Commissioner of Internal Revenue v. Joebon Marketing Corp.

SECOND DIVISION [CA-G.R. SP No. 34559. November 28, 1995.] (C.T.A. Case No. 5001) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. JOEBON MARKETING CORPORATION AND COURT OF TAX APPEALS , respondents . D E C I S I O N CARPIO MORALES , J p : This petition for review seeks the reversal of the decision of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5001, "Joebon Marketing Corporation v. Commissioner of Internal Revenue," declaring as null and void the value added tax (VAT) deficiency assessment issued by petitioner, Commissioner of Internal Revenue, against private respondent, Joebon Marketing Corporation. The following are the undisputed facts of the cases: Private respondent is a domestic corporation engage in the buying and selling of rice, copra and corn. Prior to the effectivity of the VAT Law (Executive Order No. 273), private respondent, through a letter dated December 9, 1987, requested for an official opinion or executive construction from the Bureau of Internal Revenue (BIR) Revenue Region No. 6-B in Bacolod City on the applicability or non-applicability of the (VAT) to its copra business. Acting on the request, the BIR Regional Director Beethoven L. Rualo issued BIR Ruling No. RR-6B-01 on January 11, 1988, informing private respondent that copra is not subject to the VAT in all stages of production or distribution, it having been classified as an agricultural food product by the BIR. Private respondent was subsequently issued Non-VAT Registration Certificate No. NV-6B-58-000072 on January 1, 1989. On August 17, 1990, however, petitioner issued VAT Ruling No. 190-90 reclassifying copra as a non-food agricultural product, making the sale of copra exempted from VAT only if the sale is made by the primary producer pursuant to Section 103 (a) of the National Internal Revenue Code (NIRC). This ruling revoked VAT Ruling No. 009-88 and VAT Ruling No. 279-88 both of which classified copra as an agricultural food product. On April 15, 1992 private respondent, which is a trader, not a primary producer of copra filed only its Corporate Annual Income Tax Return for the year ending December 31, 1991. After an examination of private respondent's transactions, petitioner required it, thru a demand letter dated March 1, 1993, to pay deficiency VAT for the year 1991 in the amount of P65,991.69, inclusively of 25% surcharge, interest and compromise penalty, computed as follows: DEFICIENCY VALUE-ADDED TAX Deficiency VAT due P42,838.70 Add: 25% Surcharge 10,709.70 20% Annual interest from 1.20.92 to 2.15.93 (.2137) 11,443.29 Compromise penalty 1,000.00 TOTAL AMOUNT DUE AND COLLECTIBLE 65,991.69 ======== The above deficiency VAT assessment was based on the gross sales of copra amounting to P4,283,869.75, as reported by private respondent in its Income Tax Return for the year 1991. Private respondent protested the assessment on March 15, 1993 which, by letter of May 6, 1993, was denied with finality by petitioner. Petitioner thus filed a petition for review with respondent CTA questioning the validity of petitioner's deficiency VAT assessment. On April 26, 1994, respondent court rendered the assailed judgment setting aside as null and void the deficiency VAT assessment issued against private respondent. Respondent court ruled that the sale of copra is exempted from VAT under Section 103 of the NIRC which exempt, under Section (b) thereof, "(b) Sale or importation in their original state of agricultural and marine food products; livestock and poultry of a kind generally used as, or yielding or producing food for human consumption; and breeding stock and genetic materials therefor;" In holding thus, respondent court relied heavily on the opinion rendered on April 10, 1991 by the Bureau of Food and Drug (BFAD) of the Department of Health to the effect that copra should be classified as an "agricultural food product" since copra is produced from coconut meat which is food and 80% of products derived therefrom is edible. Respondent consider BFAD as the proper government agency empowered to determine the correct classification as agricultural products as food or otherwise as the matter involves scientific skills and thorough know-how which it found lacking in the BIR. Its motion for reconsideration of the judgment having been denied by respondent court, petitioner comes to Us on appeal and raises the following issues: "I WHETHER COPRA IN ITS ORIGINAL STATE IS A NON-FOOD AGRICULTURAL PRODUCT. II WHETHER SALE OF COPRA BY A MERCHANDISER OR TRADER IS EXEMPT FROM 10% VALUE-ADDED TAX. III WHETHER THE RULING OF THE BUREAU OF FOOD AND DRUG ADMINISTRATION IS CONTROLLING IN THE INSTANT CASE." The issue, in the main, is whether or not copra is a non-food agricultural product within the meaning of Section 103 (a) of the National Revenue Code (NIRC) to be exempt from VAT if sold by the primary producer or owner of the land where the same is produced. Section 103 (a) of the NIRC provides: "SEC. 103. Exempt Transactions . The following shall be exempts from the value-added tax: (a) Sale of nonfood agricultural; marine and forest products in their original state by the primary producer or the owner of the land where the same are produced;" Petitioner contends that copra per se or in its original state is an agricultural non-food product, the same not being fit for human consumption, citing as basis thereof Section 10(e) of Republic Act No. 3720 (the law creating the Food and Drug Administration, now the BFAD) which defines "food" to mean (1) articles used for food or drink for man; (2) chewing gum; and (3) article used for components of any such articles; that while fresh coconut meat is edible, the same ceases to be so once it undergoes processing and is subsequently transformed into copra with molds and foreign bacteria infecting it, and it is for this reason that BFAD did not previously classify copra as food, although when BFAD defined food in its broader sense , it reclassified copra as an agricultural food product, being an agricultural commodity and component in the processing and manufacture of another food product; and that to classify copra as food, however, simply because it is a commodity and component in the processing and manufacture of another product is no longer classifying copra in its original state. Petitioner further contends that since Section 103 of the NIRC specifically dwells on transactions exempt from VAT including sale of non-food agricultural products in their original state , copra must be viewed in their strict and literal sense and construed strictly against the taxpayer. Petitioner contends finally that since it is the administrative officer, which is called upon to execute and implement the provisions of the NIRC, its interpretative rulings issued pursuant to Section 245 of said code, such as the VAT Ruling No. 190-90 which classifies copra as a non-food agricultural product, commands more respect and weight over and above the opinion of BFAD which is not the proper administrative body called upon to implement and enforce the provisions of the same code. In fine, petitioner concludes that since copra is a non-agricultural food product within the contemplation of Section 103(a) of the NIRC, the sale thereof by the private respondent which is a trader, and not a primary producer, of copra is subject to the VAT. On the other hand, private respondent contends that the proper government agency which is empowered to determine the correct classification of agricultural products as food or otherwise is the BFAD as it has scientific skills and know-how which the BIR patently lacks; and that the BIR's function is limited only to raising taxes and other similar revenues for the government, its powers under Section 3 of the NIRC being anchored on, if not limited to, areas of assessment, collection. enforcement of all forfeitures, as well as implementation of the supervisory powers conferred upon it, hence, VAT Ruling No. 190-90 classifying copra as non-food agricultural product is null and void. In any event, private respondent contends that the deficiency VAT assessment cannot be enforced against it, it being just the same null and void as it was never given due notice about the issuance of VAT Ruling No. 190-90 nor afforded the opportunity to contest the same during the deliberations thereon, thus denying it due process; and that to sanction the deficiency VAT assessment, especially where its procedural and substantive defects are the result of petitioner's own negligence, would be to sanction a confiscatory and penal imposition against it. We find for petitioner. Petitioner issued VAT Ruling No. 190-90 pursuant to its power under Section 245 of the NIRC to issue rulings or opinions in connection with the implementation of the provisions of internal revenue laws. Its strict construction of the above-quoted provision of the paragraph a of Section 103 of the NIRC which dwells on transactions exempts from VAT by classifying copra per se as a non-food agricultural product, it not being fit for human consumption, is in accordance with the settled rule that tax exemptions must the strictly construed against the taxpayer and liberally in Favor of the state, taxation being the rule and exemption the exception (Commissioner of Internal Revenue v. Mitsubishi Metal Corporation, 181 SCRA 214, 223 224 [1990]. As the government agency charged with the enforcement of tax laws, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight (Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 238 SCRA 63, 68 [1994]. The opinion rendered by the BFAD classifying copra as an agricultural food product cannot be accorded persuasive effect as it is no the proper government agency tasked with the enforcement of tax laws, its primary function being the promotion of the health of the nation under the mandate of Republic Act No. 3720. The fact that a BIR Commissioner had classified copra as an agricultural food product does not stop a subsequent Commissioner from reconsidering the same, for is no bound by the ruling of its predecessors, the overruling of earlier opinions being inherent in the interpretation of laws (Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, supra). Anent private respondent's argument against VAT Ruling No. 190-90 as having been issued without the process, the same is untenable. The Supreme Court in the aforecited case of Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary held that VAT Ruling 190-90 is a mere interpretative rule which does not require public participation and publication before it may be adopted and have binding effect, the High Court pointing out that only when a legislative rule is being drafted/considered where public hearings and publication are generally required. This is in consonance with the established dictum that interpretative regulations need not be published as a condition for their effectivity (Taada v. Tuvera, 146 SCRA 446, 454 [1986], for they merely interpret and clarify the statute being administered by administrative bodies as an incident of their duty to enforce the same (Cruz, Philippine Administrative Law, 1991 Ed., pp. 28 29). We therefore uphold petitioner's right to assess private respondent for deficiency VAT for the year 1991, but we take exception to the imposition of surcharge, interest and penalty in addition to the tax proper. Petitioner itself appears to have been uncertain whether or not to assess private respondent for deficiency VAT for 1991 in light of its prior rulings classifying copra as an agricultural food product. Such seeming uncertainty renders the assessment controversial as in fact it was questioned before the CTA whose decision is the subject of the present petition to justify private respondent's non-payment of surcharge, interest, and penalty arising from non-payment of the VAT for the year 1991. Jurisprudence is replete with cases holding that where the deficiency assessment appears to be controversial, such as that subject of the instant case, the taxpayer should be held liable only for the tax proper and should not be held liable for the surcharge and interest (Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue, 138 SCRA 629, 631-632 [1985]; Advertising Associate, Inc. v. Commissioner of Internal Revenue, 133 SCRA 765, 770, [1984]). For the same reason. We do not find the imposition of the amount of P1,000.00 as and for compromise penalty warranted. WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. The deficiency assessment For VAT issued to private respondent, Joebon Marketing Corporation, by petitioner, Commissioner of Internal Revenue, in the amount of P42,838.70, is upheld but the imposition, in addition thereto, of the 25% surcharge, interest and penalty should be, as it is hereby, deleted. No costs. SO ORDERED. Purisima and Martin, Jr ., JJ ., concur.