
6-85, only requires that the claim for tax credit or refund must show that the income
received was declared as part of the gross income, and that the fact of withholding was
duly established. Moreover, with regard to the argument raised in the supplemental
motion for reconsideration anent the deficiency tax assessment against herein
petitioner, the tax court ruled that since that matter was not raised in the pleadings, the
same cannot be considered, invoking therefor the salutary purpose of the omnibus
motion rule which is to obviate multiplicity of motions and to discourage dilatory
pleadings. 15

As indicated at the outset, a petition for review was filed by herein petitioner with
respondent Court of Appeals which in due course promulgated its decision affirming the
judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to this
Court, maintaining that said respondent court erred in affirming the grant of the claim for
refund of Citytrust, considering that, firstly, said private respondent failed to prove and
substantiate its claim for such refund; and, secondly, the bureau's findings of deficiency
income and business tax liabilities against private respondent for the year 1984 bars
such payment. 16

After a careful review of the records, we find that under the peculiar circumstances of
this case, the ends of substantial justice and public interest would be better subserved
by the remand of this case to the Court of Tax Appeals for further proceedings.

It is the sense of this Court that the BIR, represented herein by petitioner Commissioner
of Internal Revenue, was denied its day in court by reason of the mistakes and/or
negligence of its officials and employees. It can readily be gleaned from the records that
when it was herein petitioner's turn to present evidence, several postponements were
sought by its counsel, the Solicitor General, due to the unavailability of the necessary
records which were not transmitted by the Refund Audit Division of the BIR to said
counsel, as well as the investigation report made by the Banks/Financing and Insurance
Division of the said bureau/ despite repeated requests. 17 It was under such a
predicament and in deference to the tax court that ultimately, said records being still
unavailable, herein petitioner's counsel was constrained to submit the case for decision
on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the
order of the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule
7 of the Rules of the Court of Tax Appeals which provides that the Commissioner of
Internal Revenue and the Commissioner of Customs shall certify and forward to the
Court of Tax Appeals, within ten days after filing his answer, all the records of the case
in his possession, with the pages duly numbered, and if the records are in separate
folders, then the folders shall also be numbered.

The aforestated impass came about due to the fact that, despite the filing of the
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals,
the Tax Refund Division of the BIR still continued to act administratively on the claim for
refund previously filed therein, instead of forwarding the records of the case to the Court
of Tax Appeals as ordered. 18

It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents. 19In the performance of its governmental functions, the State
cannot be estopped by the neglect of its agent and officers. Although the Government
may generally be estopped through the affirmative acts of public officers acting within
their authority, their neglect or omission of public duties as exemplified in this case will
not and should not produce that effect.

Nowhere is the aforestated rule more true than in the field of taxation. 20 It is axiomatic
that the Government cannot and must not be estopped particularly in matters involving
taxes. Taxes are the lifeblood of the nation through which the government agencies
continue to operate and with which the State effects its functions for the welfare of its
constituents. 21The errors of certain administrative officers should never be allowed to
jeopardize the Government's financial position, 22especially in the case at bar where the
amount involves millions of pesos the collection whereof, if justified, stands to be
prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said court's
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved. 23 This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of much-
needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only
just and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other's claim and to determine all matters
of dispute between them in one single case. It is important to note that in determining
whether or not petitioner is entitled to the refund of the amount paid, it would necessary
to determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to
all the matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the
Government to lose its case in the tax court may hopefully be ascribed merely to the
ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself once again gives
substance to the public perception and suspicion that it is another proverbial tip in the
iceberg of venality in a government bureau which is pejoratively rated over the years.
What is so distressing, aside from the financial losses to the Government, is the erosion
of trust in a vital institution wherein the reputations of so many honest and dedicated
workers are besmirched by the acts or omissions of a few. Hence, the liberal view we
have here taken pro hac vice, which may give some degree of assurance that this Court
will unhesitatingly react to any bane in the government service, with a replication of
such response being likewise expected by the people from the executive authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839

is hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals
for further proceedings and appropriate action, more particularly, the reception of
evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.

SO ORDERED.

LA SUERTE v. CIR

These cases involve the taxability of stemmed leaf tobacco imported and locally
purchased by cigarette manufacturers for use as raw material in the manufacture of
their cigarettes. Under the National Internal Revenue Code of 1997 (1997 NIRC), before
it was amended on December 19, 2012 through Republic Act No. 10351 1 (Sin Tax Law),
stemmed leaf tobacco is subject to an excise tax of P0.75 for each kilogram
thereof.2 The 1997 NIRC further provides that stemmed leaf tobacco - "leaf tobacco
which has had the stem or midrib removed"3 - "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 rules and regulations prescribed by the Secretary of
Finance."4

This is a consolidation of six petitions for review of several decisions of the Court of
Appeals, involving three cigarette manufacturers and the Commissioner of Internal
Revenue. G.R. No. 125346 is anal5 from the Court of Appeals (Sixth Division) that rever
LEONEN, LEONEN, sed6 the Court of Tax Appeals' decision7 and held petitioner La
Suerte Cigar & Cigarette Factory (La Suerte) liable for deficiency specific tax on its
purchase of imported and locally produced stemmed leaf tobacco and sale of stemmed
leaf tobacco to Associated Anglo-American Tobacco Corporation (AATC) during the
period from January 1, 1986 to June 30, 1989. GR. Nos. 136328-29 is an appeal 8 by the
Commissioner of Internal Revenue (Commissioner) from the decision 9 of the Court of
Appeals that affirmed the Court of Tax Appeals' rulings 10 that Fortune Tobacco
Corporation (Fortune) was not obliged to pay the excise tax on its importations of
stemmed leaf tobacco for the periods from January 1, 1986 to June 30, 1989 and July
1, 1989 to November 30, 1990. In G.R. No. 148605, Sterling Tobacco Corporation
(Sterling) appeals11 the decision12 of the Court of Appeals that reversed the Court of Tax
Appeals decision13 and held it liable to pay deficiency excise taxes on its importation
and local purchases of stemmed leaf tobacco from November 1986 to June 24, 1989.
G.R. No. 144942is an appeal14 from the Court of Appeals decision15 that affirmed the
Court of Tax Appeals decision16 and ordered the refund of specific taxes paid by La
Suerte on its importation of stemmed leaf tobacco in April 1995. In G.R. No. 158197, La
Suerte sought to appeal17 the decision18 of the Court of Appeals holding it liable for
deficiency specific tax on its local and imported purchases of stemmed leaf tobacco and
those it sold for the period from June 21, 1989 to November 20, 1990. Finally, in G.R.
No. 165499, La Suerte again sought to appeal by certiorari 19 the decision20 of the Court
of Appeals reversing the Court of Tax Appeals and holding it liable for deficiency specific
tax on its importation of stemmed leaf tobacco in March 1995.

Factual background

Overview of cigarette manufacturing

The primary component of cigarettes is tobacco, a processed product derived from the
leaves of the plants in the genus Nicotiana. 21 Most cigarettes contain a mixture or blend
of several types of tobacco from a variety of sources.

The tobacco types grown in the Philippines are: Virginia (or fluecured), 22 which
accounts for 59.35% of tobacco production, Burley (or bright air-cured), 23 which makes
up 22.21%, and the Native (or dark air-cured), 24 which makes up the remaining
18.44%.25 "[T]he native type is normally categorized into three: cigar filler type, wrapper
type and chewing type, or . . . Batek tobacco." 26 Virginia and Burley, considered as the
aromatic type, are intended for cigarette manufacturing.

Growing and harvesting

"Tobacco seeds undergo a process of germination, which takes about 7 to 10 days,

depending on the tobacco varieties. . . . The tobacco seedlings are then sown in cold
frames or hotbedsto prevent attacks from insects, and then transplanted into the
fields"27 after 45 to 65 days.28 Harvesting begins 55 to 60 days after transplanting. 29 A
farmer carries out either priming(leaf by leaf) or stalk harvesting (by the whole plant). 30

Curing
"After harvest, tobacco is stored for curing, which allows for the slow oxidation and
degradation of carotenoids. This allows for the leaves to take on properties that are
usually attributed to the smoothness of the smoke." 31

"Curing methods vary with the type of tobacco grown. The tobacco barn design varies
accordingly."32 There are two main ways of curing tobacco in the Philippine setting:

1) Air-curing (for Burley and Native tobacco) "is carried out by hanging the
tobacco in well-ventilated barns, where the tobacco is allowed to dry over a
period of 4 to 8 weeks. Air-cured tobacco is generally low in sugar content, which
gives the tobacco smoke a light, smooth, semi-sweet flavor. These tobacco
leaves usually have a high nicotine content[;]" 33 and

2) Flue-curing (for Virginia tobacco) process "starts by the sticking of tobacco

leaves, which are then hung from tier-poles in curing barns. The procedure will
generally take about a week. Fluecured tobacco generally produces cigarette
tobacco, which usually has a high content of sugar, with medium to high levels of
nicotine."34

Once cured, the leaves are sorted into grades based on size, color, and quality, and
packed in standard bales.35 The bales are then moved to accredited trading centers
where they are purchased by leaf buyers such as wholesale tobacco dealers and
exporters or cigarette manufacturing companies. 36

Redrying and aging

After purchase, leaf tobacco is re-dried and then added with moisture to make the
tobacco pliable enough to remove its large stems.37 The leaves are stripped or de-
stemmed, eitherby hand or machine, cleaned and compressed into boxes or porous
wooden vats called hogsheads, and aged.38 Thereafter, the leaves are either exported
or used for the manufacture of cigarettes, cigars, and other tobacco products.

Primary processing39

In the cigarette factory, the tobacco leaves undergo a conditioning process where "high
temperatures and humidity restore moisture to suitable levels for cutting and blending
tobacco and completing the cigarette-making process." 40

"[T]obaccos are precisely cut and blended according to . . . formulas, or recipes, to

produce tobaccos for various brands of cigarettes. These brand recipes include
ingredients and flavors that are added to the tobacco to give each brand its unique
characteristics."41

Cigarette making and packing42

"The blended tobacco often referred to as "filler" or "cut-filler" . . . is delivered by a
pneumatic feed system to cigarette making machines . . . within the factory." 43 The
machine disperses the shredded tobacco over a continuous roll of cigarette paper and
cuts the paper to the desired length. The completed cigarettes are subsequently
packed, sealed, and placed in cartons.

Cigarette manufacturers

La Suerte Cigar & Cigarette Factory (La Suerte),44 Fortune Tobacco Corporation
(Fortune),45 and Sterling Tobacco Corporation (Sterling) 46 are domestic corporations
engaged in the production and manufacture of cigars and cigarettes. These companies
import leaf tobacco from foreign sources and purchase locally produced leaf tobacco to
be used in the manufacture of cigars and cigarettes. 47

The transactions of these cigarette manufacturers pertinent to these consolidated cases

are the following:

1. La Suertes local purchases, importations, and sale of stemmed leaf tobacco

from January 1, 1986 to June 30, 1989 (G.R. No. 125346), and from June 1989
to November 1990 (G.R. No. 158197), and importations in March 1995 (G.R. No.
165499) and April 1995 (G.R. No. 144942); 2. Fortunes importation of tobacco
strips from January 1, 1986 to June 30, 1989, and from July 1, 1989 to
November 30, 1990 (G.R. Nos. 13632829); and

3. Sterlings importations and local purchases of stemmed leaf tobacco from

November 1986 to June 24, 1989 (G.R. No. 148605).

History of applicable tax provisions

The first tax code came into existence in 1939 with the enactment of Commonwealth
Act No. 46648 (1939 Code). Section 136 of the 1939 Code imposed specific (excise)
taxes on manufactured products of tobacco, but excluded cigars and cigarettes, which
were subject to tax under a different section.49 Section 136 provided thus:

SECTION 136. Specific Tax on Products of Tobacco. On manufactured products of

tobacco, except cigars, cigarettes, and tobacco specially prepared for chewing so as to
be unsuitable for consumption in any other manner, but including all other tobacco
twisted by hand or reduced into a condition to be consumed in any manner other than
by the ordinary mode of drying and curing; and on all tobacco prepared or partially
prepared for sale or consumption, even if prepared without the use of any machine or
instrument and without being pressed or sweetened; and on all fine-cut shorts and
refuse, scraps, clippings, cuttings, and sweepings of tobacco, there shall be collected
on each kilogram, sixty centavos.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other
manner, on each kilogram, forty-eight centavos. (Emphasis supplied)
Section 132 of the 1939 Code, however, by way of exception, provided that "stemmed
leaf tobacco . . . may be sold in bulk as raw material by one manufacturer directly to
another, under such conditions as may be prescribed in the regulations of the
Department of Finance, without the prepayment of the tax." Section 132 stated:

SECTION 132. Removal of Tobacco Products Without Prepayment of Tax. Products of

tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural
or industrial use, under such conditionsas may be prescribed in the regulations of the
Department of Finance; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut
chewing tobacco, refuse, scraps, cuttings, clippings and sweepings of tobacco may be
sold in bulk as raw material byone manufacturer directly to another, under such
conditions as may be prescribed in the regulations of the Department of Finance,
without the prepayment of the tax.

"Stemmed leaf tobacco," as herein used means leaf tobacco which has had the stem or
midrib removed. The term does not include broken leaf tobacco. (Emphasis supplied)

On September 29, 1954, upon the recommendation of then Acting Collector of Internal
Revenue J. Antonio Araneta, the Department of Finance promulgated Revenue
Regulations No. V-39 (RR No. V-39), or "The Tobacco Products Regulations," relative to
"the enforcement of the provisions of Title IV of the [1939 Tax Code] in so far as they
affect the manufacture or importation of, and the collection and payment of the specific
tax on, manufactured tobacco or products of tobacco." 50 Section 20(a) of RR No. V-39,
which lays the rules for tax exemption on tobacco products, states:

SECTION 20. Exemption from tax of tobacco products intended for agricultural or
industrial purposes. (a) Sale of stemmed leaf tobacco, etc., by one factory to another.
Subject to the limitations herein established, products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for agricultural or industrial use;and
stemmed leaf tobacco, finecut shorts, the refuse of fine-cut chewing tobacco, refuse,
scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw
materials by one manufacturer directly to another without the prepayment of specific
tax.

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps,
cuttings, 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 in voice 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
of removals.

Corresponding debit entry will be made in the L-7 register book of the factory receiving
the tobacco under heading "Refuse, etc., received from other factory," showing the date
of receipt, assessment and invoice numbers, name and address of the consignor, form
in which received, and the 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 supplied)

Sections 10 and 11 of RR No. V-39 enumerate and describe the record books to be kept
and used by manufacturers of tobacco products, viz:

SECTION 10. (a) Register, auxiliary, and stamps requisition books for manufacturers.
The Collector of Internal Revenue shall from time to time supply provincial revenue
agents or the Chief of the Tobacco Tax Section with the necessary number of
manufacturers official register books and official auxiliary register booksas may be
required in each locality by manufacturers of tobacco products. Whenever any
manufacturer shall have qualified himself as such by executing a proper bond,
registering his factory, and paying the privilege tax and shall have complied with all the
requirements ofengaging in such business contained in the National Internal Revenue
Code and in these regulations, the internal revenue agent within whose district the
factory is located shall deliver to said manufacturer the necessary official register books
and auxiliary register books. These books consist of the following:

B.I.R. No. 31.09Official RegisterBook, A-3 for manufacturers of chewing and

smoking tobacco. B.I.R. No. 31.10Manufactured tobacco (Transcript sheet of
above).

B.I.R. No. 31.18Official Register Book, A-4, for manufacturers of cigar.

B.I.R. No. 31.19(Transcriptsheet of the above).

B.I.R. No. 31.27Official Register Book, A-5, for Manufacturers of cigarettes.

B.I.R. No. 31.28(Transcript sheet of above).

B.I.R. No. 31.01Official Register Book, L-7, record of raw materials for
manufacturers of any class of tobacco products.

B.I.R. No. 31.02(Transcript sheet of above)[.]

B.I.R. No. 31.46Auxiliary Register Book, L-7-1/2, bale book, for manufacturers
of any class of tobacco products.

B.I.R. No. 31.47(Transcript sheet of above).

B.I.R. No. 31.12Stamp requisition book, for manufacturers of manufactured

tobacco.

B.I.R. No. 31.21Stamp requisition book, for manufacturers of cigars.

B.I.R. No. 31.30Stamp requisition book, for manufacturers of cigarettes.

 B.I.R. No. 31.05L-7 Official Invoice Book for, use in connection with L-7
register book.

B.I.R. No. 31.05L-7-1/2 OfficialInvoice Book, for use in connection with L-7-1/2
bale book.

(b) General nature of official register and auxiliary register books. The L-7
official register book isthe record of all raw materials used in the manufacture of
tobacco products of all description in the factory.It is the primary record of the
internal operations of the factory. It shows the raw materials used in the
manufacture and the articles actually manufactured or produced. The Schedule A
register books are the record of the articles actually manufactured or produced,
and transferred from the credit side of the official register book, L-7. They show
the amount of taxes paid and the name of the person to whom the finished
products is consigned or sold when leaving the factory. The bale book[,] L-7-1/2,
is an auxiliary to the L-7 official register book.

All official register books and other official records herein required of
manufacturers shall be kept in the factory premises, or in the factory warehouse,
in the case of bale books, and open to inspection by any internal revenue officer
at all times of the day or night.

....

SECTION 11. Entries to be made in the official register and auxiliary register books;
monthly transcripts. (a) Official bale book (L-7-1/2). All leaf tobacco received in any
factory or factory warehouse shall be debited, and any removal of tobacco from the
factory shall be credited in the official bale book; except cuttings, clippings, sweepings,
and other partially manufactured tobacco, which shall be credited in the L-7 register
book.

The Collector of Internal Revenue may in his discretion waive the requirements of
keeping an official bale book by small factories.

(b) The Official Register Book (L-7). One L-7 books shall suffice for each
manufacturer of tobacco products, regardless of the classes of tobacco manufactured
by him.All loose leaf tobacco received in the factory proper and all bales of leaf tobacco
which are opened in the factory for use in the manufacture of tobacco products shall be
entered in the L-7 official register book under the heading "Received from Dealers" at
the net weights. In the column headed "Name["] and "Address" shall be shown the
words "Transferred from tobacco factory warehouse". All leaf tobacco received into a
factory must be entered in the official bale book pertaining to the factory and bales of
leaf tobacco shall not be taken up in the L-7 register book until said bales are
transferred for use and credited in the official bale book. While leaf tobacco must be
taken in the official bale book, this is done for statistical purposes only. As soon asit
enters the factory for use in manufacture it should be taken up in the L-7 register book
and credited in the official bale book.

All removals of waste of tobacco, whether transferred to other factories, removed for
agricultural orindustrial purposes, or destroyed on the premises or elsewhere, shall be
entered in the official register book, L-7, under the heading "Raw Materials Removed",
showing all information required therein. (Emphasis supplied)

Section 2 of RR No. V-39 broadly defined "manufactured products of tobacco" and

"manufacturer of tobacco products" as follows:

Section 2. Definition of terms. When used in there [sic] regulations, the following
terms shall begiven the interpretations indicated in their respective definitions given
below, except where the context indicates otherwise:

(a) "Manufactured products of tobacco" shall include cigars, cigarettes, smoking

tobacco, chewing, snuff, and all other forms of manufactured and partially
manufactured tobacco, as defined in section 194 (M) 51 of the National Internal
Revenue Code.

(b) "Manufacturer of tobacco products" shall include all persons engaged in the
manufacture of any of the forms of tobacco mentioned in the next preceding
paragraph.

In 1967, the Secretary of Finance promulgated Revenue Regulations No. 17-67 (RR
No. 17-67), as amended,52 or the "Tobacco Revenue Regulations on Leaf, Scrap, Other
Partially Manufactured Tobacco and Other Tobacco Products; Grading, Classification,
Inspection, Shipments, Exportation, Importation and the Manufacturers thereof under
the provisions of Act No. 2613, as amended." Section 2(i) of RR No. 17-67 defined a
"manufacturer of tobacco" and included in the definition one who prepares partially
manufactured tobacco. Section 2(m) defined "partially manufactured tobacco" as
including stemmed leaf tobacco. Thus, Sections 2(i) and (m) read:

(i) "Manufacturer of tobacco" Includes every person whose business it is to

manufacture tobacco o[r] snuff or who employs others to manufacture tobacco or snuff,
whether such manufacture be by cutting, pressing (not baling), grinding, or rubbing
(grating) any raw or leaf tobacco, or otherwise preparing raw or leaf tobacco, or
manufactured or partially manufactured tobacco and snuff, or putting up for
consumption scraps, refuse, or stems of tobacco resulting from any process of handling
tobacco stems, scraps, clippings, or waste by sifting, twisting, screening or by any other
process.

....

(m) "Partially manufactured tobacco" Includes:

 (1) "Stemmed leaf" handstripped tobacco, clean, good, partially broken leaf
only, free from mold and dust.

(2) "Long-filler" handstripped tobacco of good, long pieces of broken leaf

usableas filler for cigars without further preparation, and free from mold, dust
stems and cigar cuttings.

(3) "Short-filler" handstripped or machine-stripped tobacco, clean, good, short

pieces of broken leaf, which will not pass through a screen of two inches (2")
mesh.

(4) "Cigar-cuttings" clean cuttings or clippings from cigars, unsized with any
other form of tobacco.

(5) "Machine-scrap tobacco" machine-threshed, clean, good tobacco, not

included in any of the above terms, usable in the manufacture of tobacco
products.

(6) "Stems" midribs of leaftobacco removed from the whole leaf or broken leaf
either by hand or machine.

(7) "Waste tobacco" denatured tobacco; powder or dust, refuse, unfit for
human consumption; discarded materials in the manufacture of tobacco
products, which may include stems.

Section 3 of RR No. 17-67 classifiedentities that dealt with tobacco according to the
type of permit that the Bureau of Internal Revenue issued to each entity. Under this
classification, wholesale leaf tobacco dealers were considered L-3 permittees. Those
(referring to wholesale leaf tobacco dealers) that reprocess partially manufactured
tobacco for export, for themselves, and/or for other L-6 or L-7 permittees were
considered L-6 permittees. Manufacturers of tobacco products such as cigarette
manufacturers were considered L-7 permittees. Section 3 of RR No. 17-67 reads:

(a) L-3 Wholesale leaf tobacco dealer.

(b) L-3F Wholesale leaf tobacco dealer. Issued only in favor of Farmer's
Cooperative Marketing Association (FaCoMas) duly organized in accordance
with law. [This function relative to tobacco trading was transferred to the
Philippine Virginia Tobacco Administration (PVTA) under Section 15 of Republic
Act No. 2265].

(c) L-3R Wholesale leaf tobacco dealers. Issued only in favor of persons or
entities having fully equipped Redrying Plants.

(d) L-3-1/4 Buyers for wholesale leaf tobacco dealers.

 (e) L-4 Wholesale leaf tobacco dealers. Issued only in favor of persons or
entities having flue-curing barns, who may purchase or receive green Virginia
leaf tobacco from bona fide tobacco planters only, or handle green leaf of their
own production, which tobacco shall be sold or transferred only to holders of L-3
and L-3R permits after flue-curing the tobacco.

(f) L-5 Tobacco planters selling to consumers part or the whole of their
tobacco production. (g) L-6 Wholesale leaf tobacco dealers who, exclusively
for export, except as otherwise provided for in these regulations, perform the
following functions:

(1) Handstripped and/or threshwhole leaf tobacco for themselves or for

other L-6 or L-7 permittees;

(2) Re-process partially manufactured tobacco for themselves, or for other

L-6 or L-7 permittees; (3) Sell their partially manufactured tobacco to other
L-6 permittees.

(h) L-7 Manufacturers of tobacco products. [L-7 1/2 designates an auxiliary

registered book (bale books), for manufacturers of tobacco products.]

(i) B-14 Wholesale leaf tobaccodealers (Privilege tax receipt)

(j) B-14 (a) Retail leaf tobacco dealers (Privilege tax receipt)

La Suerte contends that on December 12, 1972, then Internal Revenue Commissioner
Misael P. Vera issued a ruling which declared that:

. . . . The subsequent sale or transfer by the L-6/L-3R permittee for export or to an L-7-
1/2 for use in the manufacture of cigars or cigarettes may also be allowed without the
prepayment of the specific tax.53

Almost 40 years from the enactment of the 1939 Tax Code, Presidential Decree No.
1158-A, otherwise known as the "National Internal Revenue Code of 1977," was
promulgated on June 3, 1977, to consolidate and integrate the various tax laws which
have so far amended or repealed the provisions found in the 1939 Tax Code. Section
132 was renumbered as Section 144, and Section 136 as Section 148. Sections 144
and 148, read:

SEC. 144. Removal of tobacco products without prepayment of tax.Products of

tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural
or industrial use, under such conditions as may be prescribed in the regulations of the
Department of Finance, and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-
cuts chewing tobacco, re-refuse, scraps, cuttings, clippings, stems or midribs, and
sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly
to another, under such conditions as may be prescribed in the regulations of the
Department of Finance, without the prepayment of the tax. "Stemmed leaf tobacco", as
herein used means leaf tobacco which has had the stem or midrib removed. The term
does not include broken leaf tobacco.

....

SEC. 148. Specific tax on products of tobacco.On manufactured products of tobacco,

except cigars, cigarettes, and tobacco specially prepared for chewing so as to be
unsuitable for consumption in any other manner, but including all other tobacco twisted
by hand or reduced into a condition to be consumed in any manner other than by the
ordinary mode of drying and curing; and on all tobacco prepared orpartially prepared for
sale or consumption, even if prepared without the use of any machine or instrument and
without being pressed or sweetened; and on all fine-cut shorts and refuse, scraps,
clippings,cuttings, stems, and sweepings of tobacco, there shall be collected on each
kilogram, seventy-five centavos: Provided, however, That 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 transferred, disposed of, or otherwise sold,
without prepayment ofthe specific tax herein provided for under such 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 tobacco products on which the specific tax will eventually be
paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other
manner, on each kilogram, sixty centavos.

Sections 144 and 148 were subsequently renumbered as Sections 120 and 125
respectively under Presidential Decree No. 1994, 54 which took effect on January 1, 1986
(1986 Tax Code); then as Sections 137 and 141 under Executive Order No. 273; 55 and
finally as Sections 140 and 144 under Republic Act No. 8424 or the "Tax Reform Act of
1997." However, the provisions remained basically unchanged.

The business transactions of La Suerte, Fortune, and Sterling that the Commissioner
found to be taxable for specific tax took place during the effectivity of the 1986 Tax
Code, as amended by Executive Order No. 273. The pertinent provisions are Sections
137 and 141, thus:

SEC. 137. Removal of tobacco products without prepayment of tax. Products of

tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural
or industrial use, under such conditions as may be prescribed in the regulations of the
Ministry of Finance. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut
chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of
tobacco may be soldin 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 Ministry of Finance.
Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or
midrib removed. The term does not include broken leaf tobacco.

....

SEC. 141. Tobacco Products. There shall be collected a tax of seventy-five centavos
on each kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any

manner other than the ordinary mode of drying and curing;

(b) tobacco prepared or partially prepared with or without the use of any machine
or instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco. 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 transferred, disposed of, or otherwise sold, without prepayment
of the specific tax herein provided for under such conditions as may be
prescribed in the regulations promulgated by the Ministry 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
eventuallybe paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other
manner, on each kilogram, sixty centavos.

Parenthetically, the present provisionsexplicitly state the following:

Stemmed leaf tobacco, tobacco prepared or partially prepared with or without the use of
any machine or instrument or without being pressed or sweetened, fine-cut shorts and
refuse, scraps, clippings, cuttings, stems, midribs, and sweepings of tobacco resulting
from the handling or stripping of whole leaf tobacco shall be transferred, disposed of, or
otherwise sold, without any prepayment of the excisetax . . . if the same are to be
exported or to be used in the manufacture of cigars, cigarettes, or other tobacco
products on which the excise tax will eventually be paid on the finished product, under
such conditions as may be prescribed in the rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.56

BIR assessments

G.R. No. 125346

Sometime in June, 1989, a team of examiners from the Bureau of Internal Revenue, led
by Crisanto G. Luna, Revenue Officer III of the Field Operation Division of the Excise
Tax Service, conducted an examination of the books of La Suerte by virtue of a letter of
authority issued by then Commissioner Jose U. Ong.

On January 3, 1990, La Suerte received a letter from then Commissioner Jose U. Ong
demanding the payment of 34,934,827.67 as deficiency excise tax on La Suertes entire
importation and local purchase of stemmed leaf tobacco for the period covering January
1, 1986 to June 30, 1989.

On January 12, 1990, La Suerte . . . protest[ed] the excise tax deficiency assessment . .
. stressing that the BIR assessment was based solely on Section 141(b) of the Tax
Code without, however, applying Section 137 thereof, the more specific provision, which
expressly allows the sale of stemmed leaf tobacco as raw material by one manufacturer
directly to another without payment of the excise tax. However, in a letter, dated August
31, 1990, Commissioner Jose U. Ong denied La Suertes protest, insisting that
stemmed leaf tobacco is subject to excise tax "unless there is an express grant of
exemption from [the] payment of tax."

In a letter dated October 17, 1990, Commissioner Ong reiterated his demand for the
payment of the alleged deficiency excise taxes due from La Suerte, to wit:

"Please be informed that in an investigation conducted by this Office, it was

ascertainedthat you incurred a deficiency specific tax on your importation and local
purchase of stemmed leaf tobacco covering the period from January 1, 1986 to June
30, 1989 in the total amount of 34,904,247.00 computed as follows:

STEMMEDLEAF TOBACCO

Imported 13,918,465 kls. x 0.75 P10,438,848.00

Local 32,620,532 kls. x 0.75 24,465,399.00

Total Amount Due (Basic Tax)- - - - - - - - - - - - P34,904,247.00

. . . ." (page 99, Rollo)

On December 6, 1990, La Suerte filed with the Court of Tax Appeals a Petition for
Review seeking for the annulment of the assessments. . .

. . . On July 13, 1995, the Tax Court rendered [its] Decision, the dispositive portion of
which reads[:]

"WHEREFORE, in all the foregoing, the assessment of alleged deficiency specific tax in
the amount of P34,904,247.00 issued by the Respondent is hereby CANCELLED for
lack of merit.

SO ORDERED."57
The Commissioner appealed the Court of Tax Appeals decision before the Court of
Appeals. On December 29, 1995, the Court of Appeals Sixth Division ruled against La
Suerteand found that RR No. V-39 limits the tax exemption on transfers of stemmed leaf
tobacco to transfers between two L-7 permittees. 58 The Court of Appeals ruled as
follows:

IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is hereby
REVERSED and SET ASIDE. Respondent is ordered to pay the petitioner
Commissioner of Internal Revenue the amount of P34,904,247.00 as deficiency specific
tax on its importations and local purchases of stemmed leaf tobacco and its sale of
stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation covering the
period from January 1, 1986 to June 30, 1989, plus 25% surcharge for late payment
and 20% interest per annum from October 17, 1990 until fully paid pursuant to sections
248 and 249 of the Tax Code.

SO ORDERED.59

La Suerte filed a motion for reconsideration, which was denied by the Court of Appeals
in its June 7, 1996 resolution.60

On August 2, 1996, La Suerte filed the instant petition for review,61 praying for the
reversal of the Court of Appeals decision and cancellation of the assessment by the
Commissioner. La Suerte raises the following grounds in support of its prayer:

A. THE COURT OF APPEALS ERRED WHEN IT CONSIDERED SECTION 20

(A) OF RR NO. V-39, SINCE THE COMMISSIONER RAISED IT FOR THE
FIRST TIMEIN THE COURT OF APPEALS

B. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION 20(A)

OF RR NO. V-39 RESTRICTS THE APPLICATION OF SECTION 137 OF THE
TAX CODE, SINCE LANGUAGE IN SEC. 137 IS UNQUALIFIED, WHILE SEC.
20(A) CONTAINS NO RESTRICTIVE LANGUAGE

C. THE COURT OF APPEALS ERRED WHEN IT IGNORED SEC. 43 OF RR

NO. 17-67 AS WELL AS OPINIONS OF BIR OFFICIALS WHICH CONFIRMED
THE EXEMPTION OFSTEMMED LEAF TOBACCO FROM PREPAYMENT OF
SPECIFIC TAX

D. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SEC. 43 OF RR

NO. 17-67 DID NOT REPEAL SECTIONS 35 AND 20(A) OF RR NO. V-39,
SINCE THEIR PROVISIONS ARE REPUGNANT TO EACH OTHER

E. THE COURT OF APPEALS ERRED WHEN IT HELD THAT RR NO. V-39

IMPOSES SPECIFIC TAXES ON STEMMED LEAF TOBACCO, SINCE IT
MAKES NO MENTION AT ALL OF TAXES ON STEMMED LEAF TOBACCO
F. THE COURT OF APPEALS ERRED WHEN IT HELD RR NO. V-39 APPLIED
TO L-6 PERMITTEES OR MANUFACTURERS OF STEMMED LEAF TOBACCO,
SINCE L-6 CLASSIFICATION WAS NON-EXISTENT AT THE TIME

G. THE COURT OF APPEALS ERRED WHEN IT INTERPRETED SECTION

20(A) OF RR NO. V-39 IN SUCH A WAY AS TO RESULT IN ADMINISTRATIVE
LEGISLATION, SINCE THE INTERPRETATION SANCTIONED THE
RESTRICTION OF AN UNQUALIFIED PROVISION OF LAW BY A MERE
REGULATION

H. THE COURT OF APPEALS ERRED WHEN IT GAVE NO WEIGHT TO THE

DECEMBER 12, 1972 BIR RULING AND OPINIONS OF OTHER BIR
OFFICIALS WHICH CONFIRMED THE EXEMPTION OF STEMMED LEAF
TOBACCO FROM PREPAYMENT OF SPECIFIC TAX

I. THE COURT OF APPEALS ERRED WHEN IT HELD [THAT]

NONAPPLICATION OF [THE] DECEMBER 12 RULING DID NOT IMPINGE ON
PRINCIPLE OF NON-RETROACTIVITY OF RULINGS BECAUSE THE
ASSESSMENT DID NOT CITE THE RULING, SINCE CITATION OF A RULING
INAN ASSESSMENT [IS] NOT NECESSARY FOR PRINCIPLE TO APPLY

J. THE COURT OF APPEALS ERRED WHEN IT DISREGARDED THE

ADMINISTRATIVE PRACTICE OF BIR FOR OVER HALF A CENTURY OF NOT
SUBJECTINGSTEMMED LEAF TOBACCO TO SPECIFIC TAX

K. THE COURT OF APPEALS ERRED WHEN IT HELD THAT SUBJECTING

STEMMED LEAF TOBACCO TO SPECIFIC TAX IS NOT PROHIBITED FORM
OF DOUBLE TAXATION, SINCE A TAX ON BOTH STEMMED LEAF TOBACCO
AND CIGARETTES INTO WHICH IT IS MANUFACTURED IS DOUBLE
TAXATION

L. THE COURT OF APPEALS ERRED WHEN IT HELD LA SUERTE LIABLE

FOR SPECIFIC TAX EVENIF NO EFFORT WAS FIRST MADE TO COLLECT
THE TAX FROM THE MANUFACTURER OF STEMMED LEAF TOBACCO,
SINCE TAX CODE ALLOWS THIS ONLY IF SPECIAL ALLOWANCE IS
GRANTED, WHICH IS NOT THE CASE

M. THE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT

THE REENACTMENT OF THE 1939 CODE AS THE 1977 CODE AND 1986 TAX
CODES ADOPTED THE INTERPRETATION IN THE DECEMBER 1972 BIR
RULING

N. THE COURT OF APPEALS ERRED WHEN IT APPLIED THE RULES OF

CONSTRUCTION ON EXEMPTION FROM TAXES, SINCE NO TAX
EXEMPTION WAS INVOLVED BUT MERELY AN EXEMPTION FROM
PREPAYMENT OF TAX.62
G.R. No. 13632829

In the letter dated November 24,1989, the Commissioner demanded from Fortune the
payment of deficiency excise tax in the amount of P28,938,446.25 for its importation of
tobacco strips from January 1, 1986 to June 30, 1989. Fortune requested for
reconsideration, which was denied by the Commissioner on August 31, 1990.
Undaunted, Fortune appealed to the Court of Tax Appeals through a petition for review,
which was docketed as CTA Case No. 4587.63

In the decision dated November 23, 1994, the Court of Tax Appeals ruled in favor of
Fortune and set aside the Commissioners assessment of P28,938,446.25 as deficiency
excise tax. Meanwhile, on March 20, 1991, Fortune received another letter from the
Bureau of Internal Revenue, demanding payment of 1,989,821.86 as deficiency specific
tax on its importation of stemmed leaf tobacco from July 1, 1989 to November 30,
1990.64 Fortune filed its protest and requested the Commissioner to cancel and
withdraw the assessment.65 On April 18, 1991, the Commissioner denied with finality
Fortunes request.66 Fortune appealed to the Court of Tax Appeals, and the case was
docketed as CTA Case No. 4616.67

In the decision dated October 6, 1994, the Court of Tax Appeals ruled in favor of
Fortune and set aside the Commissioners assessment of P1,989,821.26 as deficiency
excisetax on stemmed leaf tobacco.

The Commissioner filed separate petitions before the Court of Appeals, challenging the
decisions rendered by the Court of Tax Appeals in CTA Case Nos. 4587 and 4616.
These petitions were consolidated on November 28, 1996. 68

In the decision dated January 30, 1998, the Court of Appeals Seventeenth Division
dismissed the consolidated petitions filed by the Commissioner and affirmedthe assailed
decisions of the Court of Tax Appeals. It also denied the Commissioners motion for
reconsideration.

Hence, the Commissioner filed the present petition 69 on January 8, 1999. The
Commissioner claims that the Court of Appeals erred (1) "in holding that stemmed leaf
tobacco is not subject to the specific tax imposed under Section 141 of the Tax
Code[;]"70 (2) "in not holding that under Section 137 of the Tax Code, stemmed leaf
tobacco is exempt from specific tax when sold in bulk as raw material by one
manufacturer directly to another under such conditions as may be prescribed in the
regulations of the Department of Finance[;]" 71 and (3) "in holding that there is double
taxation in the prohibited sense when specific tax is imposed on stemmed leaf tobacco
and again on the finished product of which stemmed leaf tobacco is a raw material." 72

G.R. No. 144942

In April 1995, "[La Suerte] imported stemmed leaf tobacco from various sellers
abroad."73 The Commissioner "assessed specific taxes on the stemmed leaf tobacco in
the amount of 175,909.50, which [La Suerte] paid under protest." 74 "Consequently, [La
Suerte] filed a claim for refund with [the Commissioner], [who] failed to act on the
same."75 Undeterred, La Suerte appealed to the Court of Tax Appeals, which in its
March 9, 1999 decision, ruled in its favor. The Commissioner appealed to the Court of
Appeals Third Division, which on August 31, 2000, rendered its decision in CA-G.R. SP.
No. 51902, affirming the decision of the Court of Tax Appeals.

The Commissioner then filed the instant petition for review 76 asking this court to overturn
the Court of Appeals decision. It avers that the Court of Appeals erred in holding that
Section 137 of the Tax Code applied "without any conditions as to the domicile of the
manufacturers and that [the Commissioner] cannot indirectly restrict its application to
local manufacturers."77

The Third Division of this court initially denied 78 the petition due to an insufficient or
defective verification and because "the petition was filed by revenue lawyers and not by
the Solicitor General."79

The Commissioner filed a motion for clarification 80 seeking to clarify whether the Bureau
of Internal Revenuelegal officers can file petitions for review pursuant to Section 220 of
the Tax Code without the intervention of the Office of the Solicitor General.

The motion was referred to the En Banc81 on August 7, 2001, which issued the
resolution on July 4, 2002, holding that "Section 220 of the Tax Reform Act must not be
understood asoverturning the long established procedure before this Court in requiring
the Solicitor General to represent the interest of the Republic. This Court continues to
maintain that it is the Solicitor General who has the primary responsibility to appear for
the government in appellate proceedings." 82 In the same resolution, this court also
declared the following:

The present controversy ruminate upon the singular issue of whether or not Revenue
Regulation 1767 [sic] issued by petitioner, in relation to Section 137 of the
InternalRevenue Code in the imposition of a tax on stemmed-leaf tobacco, deviated
from the tax code. This question basically inquires then into whether or not the revenue
regulation has exceeded, on constitutional grounds, the allowable limits of legislative
delegation.

Aware that the dismissal of the petition could have lasting effect on government tax
revenues, the lifeblood of the state, the Court heeds the plea of petitioner for a chance
to prosecute its case.83 (Emphasis and underscoring supplied)

This court resolved to reinstate84 and give due course85 to the Commissioners petition.
G.R. No. 148605

"On January 12, 1990, [Sterling] received a pre-assessment notice for alleged
deficiency excise tax on itsimportation and local purchase of stemmed-leaf tobacco
for P5,187,432.00 covering the period from November 1986 to January 1989." 86 Sterling
filed its protest letter87 dated January 19, 1990. The Commissioner, through its
letters88 dated August 31, 1990 and October 17, 1990, denied the protest with finality.

Sterling filed before the Court of Tax Appeals a petition for review 89 dated January 3,
1991, seeking the cancellation of the deficiency assessment and praying that the
Commissioner be ordered to desist from collecting the assessed excise tax. On July 13,
1995,the Court of Tax Appeals rendered its decision ordering the cancellation of the
assessment for deficiency excise tax.

The Commissioner then appealed90 to the Court of Appeals. On March 7, 2001, the
latter, through its Ninth Division, rendered a decision reversing the Court of Tax Appeals
ruling, thus:

WHEREFORE, premises considered, the Decision of the Court of Tax Appeals in C.T.A.
Case No. 4532 is hereby REVERSED and SET ASIDE, and the respondent is
ORDERED to pay to the public petitioner the amount of P5,187,432.00 as deficiency
specific tax on its imported and locally purchased stemmed leaf tobacco from November
1986 to June 24, 1989, plus 25% surcharge on P5,187,432.00, and 20% interest per
annum on the total amount due from December 07, 1990 until full payment, pursuant to
Sections 248-49 of the Tax Code.

SO ORDERED.91

Sterling filed a motion for reconsideration,92 which was denied by the Court of Appeals
in its June 19, 2001 resolution.

Hence, on August 13, 2001, Sterling filed the instant petition for review.93

Sterling argues that the Court of Appeals erred in holding that (1) then Section 141 of
the Tax Code subjects stemmed leaf tobacco to excise tax; (2) Section 137 of the Tax
Code did notexempt stemmed leaf tobacco from prepayment of excise tax; (3) Section
20(A) of RR No. V-39 restricts the application of Section 137 of the Tax Code since its
language was unqualified, while Section 20(A) contained no restrictive language; (4) RR
No. V-39 imposed specific taxes on stemmed leaf tobacco since its language made no
mention of taxes on stemmed leaf tobacco; (5) the reason behind limiting exemptions
only to transfers fromone L-7 to another L-7 is because sale has previously been
subjected tospecific tax; and (6) the exemption from specific tax did not apply to
imported stemmed leaf tobacco.94

Sterling further argues that the Court of Appeals erred in not holding that (1) the
Commissioners interpretation of Section 141 of the Tax Code and Section 20(A) of RR
No. V-39 amounts to an amendment of Sections 141 and 137 of the Tax Code by a
mere administrative regulation; (2) a December 12, 1972 Bureau of Internal Revenue
ruling and opinions of other Bureau of Internal Revenue officials confirmed the
exemption of stemmed leaf tobacco from prepayment of specific tax; (3) the
administrative practice of the Bureau of Internal Revenue for over half a century of not
subjecting stemmed leaf tobacco to excise tax proves that no excise taxes were ever
intended to be imposed; (4) imposition of excise tax on stemmed leaf tobacco would
result in the prohibited form of double taxation; and (5) the re-enactment of the relevant
provisions in the 1977 and 1986 Tax Codes adopted the interpretation in the December
1972 Bureau of Internal Revenue ruling. 95 Sterling also contends that the "Court of
Appeals erred in applying the rules of construction on exemption from taxes, since no
tax exemption was involved, but merely an exemption from prepayment of excise tax." 96

G.R. No. 158197

On January 10, 1991, the Commissioner sent a pre-assessment notice to La Suerte

demanding payment of 11,757,275.25 as deficiency specific tax on its local purchases
and importations and on the sale of stemmed leaf tobacco during the period from
September 14, 1989 to November 20, 1990.97 On February 8, 1991, La Suerte received
the formal assessment letter of the Commissioner.98

La Suerte filed its protest on March 8, 1991. 99 On May 14, 1991, La Suerte received the
Commissioners decision "denying the protest with finality." 100

"On June 13, 1991, the Court of Tax Appeals promulgated a Decision finding for . . . La
Suerte and disposing [as follows:]"101

WHEREFORE, in view of the foregoing, We find the petition for review meritorious and
the same is hereby GRANTED. Respondents decision dated April 29, 1991 is hereby
set aside and the formal assessment for the deficiency specific tax in the sum
of P11,575,275.25 subject of the respondents letter, dated January 30, 1991, is deemed
cancelled.

No pronouncement as to costs of suit.

SO ORDERED.102

The Commissioner filed a motion for reconsideration that was denied by the Court of
Tax Appeals in its April 5, 1995 resolution.103

The Commissioner appealed to the Court of Appeals. 104 In its decision dated July 18,
2002, the Court of Appeals reversed the decision of the Court of Tax Appeals. It cited
Commissioner of Internal Revenue v. La Campaa Fabrica de Tabacos, Inc. 105 as basis
for its ruling. La Suerte filed a motion for reconsideration, but it was denied by the Court
of Appeals in the resolution106 dated May 9, 2003.

La Suerte prays for the reversal of the Court of Appeals decision and resolution in its
petition for review,107 wherein it raises the following arguments:

I. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT

SECTION 20(A) OF REV. REGS. NO. V-39 LIMITED THE CLASS OF
 MANUFACTURERS WHOSE SALES OF STEMMED LEAF TOBACCO WERE
EXEMPT FROM PRE-PAYMENT OF SPECIFIC TAX.

II. EVEN IF SEC. 3 OF RR NO. 17-67 HAD BEEN WAS [sic] INTENDED TO
LIMIT MANUFACTURERS EXEMPT FROM PREPAYMENT OF SPECIFIC TAX,
THIS WOULD AMOUNT TO UNLAWFUL DELEGATION OF LEGISLATIVE
POWER.

III. RR NO. 17-67 WAS NEITHER ISSUED TO AMEND RR NO. V-39 NOR TO
AMEND THE TAX CODE, BUT SOLELY TO IMPLEMENT ACT NO. 2613, AS
AMENDED, WHICH WAS ENACTED IN 1916 AND HAD ABSOLUTELY
NOTHING TO DO WITH TAXES.

IV. SECTION 2(H) OF RR NO. 17-67 EXCEEDED THE CONSTITUTIONAL

LIMITS ON THE DELEGATION OF LEGISLATIVE POWER.

V. SECTION 3(M) OF RR NO. 17-67 AS INTERPRETED BY COMMISSIONER

EXCEEDED ALLOWABLE LIMITS ON DELEGATION OF LEGISLATIVE
POWER.

VI. THE HONORABLE COURT OFAPPEALS ERRED IN APPLYING SECTION

20(A) OF RR NO. V-39 TO LA SUERTES IMPORTS OF STEMMED LEAF
TOBACCO, FOR THE APPLICABLE PROVISION IS CHAPTER V OF RR NO. V-
39.

VII. THE COMMISSIONERS PRESENT INTERPRETATION OF SECTIONS

2(M)(1) AND 3(H)OF RR NO. 17-67, WAS NOT THE INTERPRETATION GIVEN
TO THOSE SECTIONS BY ITS FRAMERS, AS SHOWN BY THE LONG
ADMINISTRATIVE PRACTICE AFTER THE ISSUANCE OF RR NO. 17-67 AND
THE BIR RULING DATED DECEMBER 12, 1972, WHICH CONFIRMED THE
TAX-FREE TRANSFER OF STEMMED- LEAF TOBACCO.108

G.R. No. 165499

On various dates in March 1995, the Commissioner of Internal Revenue . . . collected

from La Suerte the aggregate amount of THREE HUNDRED TWENTY-FIVE
THOUSAND FOUR HUNDRED TEN PESOS (P325,410.00) for specific taxes on La
Suertes bulk purchases of stemmed-leaf tobacco from foreign tobacco manufacturers.
La Suerte paid the said amount under protest.

....

On September 27, 1996 and October 2, 1996, La Suerte instituted with the
Commissioner of Internal Revenue . . . and with Revenue District No. 52, a claim for
refund of specific taxes said to have been erroneously paid on its importations of
stemmed-leaf tobacco for the period of November 1994 up to May 1995, including the
amount of Three Hundred Twenty Five Thousand Four Hundred Ten Pesos
(P325,410.00). . . .

Inasmuch as its claim for refund was not acted upon by petitioner and in order to toll the
running of the two-year reglementary period within which to file a judicial claim for such
refund as provided under Section 229 of the 1997 National Internal Revenue Code, as
amended, La Suerte filed on February 8, 1997 a petition for review with the CTA. 109

On September 23, 1998, the Court of Tax Appeals rendered judgment granting the
petition for review and ordering the Commissioner to refund the amount of P325,410.00
to La Suerte.110 The Commissioner filed a motion for reconsideration, but this was
denied by the Court of Tax Appeals on December 15, 1998. 111

On appeal, the Court of Appeals Fourth Division reversed 112 the Court of Tax Appeals
ruling. It also denied113 La Suertes motion for reconsideration. Hence, this petition was
filed,114 reiterating the same arguments already presented in the other cases.

This court ordered the consolidation of G.R. Nos. 13632829 and 125346. 115 Thereafter,
this court consolidated G.R. Nos. 165499, 144942, and 148605. 116 Finally, this court
approved the consolidation of G.R. Nos. 125346, 13632829, 144942, 148605, 158197,
and 165499.117

Issues

I. Whether stemmed leaf tobacco is subject to excise (specific) tax under Section
141 of the 1986 Tax Code;

II. Whether Section 137 of the 1986 Tax Code exempting from the payment of
specific tax the sale of stemmed leaf tobacco by one manufacturer to another is
not subject to any qualification and, therefore, exempts an L-7 manufacturer from
paying said tax on its purchase of stemmed leaf tobacco from other
manufacturers who are not classified as L-7 permittees;

III. Whether stemmed leaf tobacco imported by La Suerte, Fortune, and Sterling
is exempt from specific tax under Section 137 of the 1986 Tax Code;

IV. Whether Section 20(a) of RR No. V-39, in relation to RR No. 17-67, which
limits the exemption from payment of specific tax on stemmed leaf tobacco to
sales transactions between manufacturers classified as L-7 permittees is a valid
exercise by the Department of Finance ofits rule-making power under Section
338118of the 1939 Tax Code;

V. Whether the possessor or owner of stemmed leaf tobacco may be held liable
for the payment of specific tax if such tobacco product is removed from the place
of production without payment of said tax;
 VI. Whether the August 31, 1990 ruling of then Bureau of Internal Revenue
Commissioner Jose U. Ong denying La Suertes request for exemption from
specific tax on its local purchase and importation of stemmed leaf tobacco
violates the principle on non-retroactivity of administrative ruling for allegedly
contradicting the previous position taken by the Bureau of Internal Revenue that
such a transaction is not subject to specific tax as expressed in the December
12, 1972 ruling of then Bureau of Internal Revenue Commissioner Misael P.
Vera; and

VII. Whether the imposition of excise tax on stemmed leaf tobacco under Section
141 of the 1986 Tax Code constitutes double taxation.

Arguments of the cigarette manufacturers

The cigarette manufacturers claim that since Section 137 of the 1986 Tax Code and
Section 20(a) of RR No. V-39 do not distinguish "as to the type of manufacturer that
may sell stemmed-leaf tobacco without the prepayment of specific tax[,] [t]he logical
conclusion is that any kind of tobacco manufacturer is entitled to this treatment." 119 The
authority of the Secretary of Finance to prescribe the "conditions" refers only to
procedural matters and should not curtail or modifythe substantive right granted by the
law.120 The cigarette manufacturers add thatthe reference to an L-7 invoice and L-7
register book in the second paragraph of Section 20(a) cannot limit the application of
the tax exemption provision only to transfers between L-7 permittees because (1) it
does not so provide;121 and (2) under the terms of RR No. V-39, L-7 referred to
manufacturers of any class of tobacco products, including manufacturers of stemmed
leaf tobacco.122

They further argue that, going by the theory of the Commissioner, RR No. 17-67 would
have unduly restricted the meaning of "manufacturers" by limiting it to a few
manufacturers suchas manufacturers of cigars and cigarettes. 123Allegedly, RR No. 17-
67 cannotchange the original meaning of L-7 in Section 20(A) of RR No. V-39 without
exceeding constitutional limits of delegated legislative power.124 La Suerte further points
out that RR No. 17-67 was not even issued for the purpose of implementing the Tax
Code but for the sole purpose of implementing Act No. 2613; and Section 3 of RR No.
17-67 restricts the new designations only for administrative purposes. 125

Moreover, the cigarette manufacturers contend "that Section 132 does not operate as a
tax exemption" because "prepayment means payment of obligation in advance or
before it is due."126 Consequently, the rules of construction on tax exemption do not
apply.127 According to them, "the absence of tax prepayment for the saleof stemmed leaf
tobacco impliedly indicates the underlying policy of the law: that stemmed leaf tobacco
shall not be taxed twice, first, as stemmed leaf tobacco and, second, as a component of
the finished products of which it forms an integral part." 128

Fortune, for its part, claims that stemmed leaf tobacco is not subject to excise tax. It
argues that stemmed leaf tobacco cannot be considered prepared or partially prepared
tobaccobecause it does not fall within the definition of a "processed tobacco" under
Section 1-b of Republic Act No. 698, as amended.129 Furthermore, it adds that Section
141 should be strictly construed against the taxing power.130 "There being no explicit
reference to stemmed leaf tobacco in Section 141, it cannot be claimed or construed to
be subject to specific tax."131

According to Fortune, "a plain reading of Section 141 readily reveals that the intention
was to impose excise taxes on products oftobacco that are not to be used as raw
materials in the manufacture of other tobacco products." 132"Section 2(m)(1) unduly
expanded the meaning of prepared or partially prepared tobacco to includea raw
material like stemmed leaf tobacco; hence, ultra viresand invalid." 133

As regards the taxability of their importations, Sterling argues that since locally
manufactured stemmed leaf tobaccos are not subject to specific tax, it follows that
imported stemmed leaf tobaccos are also not subject to specific tax. 134 On the other
hand, La Suerteclaims that Section 20(A) of RR No. V-39 does not apply to its imports
because the applicable provision is Section 128(b) of the 1986 Tax Code, which states
that "imported articles shall be subject to the same tax and the same rates and basis of
excise taxes applicable to locally manufactured articles," and Chapter V of RR No. V-39
(Payment of specific taxes on imported cigars, cigarettes, smoking and chewing
tobacco).135

Finally, La Suerte and Sterling136 argues that the Court of Appeals erred: (1) in ignoring
Section 43 of RR No. 17-67, December 12, 1972 Bureau of Internal Revenue ruling and
other Bureau of Internal Revenue opinions confirming the exemption of stemmed leaf
tobacco from prepayment of specific tax;137 (2) in disregarding the Bureau of Internal
Revenues practice for over half a century of not subjecting stemmed leaf tobacco to
specific tax;138 (3) in failing to consider that the re-enactment of the 1939 Tax Code as
the 1977 and 1986 Tax Codes impliedly adopted the interpretation in the December 12,
1972 ruling; and 4) in holding that nonapplication of the December 12, 1972 ruling did
not impinge on the principle of non-retroactivity of rulings. 139 Moreover, it argues that the
Tax Code does not authorize collection of specific tax from buyers without a prior
attempt to collect tax from manufacturers.140

Respondents arguments

Respondent counters that "under Section 141(b), partially prepared or manufactured

tobacco is subject to specific tax."141 The definition of "partially manufactured tobacco" in
Section 2(m) of RR No. 17-67 includes stemmed leaf tobacco; hence, stemmed leaf
tobacco is subject to specific tax.142 "Imported stemmed leaf tobacco isalso subject to
specific tax under Section 141(b) in relation to Section 128 of the 1977 Tax
Code."143 Fortunes reliance on the definition of "processed tobacco" in Section 1-b of
Republic Act No. 698144 as amended by Republic Act No. 1194 is allegedly misplaced
because the definition therein of processed tobacco merely clarified the type of tobacco
product that may not be imported into the country.145 Respondent posits that "there is no
double taxation in the prohibited sense even if specific tax is also imposed on the
finished product of which stemmed leaf tobacco is a raw material." 146 Congress clearly
intended it "considering that stemmed leaf tobacco, as partially prepared or
manufactured tobacco, is subjected to specific tax under Section 141(b), while cigars
and cigarettes, of which stemmed leaf tobacco is a raw material, are also subjected to
specific tax under Section 142."147 It adds that there is no constitutional prohibition
against double taxation.148

"Foreign manufacturers of tobacco products not engaged in trade or business in the

Philippines cannot be classified as L-7, L-6, or L-3R since they are beyond the pale of
Philippine laws and regulations."149 "Since the transfer of stemmed leaf tobacco from
one factory to another must be under an official L-7 invoice and entered in the L-7
registers of both transferor and transferee, it is obvious that the factories contemplated
are those located or operating in the Philippines and operated only by L-7
permittees."150 The transaction contemplated under Section 137 is sale and not
importation because the law uses the word "sold." 151 The law uses "importation" or
"imported" whenever the transaction involves bringing in articles from foreign
countries.152

Respondent argues that "the issuance of RR Nos. V-39 and 17-67 is a valid exercise by
the Department of Finance of its rule-making power" under Sections 132 and 338 of the
1939 Tax Code.153 It explains that "the reason for the exemption from specific tax of the
sale of stemmed leaf tobacco as raw material by one L-7 directly to another L-7 is that
the stemmed leaf tobacco is supposed to have been already subjected to specific tax
when an L-7 purchased the same from an L-6." 154 "Section 20(A) of RR No. V-39
adheres to the standards set forth in Section 245 because it provides the conditions for
a tax-free removal of stemmed leaf tobacco under Section 137 without negating the
imposition of specific tax under Section 141(b)." 155 "To construe Section 137 in the
restrictive manner suggested by La Suerte will practically defeat the revenue-generating
provision of Section 141(b)."156

It further argues that the August 31, 1990 ruling of then Bureau of Internal Revenue
Commissioner Jose U. Ong denying La Suertes request for exemption from specific tax
on its local purchase and importation of stemmed leaf tobacco does not violate the
principle on non-retroactivity of administrative ruling. It alleges that an erroneous ruling,
like the December 12, 1972 ruling, does not give rise to a vested right that can be
invoked by La Suerte.157

Finally, respondent contends that under Section 127, if domestic products are removed
from the place ofproduction without payment of the excise taxes due thereon, it is not
required that the tax be collected first from the manufacturer or producer before the
possessor thereof shall be liable.158

Courts ruling

Nature of excise tax

Excise tax is a tax on the production, sale, or consumption of a specific commodity in a
country. Section 110 of the 1986 Tax Code explicitly provides that the "excise taxes on
domestic products shall be paid by the manufacturer or producer before[the] removal [of
those products] from the place of production." "It does not matter to what use the
article[s] subject to tax is put; the excise taxes are still due, even though the articles are
removed merely for storage in someother place and are not actually sold or
consumed."159 The excise tax based on weight, volume capacity or any other physical
unit of measurement is referred to as "specific tax." If based on selling price or other
specified value, itis referred to as "ad valorem" tax.

Section 141 subjects partially

prepared tobacco, such as
stemmed leaf tobacco, to
excise tax

Section 141 of the 1986 Tax Code provides:

SEC. 141. Tobacco Products. There shall be collected a tax of seventy-five centavos
on each kilogram of the following products of tobacco:

(a) tobacco twisted by hand or reduced into a condition to be consumed in any

manner other than the ordinary mode of drying and curing;

(b) tobacco prepared orpartially prepared with or without the use of any machine
or instruments or without being pressed or sweetened; and

(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of
tobacco. 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 transferred, disposed of, or otherwise sold, without prepayment
of the specific tax herein provided for under such conditions as may be
prescribed in the regulations promulgated by the Ministry of Finance upon
recommendation of the Commissioner, if the same are tobe 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.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other
manner, on each kilogram, sixty centavos. (Emphasis supplied)

It is evident that when tobacco is harvested and processed either by hand or by

machine, all itsproducts become subject to specific tax. Section 141 reveals the
legislative policy to tax all forms of manufactured tobacco in contrast to raw tobacco
leaves including tobacco refuse or all other tobacco which has been cut, split,
twisted, or pressed and is capable of being smoked without further industrial
processing.
Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a partially
prepared tobacco. The removal of the stem or midrib from the leaf tobacco makes the
resulting stemmed leaf tobacco a prepared or partially prepared tobacco. The following
is La Suertes own illustration of how the stemmed leaf tobacco comes about: In the
process of removing the stems, the whole leaf tobacco breaks into pieces; after the
stems or midribs are removed, the tobacco is threshed (cut by machine into fine narrow
strips) and then undergoes a process of redrying, 160 undoubtedly showing that stemmed
leaf tobacco is a partially prepared tobacco. Since the Tax Code contained no definition
of "partially prepared tobacco," then the term should be construed in its general,
ordinary, and comprehensive sense.161

RR No. 17-67, as amended, supplements the law by delineating what products of

tobacco are "prepared or manufactured" and "partially prepared or partially
manufactured." Section 2(m) states:

(m) "Partially manufactured tobacco" Includes:

(1) "Stemmed leaf" handstripped tobacco, clean, good, partially broken leaf
only, free from mold and dust.

(2) "Long-filler" handstripped tobacco of good, long pieces of broken leaf

usableas filler for cigars without further preparation, and free from mold, dust
stems and cigar cuttings.

(3) "Short-filler" handstripped or machine-stripped tobacco, clean, good, short

pieces of broken leaf, which will not pass through a screen of two inches (2")
mesh.

(4) "Cigar-cuttings" clean cuttings or clippings from cigars, unsized with any
other form of tobacco.

(5) "Machine-scrap tobacco" machine-threshed, clean, good tobacco, not

included in any of the above terms, usable in the manufacture of tobacco
products.

(6) "Stems" midribs of leaftobacco removed from the whole leaf or broken leaf
either by hand or machine.

(7) "Waste tobacco" denatured tobacco; powder or dust, refuse, unfit for
human consumption;

discarded materials in the manufacture of tobacco products, which may include stems.

Insisting on the inapplicability of RR No. 17-67, La Suerte points to the different

definitions given to stemmed leaf tobacco by Section 2(m)(1) of RR No. 17-67 and
Section 137. It argues that while RR No. 17-67 defines stemmed leaf tobacco as
handstripped tobacco of clean, good, partially broken leaf only, free from mold and
dust,Section 137 defines it as leaf tobacco which has had the stemor midrib
removed.The term does not include broken leaf tobacco. We are not convinced.

Different definitions of the term "stemmed leaf" are unavoidable, especially considering
that Section 2(m)(1) is an implementing regulation of Act No. 2613, which was enacted
in 1916 for purposes of improving the qualityof Philippine tobacco products, while
Section 137 defines the tobacco product only for the purpose of exempting it from the
specific tax. Whichever definition is adopted, there is no doubt that stemmed leaf
tobacco is a partially prepared tobacco.

The onus of proving that stemmed leaf tobacco is not subject to the specific tax lies with
the cigarette manufacturers. Taxation is the rule, exemption is the
exception.162 Accordingly, statutes granting tax exemptions must be construed
instrictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority. The
cigarette manufacturers must justify their claim by a clear and categorical provision in
the law. Otherwise, they are liable for the specific tax on stemmed leaf tobacco found in
their possession pursuant to Section 127163 of the 1986 Tax Code, as amended.

Stemmed leaf tobacco

transferred in bulk between
cigarette manufacturers are
exempt from excise tax under
Section 137 of the 1986 Tax
Code in conjunction with RR
No. V-39 and RR No. 17-67

In the instant case, an exemption on the taxability of stemmed leaf tobacco is found in
Section 137, which provides the following:

SEC. 137. Removal of tobacco products without prepayment of tax. Products of

tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural
or industrial use, under such conditions as may be prescribed in the regulations of the
Ministry of Finance. Stemmed leaf tobacco,fine-cut shorts, the refuse of fine-cut
chewing tobacco, scraps, 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 Ministry of Finance.

Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or
midrib removed. The term does not include broken leaf tobacco. (Emphasis and
underscoring supplied) Section 137 authorizes a tax exemption subject to the following:
(1) that the stemmed leaf tobacco is sold in bulk as raw material by one
manufacturerdirectly to another; and (2) that the sale or transfer has complied with the
conditions prescribed by the Department of Finance.
That the title of Section 137 uses the term "without prepayment" while the body itself
uses "without payment" is of no moment. Both terms simply mean that stemmed leaf
tobacco may be removed from the factory or place of production without prior payment
of the specific tax.

This court has held in Commissioner of Internal Revenue v. La Campaa Fabrica de

Tabacos, Inc.,164 reiterated in Compania General de Tabacos de Filipinas v. Court of
Appeals165 and Commissioner of Internal Revenue v. La Suerte Cigar and Cigarette
Factory, Inc.166 that the exemption from specific tax of the sale of stemmed leaf tobacco
is qualified by and is subject to "such conditions as may be prescribed in the regulations
of the Department of Finance." These conditions were provided for in RR Nos. V-39 and
17-67. Thus, Section 137 must be read and interpreted in accordance with these
regulations.

Section 20(a) of RR No. V-39 provides the rules for tax exemption on tobacco products:
SECTION 20. Exemption from tax of tobacco products intended for agricultural or
industrial purposes. (a) Sale of stemmed leaf tobacco, etc., by one factory to another.
Subject to the limitations herein established, products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for agricultural or industrial use; and
stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse,
scraps, cuttings, clippings, and sweepings 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,
cuttings, clippings, and sweeping of leaf tobacco or partially manufactured tobaccoor
other refuse of tobacco may be transferred from one factory to another under an official
L-7 invoiceon which shall be entered the exact weightof 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
of removals. Corresponding debit entry will be made in the L-7 register book of the
factory receiving the tobacco under heading "Refuse, etc., received from other factory,"
showing the date of receipt, 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 supplied)

The conditions under which stemmed leaf tobacco may be transferred from one factory
to another without prepayment of specific tax are as follows:

(a) The transfer shall be under an official L-7 invoice on which shall be entered
the exact weight of the tobacco at the time of its removal;

(b) Entry shall be made in the L-7 register in the place provided on the page for
removals; and
 (c) Corresponding debit entry shall bemade in the L-7 register book of the factory
receiving the tobacco under the heading, "Refuse, etc.,received from the other
factory," showing the date of receipt, assessment and invoice numbers, name
and address of the consignor, formin which received, and the weight of the
tobacco.

Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau of Internal
Revenue with an L-7 permit refer to "manufacturers of tobacco products." Hence, the
transferor and transferee of the stemmed leaf tobacco must be an L-7 tobacco
manufacturer.

La Campaaexplained that the reason behind the tax exemption of stemmed leaf
tobacco transferred between two L-7 manufacturers is that the same had already been
previouslytaxed when acquired by the L-7 manufacturer from dealers of tobacco, thus:

[T]he exemption from specific tax of the sale of stemmed leaf tobacco as raw material
by one L-7 directly to another L-7 is because such stemmed leaf tobacco has been
subjected to specific tax when an L-7 manufacturer purchased the same from wholesale
leaf tobacco dealers designated under Section 3, Chapter I, Revenue Regulations No.
17-67 (supra) as L-3, L-3F, L-3R, L-4, or L-6, the latter being also a stripper of leaf
tobacco. These are the sources of stemmed leaf tobacco to be used as raw materials
by an L-7 manufacturer which does not produce stemmed leaf tobacco. When an L-7
manufacturer sells the stemmed leaf tobacco purchased from the foregoing suppliersto
another L-7 manufacturer as raw material, such sale is not subject to specific tax under
Section 137 (now Section 140), as implemented by Section 20(a) of Revenue
Regulations No. V-39.167

There is no new product when stemmed leaf tobacco is transferred between two L-7
permit holders. Thus, there can be no excise tax that will attach. The regulation,
therefore, is reasonable and does not create a new statutory right.

RR Nos. V-39 and 17-67 did

not exceed the allowable
limits of legislative delegation

The cigarette manufacturers contend that the authority of the Department of Finance to
prescribe conditions is merely procedural. Its rule-making power is only for the effective
enforcement of the law, which implicitly rules out substantive modifications. The
Secretary of Finance cannot, by mere regulation, limit the classes of manufacturers that
may be entitled to the tax exemption. Otherwise, Section 137 (Section 132 in the 1939
Tax Code) would be invalid as an undue delegation of legislative power without the
required standards or parameters.

The power of taxation is inherently legislative and may be imposed or revoked only by
the legislature.168 Moreover, this plenary power of taxation cannot be delegated by
Congress to any other branch of government or private persons, unless its delegation is
authorized by the Constitution itself. 169 Hence, the discretion to ascertain the following
(a) basis, amount, or rate of tax; (b) person or property that is subject to tax; (c)
exemptions and exclusions from tax; and (d) manner of collecting the tax may not be
delegated away by Congress.

However, it is well-settled that the power to fill in the details and manner as to the
enforcement and administration of a law may be delegated to various specialized
administrative agencies like the Secretary of Finance in this case. 170

This court in Maceda v. Macaraig, Jr.171 explained the rationale behind the permissible
delegation of legislative powers to specialized agencies like the Secretary of Finance:

The latest in our jurisprudence indicates that delegation of legislative power has
become the rule and its non-delegation the exception. The reason is the increasing
complexity of modern life and many technical fields of governmental functions as in
matters pertaining to tax exemptions. This is coupled by the growing inability of the
legislature to cope directly with the many problems demanding its attention. The growth
of society has ramified its activities and created peculiar and sophisticated problems
that the legislature cannot be expected reasonably to comprehend. Specialization even
in legislation has become necessary. To many of the problems attendant upon present
day undertakings, the legislature may not have the competence, let alone the interest
and the time, to provide the required directand efficacious, not to say specific
solutions.172

Thus, rules and regulations implementing the law are designed to fill in the details or to
make explicit whatis general, which otherwise cannot all be incorporated in the provision
of the law.173 Such rules and regulations, when promulgated in pursuance of the
procedure or authority conferred upon the administrative agency by law,174"deserve to
be given weight and respect by the courts in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective fields." 175 To be
valid, a revenue regulation mustbe within the scope of statutory authority or standard
granted by the legislature. Specifically, the regulation must (1) be germane to the object
and purpose of the law;176 (2) not contradict, but conform to, the standards the law
prescribes;177 and (3) be issued for the sole purpose of carrying into effect the general
provisions of our tax laws.178

Section 338 authorizes the Secretary of Finance to promulgate all needful rules and
regulations for the effective enforcement of the provisions of the 1939 Tax Code.

The specific authority of the Department of Finance to issue regulations relating to the
taxation of tobacco products is found in Section 4179 (Specific provisions to be contained
in regulations); Section 125180 (Payment of specific tax on imported articles to customs
officers prior to release from the customhouse); Section 132 (Removal of tobacco
products without prepayment of tax); Section 149 181 (Extent of supervision over
establishments producing taxable output); Section 150 182 (Records to be kept by
manufacturers; Assessment based thereon); and Section 152 183(Labels and form of
packages) of the 1939 Tax Code.

RR No. V-39 was promulgated to enforce the provisions of Title IV (Specific Taxes) of
the 1939 Tax Code relating to the manufacture and importation of, and payment of
specific tax on, manufactured tobacco or products of tobacco. By an explicit provision in
Section 132, the lawmakers defer to the Department of Finance to provide the details
upon which the removal of stemmed leaf tobacco may be exempt from the specific tax
in view of its supposed expertise in the tobacco trade. Section 20(a) of RR No. V-39
adhered to the standards because it provided the conditions the proper
documentation and recording of raw materials transferred from one factory to another
for a tax-free removal of stemmed leaf tobacco, without negating the imposition of
specific tax under Section 137. The "effective enforcement of the provisions of [the Tax
Code]" in Section 338 provides a sufficient standard for the Secretary of Finance in
determining the conditionsfor the tax-free removal of stemmed leaf tobacco. Section 4
further provides a limitation on the contents of revenue regulations to be issued by the
Secretary of Finance.

On the other hand, RR No. 17-67 was promulgated "[i]n accordance with the provisions
of Section 79 (B) of the Administrative Code, as amended by Act No. 2803." 184 Among
the specific administrative powers conferred upon a department head under the
Administrative Code is that of promulgating rules and regulations, not contrary to law,
"necessary to regulate the proper working and harmonious and efficient administration
of each and all of the offices and dependencies of his Department, and for the strict
enforcement and proper execution ofthe laws relative to matters under the jurisdiction of
said Department."185 Under the 1939 Tax Code, the Secretary of Finance is authorized
to prescribe regulations affecting the business of persons dealing in articles subject to
specific tax, including the mode in which the processes of production of tobacco and
tobacco products should be conducted and the records to be kept by manufacturers.
Clearly then, the provisions of RR No. 17-67 classifying and regulating the business of
persons dealing in tobacco and tobacco products are within the rulemaking authority of
the Secretary of Finance.

RR No. 17-67 did not create a

new classification

The contention of the cigarette manufacturers that RR No. 17-67 unduly restricted the
meaning of manufacturers of tobacco products by limiting it to a few manufacturers
suchas manufacturers of cigars and cigarettes is misleading.

The definitions in RR No. 17-67 of"manufacturer of tobacco" and "manufacturer of

cigars and/or cigarettes" are in conformity with, as in fact they are verbatim adoptions
of, the definitions under Section 194(m) and (n) of the 1939 Tax Code.

The cigarette companies further argue that RR No. 17-67 unduly restricted the meaning
of L-7 in Section 20(a) of RR No. V-39 because when RR No. V-39 was issued, there
was no distinction at all between L-7, L-3, L-6 permittees, and L-7 referred to
manufacturers of any class of tobacco products including stemmed leaf tobacco.

This argument is similarly misplaced.

A reading of the entire RR No. V-39 shows that the regulation pertains particularly to
activities ofmanufacturers of smoking and chewing tobacco, cigars and
cigarettes.186 This was rightly so because the regulation was issued to enforce the tax
law provisions in relation to the manufacture and importation of tobacco products.
Clearly apparent in Section 10(a) is that when a manufacturer of chewing and smoking
tobacco, cigars, or cigarettes has been qualified to conduct his or her business as such,
he or she is issued by the internal revenue agent the corresponding register books and
auxiliary register books pertaining to his business as well as the official register book, L-
7, to be used as record of the raw materials for his or her product. It is, therefore, logical
toconclude that the L-7 invoice and L-7 register book under Section 20(a) refers to
those invoice and books used by manufacturers of chewing and smoking tobacco,
cigars or cigarettes.

RR No. 17-67 clarified RR No. V-39 by explicitly designating the manufacturers of

tobacco products as L-7 permittees (Section 2), in contrast to wholesale leaf tobacco
dealers and those that process partially manufactured tobacco such as stemmed leaf
tobacco. RR No. 17-67 did not create a new and restrictive classification but only
expressed in clear and categorical terms the distinctions between "manufacturers" and
"dealers" of tobacco that were already implicit in RR No. V-39.

Indeed, there is no repugnancy between RR No. 17-67 and RR No. V-39, on the one
hand, and the Tax Code, on the other. It is safer to presume that the term
"manufacturer" used in Section 137 on tax exempt removals referred to an entity that is
engaged in the business of, and was licensed by the Bureau of Internal Revenue as a,
manufacturer of tobacco products. It does not include an entity engaged in business as
a dealer in tobacco that, incidentally or in furtherance of its business as a dealer, strip or
thresh whole leaf tobacco or reprocess partially manufactured tobacco. 187

Such construction is consistent with the rule that tax exemptions, deemed to be in
derogation of the states sovereign right of taxation, are strictly applied and may be
granted only under clear and unmistakable terms of the law and not merely upon a
vague implication or inference.188

RR No. V-39 must be applied

and read together with RR
No. 17-67

The cigarette manufacturers argument is misplaced, stating that RR No. 17-67 could
not modify RR No. V-39 because it was promulgated to enforce Act No. 2613, as
amended (entitled "An Act to Improve the Methods of Production and the Quality
ofTobacco in the Philippines and to Develop the Export Trade Therein"), which allegedly
had nothing whatsoever to do with the Tax Code or with the imposition of taxes.

"The Tobacco Inspection Service,instituted under Act No. 2613, was made part of the
Bureau of Internal Revenue and Bureau of Customs administration for . . . internal
revenue purposes."189 The Collector of Internal Revenue was charged to enforce Act
No. 2613, otherwise known as the Tobacco Inspection Law, with a view to promoting the
Philippine tobacco trade and thereby increase the revenues of the government. This
can be inferred from a reading of the following provisions of Act No. 2613:

SEC. 6. The Collector of InternalRevenue shall have the power and it shall be his duty:

(a) To establish general and local rules respecting the classification, marking, and
packing of tobacco for domestic sale or factory use and for exportation so far as
may be necessary to secure leaf tobacco of good quality and to secure its
handling under sanitary conditions, and to the end that leaf tobacco be not
mixed, packed, and marked and of the same quality when it is not of the same
class and origin.

(b) To establish from time to time adequate rules defining the standard and the
type of leaf and manufactured tobacco which shall be exported, as well also as
the manner in which standard tobacco, shall be packed. Before establishing the
rules above specified, the Collector of Internal Revenue shall give due notice of
the proposed rules or amendments to those interested and shall give them an
opportunity to present their objections to such rules or amendments.

(c) To require, whenever it shall be deemed expedient the inspection of and

affixture of inspection labels to tobacco removed from the province of itsorigin to
another province before such removal, or to tobacco for domestic sale or factory
use.190

SEC. 7. No leaf tobacco or manufactured tobacco shall be exported until it shall have
been inspected by the Collector of Internal Revenue or his duly authorized
representative and found to be standard for export.Collector of customs shall not permit
the exportation of tobacco from the Philippines unless the shipment be in conformity
with the requirements set forth in this Act. The prohibition contained in this section shall
not apply to waste and refuse tobacco accumulated in the manufacturing process when
it is invoiced and marked as such waste and refuse. 191(Emphasis supplied)

....

SEC. 9. The Collector of Internal Revenue may appoint inspectors of tobacco for the
purpose of making the inspections herein required, and may also detail any officer or
employee of the Bureau to perform such duty. Said inspectors or employees shall
likewise be charged with the dutyof grading leaf tobacco and shall perform such other
duties as may be required of them in the promotion of the Philippine tobacco industry.
The Collector of Internal Revenue shall likewise appoint, with the approval of the
Secretary of Finance, agents in the United States for the purpose of promoting the
export trade in tobacco with the United States, whose duty it shall be to inspect
shipments of tobacco upon or after their arrival in that country when so required, to
assist manufacturers of, exporters of, and dealers in tobacco in disseminating
information regarding Philippine tobacco and, at the request of the parties, to act as
arbitrators between the exporter in the Philippine Islands and the importer in the United
States whenever a dispute arises between them as to the quality, sizes, classes, or
shapes shipped or received. When acting asarbitrator as aforesaid, the agent shall
proceed in accordance with the law governing arbitration and award inthe locality where
the dispute arises. All agents, inspectors, and employees acting under and by virtue of
this Act shall be subject to all penal provisions applicable to internal-revenue officers
generally.192 (Emphasis supplied)

....

SEC. 12. The inspection fees collectedby virtue of the provisions of this Act shall
constitute a special fund to be known a the Tobacco Inspection Fund, which shall be
expended by the Collector of Internal Revenue, with the approval of the Secretary of
Finance, upon allotment by a Board consisting of the Commissioner of Internal
Revenue, the Director of Plant Industry, the Director of the Bureau of Commerce and
Industry, two manufacturers designated by the Manila Tobacco Association, and two
persons representing the interests of the tobacco producers and growers, appointed by
the President of the Philippine Islands[.]

These funds may be expended for any of the following purposes:

(a) The payment of the expenses incident to the enforcement of this Act including
the salaries of the inspectors and agents.

(b) The payment of expenses incident to the reconditioning and returning to the
Philippine Islands of damaged tobacco and the reimbursement of the value of the
United States internal-revenue stamps lost thereby.

(c) The advertising of Philippine tobacco products in the United States and in
foreign countries. (d) The establishment of tobaccowarehouses in the Philippine
Islands and in the United States at such points as the trade conditions may
demand.

(e) The payment of bounties to encourage the production of leaf tobacco of high
quality.

(f) The promotion and defense of the Philippine tobacco interests in the United
States and in foreign countries.
 (g) The establishment, operation, and maintenance of tobacco experimental
farms for the purpose of studying and testing the best methods for the
improvement of the leaves:Provided, however, That thirty per centum of the total
annual income of the tobacco inspection fund shall be expended for the
establishment, operation, and maintenance of said tobacco experimental farms
and for the investigation and discovery of efficacious ways and means for the
extermination and control of the pests and diseases of tobacco: Provided, further,
That in the establishment of experimental farms, preference shall be given to
municipalities offering the necessary suitable land for the establishment of an
experimental farm.

(h) The sending of special agentsand commissions to study the markets of the
United States and foreign countries with regard to the Philippine cigars and their
propaganda in said markets.

(i) The organization of exhibits of cigars and other Philippine tobacco products in
the United States and in foreign countries.193

SEC. 13. The Collector Internal Revenue shall be the executive officer charged with the
enforcement of the provisions of this Act and of the regulations issued in accordance
therewith, but it shall be the duty of the Director of Agriculture, with the approval of the
Secretary of Public Instruction, to execute and enforce the provisions hereof referring to
the cultivation of tobacco. (Emphasis supplied)

The cigarette manufacturers, thus, erroneously concluded that Act No. 2613 does not
involve taxation.

Parenthetically, Section 8 of Act No. 2613 pertained to the imposition of tobacco

inspection fees, which are National Internal Revenue taxes, these being one of the
miscellaneous taxes provided for under the Tax Code. Said Section 8 was in fact
repealed by Section 369(b) of the 1939 Tax Code, and the provision regarding
inspection feesare found in Section 302 of the 1939 Tax Code.

Since the two revenue regulations, RR Nos. V-34 and 17-67, are in pari materia, i.e.,
they both pertain specifically to the regulation of tobacco trade, they should be read and
applied together. Statutes are in pari materia when they relate to the same person or
thing or to the same class of persons or things, or object, or cover the same specific or
particular subject matter.

It is axiomatic in statutory construction that a statute must be interpreted, not only to be

consistent with itself, but also to harmonize with other laws on the same subject matter,
as to form a complete, coherent and intelligible system. The rule is expressed in the
maxim, "interpretare et concordare legibus est optimus interpretandi,"or every statute
must be so construed and harmonized with other statutes as to form a uniform system
of jurisprudence.194(Citation omitted)
The foregoing rules on statutory construction can be applied by analogy to
administrative issuances suchas RR No. V-39 and RR No. 17-67, especially since both
are issued by the same administrative agency.

Importation of stemmed leaf

tobacco not included in the
exemption under Section 137

The transaction contemplated in Section 137 does not include importation of stemmed
leaf tobacco for the reason that the law uses the word "sold" to describe the transaction
of transferring the raw materials from one manufacturer to another.

The Tax Code treats an importerand a manufacturer differently. Section 123 clearly
distinguishes between goods manufactured or produced in the Philippines and things
imported. The law uses the proper term "importation" or "imported" whenever the
transaction involves bringing in articles from foreign countries as provided under Section
125 (cf. Section 124). Whenever the Tax Code refers to importers and manufacturers,
they are separately mentioned as two distinct persons or entities (Sections 156 and
160). Under Chapter II, whenever the law uses the word manufacturer, it only means
local manufacturer or producer of domestic products (Sections 150, 151, and 152 of the
1939 Tax Code).

Moreover, foreign manufacturers oftobacco products not engaged in trade or business

in the Philippines cannot be designated as L-7 since these are beyond the pale of
Philippine law and regulations. The factories contemplated are those located
oroperating only in the Philippines. Contrary to La Suertes claim, Chapter V, Section 61
of RR No. V-39195 is not applicable to justify the tax exemption of its importation of
stemmed leaf tobacco because from the title of Chapter V, the provision particularly
refers to specific taxes on imported cigars, cigarettes, smoking and chewing tobacco.

No estoppel against government

The cigarette manufacturers contend that for a long time prior to the transactions herein
involved, the Collector of Internal Revenue had never subjected their purchases and
importations of stemmed leaf tobacco to excise taxes. This prolonged practice allegedly
represents the official and authoritative interpretation of the law by the Bureau of
Internal Revenue which must be respected.

We are not persuaded.

In Philippine Long Distance Telephone Co. v. Collector of Internal Revenue, 196 this court
has held that this principle is not absolute, and an erroneous implementation by an
officerbased on a misapprehension of law may be corrected when the true construction
is ascertained. Thus:
The appellant argues that the Collector of Internal Revenue, previous to the
transactions hereininvolved, had never collected the franchise tax on items of the same
nature as those herein in question and this is strong evidence that such transactions are
not subject to tax on the principle that a prolonged practice on the part of an executive
or administrative officer in charge of executing a certain statute is an authoritative
construction of great weight. This contention may be granted, but the principle is not
absolute and may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has erroneously executed it for a long time, the error
may be corrected when the true construction is ascertained. Such we deem to be the
situation in the present case. Incidentally, the doctrine of estoppel does not apply
here.197 (Emphasis supplied)

This court reiterated this rule in Abello v. Commissioner of Internal Revenue 198 where it
rejected petitioners claim that the prolonged practice (since 1939 up to 1988) of the
Bureau of Internal Revenue in not subjecting political contributions to donors tax was
an authoritative interpretation of the statute, entitled to great weight and the highest
respect:

This Court holds that the BIR isnot precluded from making a new interpretation of the
law, especially when the old interpretation was flawed. It is a well-entrenched rule that[:]

. . . erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute, and that the Government is never
estopped by mistake or error on the part of its agents. 199 (Emphasis supplied, citations
omitted)

Prolonged practice of the Bureau of Internal Revenue in not collecting the specific tax
on stemmed leaf tobacco cannot validate what is otherwise an erroneous application
and enforcement of the law. The government is never estopped from collecting
legitimate taxes because of the error committed by its agents. 200

In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals, 201 this court upheld
the validity of a revenue memorandum circular issued by the Commissioner of Internal
Revenue to correct an error in a previous circular that resulted in the non-collection of
tobacco inspection fees for a long time and declared that estoppel cannot work against
the government:

. . . the assailed Revenue Memorandum Circular was issued to rectify the error in
General Circular No. V-27 and to interpret the phrase "tobacco for domestic sale or
factory use" with the view of arresting huge losses of tobacco inspection fees which
were not collected and imposed since the said Circular (No. V-27) took effect.
Furthermore, the questioned Revenue Memorandum Circular was also issued to
apprise those concerned of the construction and interpretation which should be
accorded to Act No. 2613, as amended, and which respondent is duty bound to enforce.
It is an opinion on how the law should be construed and there was no attempt
whatsoever to enlarge or restrict the meaning of the law.
The basis for the issuance of said Memorandum Circular was so stated in Resolution
No. 2-67 of the Tobacco Board, wherein petitioners as members of the Manila Tobacco
Association, Inc. were duly represented, the pertinent portions of which read:

". . . .

WHEREAS, this original recommendation of Mr. Hernandez was perfectly in accordance

with existing law, more particularly Sec. 1 of Republic Act No. 31 which took effect since
September 25, 1946, but perhaps thru oversight by the former Commissioners and
officers of the Tobacco Inspection Service the propriety and legality of effecting the
inspection of tobacco products for local salesand imported leaf tobacco for factory use
might have overlooked resulting in huge losses of tobacco inspection fees. . ." (Italics
supplied)

....

Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being
one of the miscellaneous taxes provided for under the Tax Code. Section 228 (formerly
Section 302) of Chapter VII of the Code specificallyprovides for the collection and
manner of payment of the said inspection fees. It is within the power and duty of the
Commissioner to collect the same, even without inspection, should tobacco products be
removed clandestinely or surreptitiously from the establishment of the wholesaler,
manufacturer or redrying plant and from the customs custody in case of imported leaf
tobacco. Errors, omissions or flaws committed by BIR inspectors and representatives
while in the performance of their duties cannot beset up as estoppel nor estop the
Government from collecting a tax legally due. Tobacco inspection fees are levied and
collected for purposes of regulation and control and also as a source of revenue since
fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection Fee Fund
created by Sec. 12 of Act No. 2613, as amended and the other fifty percentum, to the
Cultural Center of the Philippines. (Sec. 88, Chapter VII, NIRC) 202 (Emphasis in this
paragraph supplied, citation omitted)

Furthermore, the December 12, 1972 ruling of Commissioner Misael P. Vera runs
counter to Section 20(a)of RR No. V-39 in relation to RR No. 17-67, which provides that
only transfers of stemmed leaf tobacco between L-7 permittees are exempt. An
implementing regulation cannot be superseded by a ruling which is a mere
interpretation of the law. While opinions and rulings of officials of the government called
upon to execute or implement administrative laws command much respect and weight,
courts are not bound to accept the same if they override, instead of remain consistent
and in harmony with, the law they seek to apply and implement. 203

Double taxation

The contention that the cigarette manufacturers are doubly taxed because they are
paying the specific tax on the raw material and on the finished product in which the raw
material was a part is also devoid of merit.
For double taxation in the objectionable or prohibited sense to exist, "the same property
must be taxed twice, when it should be taxed but once." 204 "[B]oth taxes must be
imposed on the same property or subject- matter, for the same purpose, by the same. . .
taxing authority, within the same jurisdiction or taxing district, during the same taxing
period, and they must be the same kind or character of tax." 205

At all events, there is no constitutional prohibition against double taxation in the

Philippines.206 This court has explained in Pepsi-Cola Bottling Company of the
Philippines, Inc. v. Municipality of Tanauan, Leyte:207

There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation.1wphi1 It must be observed that the
delegating authority specifies the limitations and enumerates the taxes over which local
taxation may not be exercised. The reason is that the State has exclusively reserved the
same for its own prerogative. Moreover, double taxation, in general, is not forbidden by
our fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the
Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity or by the same jurisdiction for the same
purpose, but not in a case where one tax is imposed by the State and the other by the
city or municipality.208 (Emphasis supplied, citations omitted)

"It is something not favored, but is permissible, provided some other constitutional
requirement is not thereby violated, such as the requirement that taxes must be
uniform."209

Excise taxes are essentially taxes on property210 because they are levied on certain
specified goods or articles manufactured or produced in the Philippines for domestic
saleor consumption or for any other disposition, and on goods imported. In this case,
there is no double taxation in the prohibited sense because the specific tax is imposed
by explicit provisions of the Tax Code on two different articles or products: (1) on the
stemmed leaf tobacco; and (2) on cigar or cigarette. 211

WHEREFORE, this court:

1. DENIESthe petition for review filed by La Suerte Cigar & Cigarette Factory in
G.R. No. 125346 and AFFIRMSthe questioned decision and resolution of the
Court of Appeals in CA-G.R. SP. No. 38107;

2. GRANTS the petition for review filed by the Commissioner of Internal Revenue
in G.R. Nos. 13632829 and REVERSES and SETS ASIDE the challenged
decision and resolution of the Court of Appeals in CA-G.R. SP. Nos. 38219 and
40313. Fortune Tobacco Corporation is ORDERED to pay the following taxes:
 a. P28,938,446.25 as deficiency excise tax for the period covering
January 1, 1986to June 30, 1989, plus 20% interest per annum from
November 24,1989 until fully paid; and

b. P1,989,821.26 as deficiency excise tax for the period covering July 1,

1989 to November 30, 1990, plus 20% interest per annum from March
1,1991 until fully paid.

3. GRANTS the petition for review filed by the Commissioner of Internal Revenue
in G.R. No. 144942 and REVERSES and SETS ASIDE the challenged decision
of the Court of Appeals in CA-G.R. SP. No. 51902. La Suerte Cigar & Cigarette
Factorys claim for refund of the amount of P175,909.50 is DENIED.

4. DENIES the petition for review filed by Sterling Tobacco Corporation in G.R.
No. 148605 and AFFIRMS the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 38159;

5. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in
G.R. No. 158197 and AFFIRMS the questioned decision and resolution of the
Court of Appeals in CA-G.R. SP. No. 37124; and

6. DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory in
G.R. No. 165499 and AFFIRMS the questioned decision and resolution of the
Court of Appeals in

CA-G.R. SP. No. 50241.

CIR v. CEBU PORTLAND

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as
modified on appeal by the Supreme Court on February 27, 1965, the Commissioner of
Internal Revenue was ordered to refund to the Cebu Portland Cement Company the
amount of P 359,408.98, representing overpayments of ad valorem taxes on cement
produced and sold by it after October 1957. 1

On March 28, 1968, following denial of motions for reconsideration filed by both the
petitioner and the private respondent, the latter moved for a writ of execution to enforce
the said judgment . 2

The motion was opposed by the petitioner on the ground that the private respondent
had an outstanding sales tax liability to which the judgment debt had already been
credited. In fact, it was stressed, there was still a balance owing on the sales taxes in
the amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the
alleged sales tax liability of the private respondent was still being questioned and
therefore could not be set-off against the refund. 4

In his petition to review the said resolution, the Commissioner of Internal Revenue
claims that the refund should be charged against the tax deficiency of the private
respondent on the sales of cement under Section 186 of the Tax Code. His position is
that cement is a manufactured and not a mineral product and therefore not exempt from
sales taxes. He adds that enforcement of the said tax deficiency was properly effected
through his power of distraint of personal property under Sections 316 and 318 5 of the
said Code and, moreover, the collection of any national internal revenue tax may not be
enjoined under Section 305, 6 subject only to the exception prescribed in Rep. Act No.
1125. 7 This is not applicable to the instant case. The petitioner also denies that the
sales tax assessments have already prescribed because the prescriptive period should
be counted from the filing of the sales tax returns, which had not yet been done by the
private respondent.

For its part, the private respondent disclaims liability for the sales taxes, on the ground
that cement is not a manufactured product but a mineral product. 8 As such, it was
exempted from sales taxes under Section 188 of the Tax Code after the effectivity of
Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. v.
Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles
declared that "before the effectivity of Rep. Act No. 1299, amending Section 246 of the
National Internal Revenue Code, cement was taxable as a manufactured product under
Section 186, in connection with Section 194(4) of the said Code," thereby implying that
it was not considered a manufactured product afterwards. Also, the alleged sales tax
deficiency could not as yet be enforced against it because the tax assessment was not
yet final, the same being still under protest and still to be definitely resolved on the
merits. Besides, the assessment had already prescribed, not having been made within
the reglementary five-year period from the filing of the tax returns. 10

Our ruling is that the sales tax was properly imposed upon the private respondent for
the reason that cement has always been considered a manufactured product and not a
mineral product. This matter was extensively discussed and categorically resolved
in Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on
August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the
pertinent cases, declared for a unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never
considered as a mineral product within the meaning of Section 246 of the
Tax Code, notwithstanding that at least 80% of its components are
 minerals, for the simple reason that cement is the product of
a manufacturing process and is no longer the mineral product
contemplated in the Tax Code (i.e.; minerals subjected to simple
treatments) for the purpose of imposing the ad valorem tax.

What has apparently encouraged the herein respondents to maintain their

present posture is the case of Cebu Portland Cement Co. v. Collector of
Internal Revenue, L-20563, Oct. 29, 1968 (28 SCRA 789) penned by
Justice Eugenio Angeles. For some portions of that decision give the
impression that Republic Act No. 1299, which amended Section 246,
reclassified cement as a mineral product that was not subject to sales
tax. ...

xxx xxx xxx

After a careful study of the foregoing, we conclude that reliance on the

decision penned by Justice Angeles is misplaced. The said decision is no
authority for the proposition that after the enactment of Republic Act No.
1299 in 1955 (defining mineral product as things with at least 80% mineral
content), cement became a 'mineral product," as distinguished from a
"manufactured product," and therefore ceased to be subject to sales tax. It
was not necessary for the Court to so rule. It was enough for the Court to
say in effect that even assuming Republic Act No. 1299 had reclassified
cement was a mineral product, the reclassification could not be given
retrospective application (so as to justify the refund of sales taxes paid
before Republic Act 1299 was adopted) because laws operate
prospectively only, unless the legislative intent to the contrary is manifest,
which was not so in the case of Republic Act 1266. [The situation would
have been different if the Court instead had ruled in favor of refund, in
which case it would have been absolutely necessary (1) to make an
unconditional ruling that Republic Act 1299 re-classified cement as a
mineral product (not subject to sales tax), and (2) to declare the law
retroactive, as a basis for granting refund of sales tax paid before Republic
Act 1299.]

In any event, we overrule the CEPOC decision of October 29, 1968 (G.R.
No. L-20563) insofar as its pronouncements or any implication therefrom
conflict with the instant decision.

The above views were reiterated in the resolution 12 denying reconsideration of the said
decision, thus:
 The nature of cement as a "manufactured product" (rather than a "mineral
product") is well-settled. The issue has repeatedly presented itself as a
threshold question for determining the basis for computing the ad
valorem mining tax to be paid by cement Companies. No pronouncement
was made in these cases that as a "manufactured product" cement is
subject to sales tax because this was not at issue.

The decision sought to be reconsidered here referred to the legislative

history of Republic Act No. 1299 which introduced a definition of the terms
"mineral" and "mineral products" in Sec. 246 of the Tax Code. Given the
legislative intent, the holding in the CEPOC case (G.R. No. L-20563) that
cement was subject to sales tax prior to the effectivity f Republic Act No.
1299 cannot be construed to mean that, after the law took effect, cement
ceased to be so subject to the tax. To erase any and all misconceptions
that may have been spawned by reliance on the case of Cebu Portland
Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968
(28 SCRA 789) penned by Justice Eugenio Angeles, the Court has
expressly overruled it insofar as it may conflict with the decision of August
10, 1983, now subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year
reglementary period for the assessment of its tax liability started from the time it filed its
gross sales returns on June 30, 1962. Hence, the assessment for sales taxes made on
January 16, 1968 and March 4, 1968, were already out of time. We disagree. This
contention must fail for what CEPOC filed was not the sales returns required in Section
183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. As
Justice Irene R. Cortes emphasized in the aforestated resolution:

In order to avail itself of the benefits of the five-year prescription period

under Section 331 of the Tax Code, the taxpayer should have filed the
required return for the tax involved, that is, a sales tax return. (Butuan
Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA
277). Thus CEPOC should have filed sales tax returns of its gross sales
for the subject periods. Both parties admit that returns were made for
the ad valorem mining tax. CEPOC argues that said returns contain the
information necessary for the assessment of the sales tax. The
Commissioner does not consider such returns as compliance with the
requirement for the filing of tax returns so as to start the running of the
five-year prescriptive period.
 We agree with the Commissioner. It has been held in Butuan Sawmill Inc.
v. CTA, supra, that the filing of an income tax return cannot be considered
as substantial compliance with the requirement of filing sales tax returns,
in the same way that an income tax return cannot be considered as a
return for compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc.
v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29,
1959). There being no sales tax returns filed by CEPOC, the statute of
stations in Sec. 331 did not begin to run against the government. The
assessment made by the Commissioner in 1968 on CEPOC's cement
sales during the period from July 1, 1959 to December 31, 1960 is not
barred by the five-year prescriptive period. Absent a return or when the
return is false or fraudulent, the applicable period is ten (10) days from the
discovery of the fraud, falsity or omission. The question in this case is:
When was CEPOC's omission to file tha return deemed discovered by the
government, so as to start the running of said period? 13

The argument that the assessment cannot as yet be enforced because it is still being
contested loses sight of the urgency of the need to collect taxes as "the lifeblood of the
government." If the payment of taxes could be postponed by simply questioning their
validity, the machinery of the state would grind to a halt and all government functions
would be paralyzed. That is the reason why, save for the exception already noted, the
Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. No court

shall have authority to grant an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment is
already being questioned in a court of justice but more so if, as in the instant case, the
challenge to the assessment is still-and only-on the administrative level. There is all the
more reason to apply the rule here because it appears that even after crediting of the
refund against the tax deficiency, a balance of more than P 4 million is still due from the
private respondent.

To require the petitioner to actually refund to the private respondent the amount of the
judgment debt, which he will later have the right to distrain for payment of its sales tax
liability is in our view an Idle ritual. We hold that the respondent Court of Tax Appeals
erred in ordering such a charade.
WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA
Case No. 786 is SET ASIDE, without any pronouncement as to costs.

SO ORDERED.

REYES V. ALMANZOR

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the
Central Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L.
Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City
Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax
Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose
Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros Reyes v.
City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land
situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said tenants were paying monthly rentals not
exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an
increase in monthly rentals of dwelling units or of lands on which another's dwelling is
located, where such rentals do not exceed three hundred pesos (P300.00) a month but
allowing an increase in rent by not more than 10% thereafter. The said Act also
suspended paragraph (1) of Article 1673 of the Civil Code for two years from its
effectivity thereby disallowing the ejectment of lessees upon the expiration of the usual
legal period of lease. On October 12, 1972, Presidential Decree No. 20 amended R.A.
No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00
and by indefinitely suspending the aforementioned provision of the Civil Code,
excepting leases with a definite period. Consequently, the Reyeses, petitioners herein,
were precluded from raising the rentals and from ejecting the tenants. In 1973,
respondent City Assessor of Manila re-classified and reassessed the value of the
subject properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in the
corresponding tax rates prompting petitioners to file a Memorandum of Disagreement
with the Board of Tax Assessment Appeals. They averred that the reassessments made
were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which
the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals,
however, considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit

concrete evidence which could overcome the presumptive regularity of the
classification and assessments appear to be in accordance with the base
schedule of market values and of the base schedule of building unit values, as
approved by the Secretary of Finance, the cases should be, as they are hereby,
upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals.1wphi1 They

submitted, among others, the summary of the yearly rentals to show the income derived
from the properties. Respondent City Assessor, on the other hand, submitted three (3)
deeds of sale showing the different market values of the real property situated in the
same vicinity where the subject properties of petitioners are located. To better
appreciate the locational and physical features of the land, the Board of Hearing
Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners
nor their authorized representatives were present during the said ocular inspection
despite proper notices served them. It was found that certain parcels of land were below
street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment

of the lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-
5844 and PD-3824 is affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and
(1) PD-266, the appealed Decision is modified by allowing a 20% reduction in
their respective market values and applying therein the assessment level of 30%
to arrive at the corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p.

27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE

SALES APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF
APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in
question. Petitioners maintain that the "Income Approach" method would have been
more realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the
market value of the properties affected, respondent Assessor of the City of Manila
unlawfully and unjustifiably set increased new assessed values at levels so high and
successive that the resulting annual real estate taxes would admittedly exceed the sum
total of the yearly rentals paid or payable by the dweller tenants under P.D. 20. Hence,
petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted,
inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its
decision that the income approach is used in determining land values in some vicinities,
it maintains that when income is affected by some sort of price control, the same is
rejected in the consideration and study of land values as in the case of properties
affected by the Rent Control Law for they do not project the true market value in the
open market (Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales
Approach" on the ground that the value estimate of the properties predicated upon
prices paid in actual, market transactions would be a uniform and a more credible
standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise
stated, public respondents would have this Court completely ignore the effects of the
restrictions of P.D. No. 20 on the market value of properties within its coverage. In any
event, it is unquestionable that both the "Comparable Sales Approach" and the "Income
Approach" are generally acceptable methods of appraisal for taxation purposes (The
Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However,
it is conceded that the propriety of one as against the other would of course depend on
several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v.
Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the
assessors, in finding the value of the property, have to consider all the circumstances
and elements of value and must exercise a prudent discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation
must not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of
property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34
Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive
aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the
Philippines", p. 221, Second Edition). Thus, the need to examine closely and determine
the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the person
affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the
powers of government. But for all its plenitude the power to tax is not unconfined as
there are restrictions. Adversely effecting as it does property rights, both the due
process and equal protection clauses of the Constitution may properly be invoked to
invalidate in appropriate cases a revenue measure. If it were otherwise, there would be
truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the
power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not
the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v.
Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can
be shown to amount to confiscation of property. That would be a clear abuse of power
(Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions
not being different both in the privileges conferred and the liabilities imposed (Ibid., p.
662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the
first Fundamental Principle to guide the appraisal and assessment of real property for
taxation purposes is that the property must be "appraised at its current and fair market
value."

By no strength of the imagination can the market value of properties covered by P.D.
No. 20 be equated with the market value of properties not so covered. The former has
naturally a much lesser market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by the public
respondents, namely: (1) that the sale must represent a bonafide arm's length
transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of
judicial notice that for properties covered by P.D. 20 especially during the time in
question, there were hardly any willing buyers. As a general rule, there were no takers
so that there can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither can the
given circumstances be nonchalantly dismissed by public respondents as imposed
under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no
end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with
law as any arbitrariness will negate the very reason for government itself It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158
SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened by
the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the
principle of social justice should not now be penalized by the same government by the
imposition of excessive taxes petitioners can ill afford and eventually result in the
forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would
amount to only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of
public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of
Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a
new assessment by the income approach method to guarantee a fairer and more
realistic basis of computation (Rollo, p. 71).

SO ORDERED.

PHIL GUARANTY v. CIR

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compaia de Seguros, La Union y El Fenix
Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza,
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance
it has originally underwritten in the Philippines, in consideration for the assumption by
the latter of liability on an equivalent portion of the risks insured. Said reinsurrance
contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign
reinsurers outside the Philippines, except the contract with Swiss Reinsurance
Company, which was signed by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability

simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks
ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered from
the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5%
of the reinsurance premiums. Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company stipulated that their contract shall be construed by the
laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or
pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of
Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums, thus:
 1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not
subject to withholding tax. Its protest was denied and it appealed to the Court of Tax
Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive
portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine

Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum
of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner
of Internal Revenue's assessment for withholding tax on the reinsurance premiums
ceded in 1953 and 1954 to the foreign reinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the Philippines.
The liability of the foreign reinsurers commenced simultaneously with the liability of
Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co.,
Inc. kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in
such register bound the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the reinsurance undertaking by
the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for
the privilege of doing insurance business in the Philippines were payable by the foreign
reinsurers when the same were not recoverable from the original assured. The foreign
reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded
premiums, in consideration for administration and management by the latter of the
affairs of the former in the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company,
were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the
foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc.
and Swiss Reinsurance Company was signed by both parties in Switzerland, the same
specifically provided that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear intention of the parties to subject themselves to
Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such
undertaking, as explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence, are subject
to corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity
may consist of only a single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign corporation to engage
in business in the Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered
likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It
is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance premiums
in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.

Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax,
but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its
agents.3

In respect to the question of whether or not reinsurance premiums ceded to foreign

reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already been
answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the
amount actually remitted to the foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954, no
withholding tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. All persons, corporations and general copartnerships

(compaias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
 officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income
of such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize
such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due
on the reinsurance premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for
the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within
30 days from the date this judgement becomes final, there shall be collected a
surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month from
the date of delinquency to the date of payment, provided that the maximum amount that
may be collected as interest shall not exceed the amount corresponding to a period of
three (3) years. With costs againsts petitioner.