Fortune Tobacco Corp. v. Commissioner of Internal Revenue

Case History [C.T.A. CASE NO. 5015. October 11, 1994.] FORTUNE TOBACCO CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N Sought to be reconsidered by the respondent Commissioner of Internal Revenue is this Court's decision in the above-entitled case promulgated on August 10, 1994 the dispositive portion of which states: "WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz: "HOPE", "MORE" and "CHAMPION" being manufactured by Fortune Tobacco Corporation as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 142(c)(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified as other locally manufactured cigarettes and taxed at 45% or 20% as the case may be. Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby cancelled for lack of legal basis. Respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency tax assessment made and issued on petitioner in relation to the implementation of RMC No. 37-93. SO ORDERED." The arguments raised by respondent in support of its motion for reconsideration are the following: I. Petitioner is deemed to have been notified of Revenue Memorandum Circular No. 37-93 (RMC 37-93) on July 2, 1993. II. RMC 37-93 is a ruling or opinion in connection with the implementation of the provisions of the Tax Code. III. RMC 37-93 being an interpretative regulation, its publication and filing of copies thereof with the U.P. Law Center are not necessary to its validity, effectivity and enforceability. IV. Section 9, Chapter 2, Book VII of the Administrative Code of 1987 requiring publication of proposed rules does not apply to rules interpreting the law. V. RMC 20-86 requiring notice and publication of internal revenue tax rules and regulations does not apply to rulings interpreting the provisions of the Tax Code. VI. Mere issuance of RMC No. 37-93 does not amount to deprivation of petitioner's property without due process of law. VII. RMC 37-93 is not violative of the rule on uniformity and equality in taxation. VIII. There is no basis for the Court's finding of a legislative intent to adopt as part of Republic Act 7654, amending Section 142 of the Tax Code, the classification of cigarettes existing at the time of the approval of said act. IX. Before the effectivity of R.A. 7654, respondent was not legally prescribed from issuing a ruling interpreting the provisions of Section 142(c)(1) of the Tax Code, as amended. New evidence in support of its motion for reconsideration was attempted to be introduced by respondent's counsel in the hearing of said motion on September 16, 1994. These pertain to the minutes of the House Committee on Ways and Means with respect to the approval of Republic Act No. 7654 and sponsorship speeches of Congressman Javier and Fuentebella. Petitioner's counsel pointed out that it is entirely inappropriate to consider the presentation of evidence at this point since what they are presenting are not newly discovered evidence which they could not, with due diligence, have presented during the trial. They should have presented them during the trial when their turn to present evidence came, but they did not do that. At this juncture, respondent's counsel requested the Court to take judicial notice of the aforementioned evidence as annexes to the motion for reconsideration because they are legislative acts. A court may take judicial notice of matters which are of public knowledge, or are capable of unquestionable demonstration or ought to be known to judges because of their judicial functions (Section 2, Rule 129, Revised Rules of Court). Included therein are the official acts of the legislative department of the government. In opposition to the motion for reconsideration, petitioner highlighted the following points: 1. The motion for reconsideration does not dispute the findings of facts in the decision of the Court. 2. All of respondent's arguments are premised on just one single contention and that is, that RMC 87-93 is an interpretative circular. 3. Respondent concedes that there was no prior notice to comply with the procedural requirements of due process under the Constitution and the revised Administrative Code. 4. As to the argument that there is no deprivation of property by the issuance of RMC 37-93, it is interposed that without RMC 37-93 there would be no assessment. Petitioner's counsel prayed that the motion for reconsideration be denied since all the foregoing arguments were actually raised before and passed upon already by this Court in its decision. Nonetheless, We will once again go over the grounds relied on by respondent in her motion for reconsideration. Respondent is of the belief that the telefax sent by Deputy Commissioner Victor A. Deoferio, Jr. to petitioner's factory on July 2, 1993 at 5:30 in the afternoon is the "notice" contemplated by us which is necessary for the effectivity of RMC No. 37-93. To set things in their proper perspective, the "notice" referred to by Us is in relation to Section 9, Chapter 2, Book VII of the Administrative Code of 1987 which calls for publication or circulation of notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule. As defined in Section 2, (2), Chapter 1, supra , rule means any agency statement of general applicability that implements or interprets a law , fixes and describes the procedure in, or practice requirements of an agency, including its regulations. The term includes memoranda or statements concerning the internal administration or management of an agency not affecting the rights of, or procedure available to, the public. Respondent failed to refute the fact that the petitioner was not notified beforehand of the proposed reclassification or given the chance to express its position thereon prior to its adoption despite its admitted significance and far-reaching effect not only on petitioner's business but more so in the local tobacco industry. It was conceded that there was no such "notice" as provided under the Administrative Code. The notice by telefax was only given after RMC No. 37-93 was approved and issued by respondent for implementation. Even granting that "notice" is understood to mean notification of the issuance of RMC No. 37-93, notice by telefax still cannot be considered due notice since it is not yet an accepted mode of service. Besides, RMC No. 20-86 categorically stated the procedures to be taken in order that due notice may be fairly presumed so that internal revenue issuances may be operative (Exhibit "L"). These were definitely established not to have been complied with in the case of RMC No. 37-93. The insistence of respondent that RMC No. 37-93 is an interpretative regulation such that the requirement for its effectivity as provided under the 1987 Administrative Code (AC '87) and BIR Revenue Memorandum Circular No. 20-86 do not apply, is nothing new but simply a rehash of the arguments which have been squarely addressed and clearly disposed of by this Court in its decision. The wordings of the law is unambiguous and leaves no doubt as to its intended coverage. "Interpretative regulation" falls within the purview of the term "rule" as defined in Section 2. (2), Chapter 1, Book VII of AC `87 since it includes any agency statement that implements or interprets a law as well as memoranda or statements concerning the internal administration or management of an agency not affecting the rights of, or procedure available to, the public. RMC No. 20-86 entitled "Notice" publication, and effectivity of internal revenue tax rules and regulations also explicitly provides in paragraph 1 thereof that said Circular shall apply to Revenue Memorandum Circulars. The word "law" includes "regulations and circulars, issued in accordance therewith ( People vs. Que Po Lay, 94 Phil. 640 ). Even as respondent is claiming that filing of copies of RMC No. 37-93 with the U.P Law Center is not necessary to its validity, effectivity and enforceability, respondent nevertheless filed the same, albeit belatedly, on August 3, 1993 (T.S.N., Sept. 29, 1993, p. 12). No amount of assertion by respondent that RMC No. 37-93 is merely an "interpretative ruling" or that in substance it is not a revenue memorandum circular, can remove it away from the coverage of the Administrative Code of 1987, taken together with RMC No. 20-86, in the light of the clear mandate of said provisions. Compliance with the notice, publication and rule-making requirements are necessary to the validity, effectivity and enforceability of RMC No. 37-93. Failing in these requirements, it is invalid, defective and unenforceable. This is the essence of the Supreme Court's decision in the case of Philippine Association of Service Exporters, Inc. vs. Torres, et al., (212 SCRA 298) which involves the same provisions of the Administrative Code of 1987 as the case at bar. Respondent contends that mere issuance of RMC No. 37-93 does not amount to depriving petitioner of its property without due process of law. This is a myopic view of it. The issuance of RMC No. 37-93 effectively reclassified petitioner's cigarette brands and subjects them to a 55% ad valorem tax from the erstwhile tax rate of 45% or 20% as the case may be. Petitioner becomes liable to a higher tax as in fact it was assessed a deficiency ad valorem tax of P9,598,334.00. Without RMC No. 37-93, there would be no cause to issue as assessment against petitioner. While respondent admitted that only "Hope", "More" and "Champion" cigarettes were actually reclassified by RMC NO. 37-93, she reasoned out that it does not preclude the classification of other cigarettes similarly situated. Nothing can be further from the truth. With the effectivity of R.A. 7654 on July 3, 1993, respondent has no longer the authority to reclassify the brands of cigarettes such that those cigarettes similarly situated as "Hope", "More" and "Champion" which have not been reclassified will remain to be classified as other locally manufactured cigarettes subject to the lower ad valorem tax of 45% or 20% as the case may be. (See "Decision") Respondent hastened to add that because of lack of time, it was impossible to actually reclassify all other cigarette brands similarly situated as petitioner's "Hope", "More" and "Champion". There was, therefore, no intent to apply RMC No. 37-93 to petitioner's cigarette brands only. This is unacceptable and cannot be allowed on account of the actual consequence of said circular not only on petitioner's business but also on the local tobacco industry at large. "Unintentional" discrimination has no place in our jurisdiction. Respondent contends that there is no basis for this Court's finding of a legislative intent to adopt as part of Republic Act 7654, amending Section 142 of the Tax Code, the classification of cigarettes existing at the time of the approval of the said Act. A perusal of the minutes of the House Committee on Ways and Means with respect to the approval of RA 7654 and the sponsorship speeches of Congressman Javier and Fuentebella allegedly does not reveal any legislative intent to freeze all classifications of cigarettes at the time of the enactment of said Act and to adopt as part of said law the classification of cigarettes existing at the time of the approval thereof. This allegation is not completely true. The records would show that classification was never an issue when RA 7654 was taken up by the House of Representatives and it is precisely for this reason that the legislative intent as to the classification of cigarettes was not recorded. It was only during the hearings on RMC 37-93 conducted by the Committee on Ways and Means of the House of Representatives that the members of Congress who voted on RA 7654 were able to articulate collectively their intention as to the contemplated classification and, that is, to adopt the classification existing at the time of the approval of RA 7654. Under the circumstances, there is no better evidence of legislative intent insofar as the issue at hand is concerned. When RA 7654 was approved by Congress on June 10, 1993 and signed by the President on June 14, 1993 , it cannot be claimed that the "locally manufactured cigarettes which are currently classified and taxed at 55%" referred to in Section 142(c)(1) of the Tax Code would mean the reclassification made by RMC 37-93, because it was only issued on July 1, 1993 . Unless Congress can foresee the future, how can "current classification" as of the approval of the Act on June 10, 1993 mean the classification at the time of the effectivity of the Act on July 3, 1993 after its reclassification on July 1, 1993 ? Respondent contends that before the effectivity of RA 7654, she was not legally prescribed from issuing a ruling interpreting the provisions of Section 142(c)(1) of the Tax code, as amended. As earlier discussed, the legislative intent is to freeze all classifications of cigarettes at the time of the passage of RA 7654 such that any attempt to subvert this intention through an administrative circular prior to its effectivity cannot be countenanced and should not be allowed. The actuations of the Secretary of Finance and his group, as revealed in the Committee hearings on RMC 37-93, were very insightful as to their real perception with reference to the legislative intent in the passage of RA 7654. Short of moving heaven and earth, they tried to convince the President not to sign RA 7654 and to control its publication but failed. Upon questioning by Representative Golez, Secretary Leung admitted that it is no secret that they have tried on a number of occasions to beat the gun on the full effectivity of RA 7654 and tried to go around it by way of a memorandum circular (See "Decision"). Why would they act so desperately if they are fully convinced that the legislative intent is not to maintain the classification at the time of the approval of RA 7654 which they do not want? If they seriously believed that they are not prohibited from reclassifying the cigarettes after the approval but before the effectivity of RA 7654 on July 3, 1993, why would they issue RMC 37-93 only in the late afternoon of July 1, 1993? In view of the all the foregoing, We find no cogent reason to depart from our decision in the instant case promulgated on August 10, 1994. Respondents motion for reconsideration is hereby dismissed for lack of merit. SO ORDERED. ERNESTO D. ACOSTA Presiding Judge WE CONCUR: RAMON O. DE VEYRA Associate Judge MANUEL K. GRUBA Associate Judge