BIR Ruling

September 14, 1972 5th Indorsement Returned to the Chief, Tobacco Inspection Service, thru the Revenue Operations Head (Specific Tax) the within papers relative to the query of Alhambra Industries, Inc. as to whether or not the transfer of tobacco stems from its place of manufacture (L-6 establishment in Echague, Isabela) to its L-7 warehouse of its own L-7 for the purpose of using them as raw materials in the manufacture of its tobacco products, is subject to inspection and the payment of the corresponding inspection fees considering that the inspection fee has already been paid on the same leaf tobacco when it was transferred from its L-3 to its L-6 establishment. cdta It appears that Alhambra Industries, Inc. is engaged in the manufacture of cigars, cigarettes, scrap and stripped tobacco and exporters thereof; that it is a holder of L-7, L-6 and L-3 permits; that the inspection fee for the leaf tobacco sought to be transferred from its L-6 to L-7 is paid before actual transfer from its own L-3 to its own L-6; that the stripped tobacco will be exported and the particles of tobacco any stems are for its own factory use. It is the contention of that Office that, following the ruling of this Office dated July 19, 1971, all manufactured or partially manufactured products of leaf tobacco, irrespective as to whether the partially manufactured tobacco is owned by the L-6 permittee or not, are subject to inspection and the corresponding inspection fee shall be paid before removal from the place of manufacture (L-6 establishment), in accordance with Section 6 of Revenue Regulations No. 1-65. On the other hand, it is the position of the taxpayer that its partially manufactured tobacco and tobacco stems are not subject to inspection nor liable for the payment of the inspection fee on the ground that it owns the tobacco which came from the L-3 of which the inspection fees were already paid before transfer is made to its own L-6 establishment; and that it also owns the L-7 warehouse of the L-7 to which the particles of tobacco and stems will be transferred; and that the partially manufactured tobacco and tobacco stems will be used exclusively as raw materials in the manufacture of its own tobacco products. To further buttress its claim, taxpayer cited Sections 36(b)(1), 18(b) and 36(b)(4) of Revenue Regulations No. 17-67 which for ready reference are reproduced viz.: "SEC. 36(b)(1). An L-3 permittee may sell or transfer packed leaf tobacco on which an inspection fee has been paid, to another L-3, L-6, L-7 or B-14(a) without further inspection and permit". "Sec. 18(b). Exemptions regarding L-6 permittees who are at the same time L-7 permittees . An L-6 permittee, who is at the same time a holder of an L-7 permit is allowed to process his tobacco for export under his L-7 establishment, provided that all his export shipments are recorded in his L-6 official register book, and provided further, that the partially manufactured tobacco for export is stored separately from his L-7 stocks. "Sec. 36(b)(4). An L-6 permittee may dispose of any and all by products of his partially manufactured tobacco, such as stems, siftings, etc., and/or any partially manufactured tobacco unfit for export, by selling same to an L-7 permittee for use as raw material in the manufacture of tobacco products, provided a permit from the Tobacco Inspection Service is previously secured. Such Tobacco must be inspected and the corresponding inspection fee paid before removal except when the tobacco has been previously inspected and the corresponding inspection fee paid." The aforecited regulations should be read in the light of the provisions of other laws applicable in the instant case. It should be noted that Section 6 of Revenue Regulations No. 1-65 was issued pursuant to the provision of Section 6 of Act No. 2613, as amended, which provides as follows: "to require, whenever it shall be deemed expedient, the inspection of and affixture of inspection labels to tobacco removed from the province of its origin to another province before such removal, or to tobacco for domestic sale or factory use ." The above-cited provision of law is clear and explicit, Tobacco which should be inspected is not limited to tobacco for domestic sale but also to tobacco for factory use. The omission of the phrase "for factory use" in Section 6(b)(4) of Revenue Regulations No. 17-67 can not therefore have the effect of amending Section 6 of Revenue Regulations No. 1-65, inasmuch as the latter is merely an implementing provision of Section 6(c) of Act No. 2613 requiring the inspection of tobacco for domestic sale or factory use . Furthermore, the last sentence of Section 36(b)(4) of Revenue Regulations No. 17-67 which provides that ". . . Such tobacco must be inspected and the corresponding inspection fees paid before removal except when the tobacco has been previously inspected and the corresponding inspection fee paid ." (Emphasis supplied) refers to tobacco already inspected. The tobacco (partially manufactured tobacco) requested to be exempted from further inspection and payment of the corresponding inspection fee has not been previously inspected in view of the fact that what was previously inspected was the tobacco in leaf form, not as partially manufactured tobacco. In view of the foregoing, and consistent with the ruling of this Office dated July 19, 1971, the partially manufactured tobacco and tobacco stems sought to be transferred by Alhambra Industries, Inc. from its L-6 establishment in Echague, Isabela to its L-7 is subject to inspection and the payment of the corresponding inspection fee. cdta MISAEL P. VERA Commissioner of Internal Revenue