Commissioner of Internal Revenue v. La Suerte Cigar and Cigarette Factory

SPECIAL FORMER SPECIAL FOURTEENTH DIVISION [CA-G.R. SP No. 37124. July 18, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . LA SUERTE CIGAR AND CIGARETTE FACTORY and COURT OF TAX APPEALS , respondents . D E C I S I O N AQUINO , J p : The Commissioner of Internal Revenue is asking the Court to review and set aside the Decision of the Court of Tax Appeals dated September 6, 1994 in CTA Case No. 4617, entitled " La Suerte Cigar and Cigarette Factory versus Commissioner of Internal Revenue ", and its Resolution dated April 6, 1995 which denied the Commissioner's Motion for Reconsideration. aHIDAE The facts of the case as narrated in the assailed Decision are undisputed ( rollo, pp. 48-51 ), thus: "Petitioner ( La Suerte Cigar and Cigarette Factory which is the private respondent in this petition for review ) is a domestic corporation engaged in the production and manufacture of cigars and cigarettes. It imports and purchases locally produced stemmed leaf tobacco to be used in its manufacture of cigars and cigarettes. "On January 10, 1991, the Bureau of Internal Revenue sent a Pre-Assessment Notice to petitioner, received on January 14, 1991, informing the latter that it has incurred deficiency specific taxes on its local purchases and importations and on the sale of partially manufactured tobacco pursuant to the provisions of Section 141(b), 127(a) and 128 of the National Internal Revenue Code, computed as follows: "SPECIFIC TAX DUE a) Partially Manufactured Tobacco from Local Suppliers: TOTAL KILOS RECEIVED: 14,703,644 @ P0.75 = P11,027,733.00 b) Partially Manufactured Tobacco from Foreign Suppliers: TOTAL KILOS RECEIVED: 3,794,910 @ P0.75 = P2,846,182.50 Less: Specific Tax paid from Sept. 14, 1989 to Nov. 20, 1990 = 2,264,015.25 Net Specific Tax Due 582,167.25 c) Partially Manufactured Tobacco Sold to Associated Anglo-American Tobacco Corp.: TOTAL KILOS SOLD: 157,200 at P0.75 = P117,900.00 29,475.00 147,375.00 TOTAL SPECIFIC TAX DUE: P11,757,275.25 =========== "On January 25, 1991, petitioner filed a protest letter, dated January 22, 1991, requesting for the reconsideration and withdrawal of the pre-assessment notice. "Subsequently, on February 8, 1991, petitioner received from the respondent ( Commissioner of Internal Revenue which is the petitioner in this petition for review ) a demand letter, dated January 30, 1991, reiterating the findings of the examiners as indicated in the pre-assessment notice sent to petitioner. A formal protest, dated March 6, 1991, was filed by petitioner with respondent's office on March 8, 1991. Then on May 14, 1991, petitioner received respondent's decision, dated April 29, 1991, denying the protest with finality and upholding the ruling of former Commissioner of Internal Revenue, Efren I. Plana, where he ruled, in a similar case involving the same party, that stemmed-leaf tobacco whether locally purchased or imported is subject to the specific tax of P0.75 per kilo pursuant to Section 141(b) of the Tax Code." SEIaHT On June 13, 1991, the Court of Tax Appeals promulgated a Decision finding for the private respondent La Suerte and disposing the case in this wise "WHEREFORE, in view of the foregoing, We find the petition for review meritorious and the same is hereby GRANTED. Respondent's 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 respondent's letter, dated January 30, 1991, is deemed cancelled. No pronouncements as to costs of suit. SO ORDERED." In deciding in favor of the private respondent, the CTA ruled that both La Suerte's purchases of stemmed leaf tobacco (item "a" in the assessment) from local suppliers and the sale that it made of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation, another local manufacturer (item "c" in the assessment) were covered by Section 137 of the Tax Code and as such, were exempt from the payment of specific tax. The same conclusion was reached by the CTA as to the imported stemmed leaf tobacco purchased by the private respondent from imported sources (item "b" in the assessment). The CTA pointed out that Section 137 does not make any distinction whether the stemmed leaf tobacco sold by a manufacturer to another is imported or not. On September 21, 1994, petitioner filed a Motion for Reconsideration of the said Decision which was denied by the CTA in its Resolution dated April 5, 1995. Hence this appeal. The petitioner is now before this Court arguing that: (1) Under Section 141(b) of the Tax Code, stemmed leaf tobacco, being partially prepared or manufactured tobacco, is subject to specific tax; (2) The stemmed leaf tobacco purchased by respondent from local suppliers and the stemmed leaf tobacco sold by respondent are not exempt from specific tax since the sale thereof was not made under the conditions prescribed in the regulations of the Department of Finance; (3) Construing together Sections 141 and 137 of the Tax Code, stemmed leaf tobacco is subject to specific tax, except when sold in bulk as raw material from one L-7 directly to another L-7; (4) Under Section 43 of Revenue Regulations No. 17-67, the exemption from specific tax of partially manufactured tobacco applies only to partially manufactured tobacco for export; (5) Imported stemmed leaf tobacco is not covered by the exemption from specific tax under Section 137 of the Tax Code; (6) The exemption under Section 43(a) of Revenue Regulation No. 17-67 of imported leaf tobacco entered in the L-7 Register does not apply to imported stemmed leaf tobacco; (7) Under Section 127 of the Tax Code, if domestic products are removed from the place of production without the payment of the excise tax, it is not required that the tax be collected first from the manufacturer or producer before the possessor thereof shall be liable; and (8) Tax exemptions are construed strictly against the taxpayer and liberally in favor of the government. Synthesizing the above cited contentions, the pivotal issue this Court is tasked to resolve is whether or not private respondent La Suerte Cigar and Cigarette Factory is liable for deficiency specific tax on purchases of stemmed leaf tobacco from local and imported suppliers and on the sale of stemmed leaf tobacco to another local manufacturer covering the period June 21, 1989 to November 20, 1990, totaling P11,757,275.25. Central to the resolution of this case is the application of two provisions of the National Internal Revenue Code, to wit, Sections 141 ( presently Section 144 of the New National Internal Revenue Code of 1997 ) and 137 ( presently Section 140 of the New NIRC of 1997 ), as well as two Revenue Regulations namely, RR No. 17-67, and RR No. V-39, particularly Section 20 thereof. TAX CODE (1) Section 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 Department of Finance. Stemmed leaf 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 regulation of the Department 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." xxx xxx xxx (2) "Section 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 sweeping 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 Department 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 eventually be paid on the finished product." REVENUE REGULATIONS (1) (RR No. 17-67 Tobacco Regulations on Leaf, Scrap, other Partially Manufactured tobacco and other Tobacco Products, etc.) "Section 2. Definition of terms . xxx xxx xxx (iii) " Partially manufactured tobacco" includes : (i) " stemmed leaf " handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust. xxx xxx xxx (2) Section 3. (ADMINISTRATIVE DESIGNATION, SCHEDULES, PARAGRAPH AND ASSESSMENT NUMBER) (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. xxx xxx xxx (c) L-3R Wholesale leaf tobacco dealers. Issued only in favor of persons or entities having fully equipped Redrying Plants. (d) L-31/4 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 productions. (g) L-6 Wholesale leaf tobacco dealers who, is exclusively for export, except as otherwise provided for in these regulations, perform the following functions: (1) handstripped and/or thresh whole leaf tobacco for themselves or for other L-6 or L-7 permittees; (2) Re-process partially manufactured tobacco for themselves, or 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 designates an auxiliary registered book (bale books), for manufacturers of tobacco products.] (i) B-14 Wholesale leaf tobacco dealers (Privilege tax receipt) (j) B-14 Retail leaf tobacco dealers (Privilege tax receipt)" (3) (RR no. V-39) "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 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 invoice 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 the 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 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." In rationalizing its position, petitioner posits that under Section 141, particularly paragraph (b), of the Tax Code, stemmed leaf tobacco, being partially prepared or manufactured tobacco, is subject to specific tax. The stemmed leaf tobacco La Suerte purchased from local and foreign suppliers and the stemmed leaf tobacco which it sold to Associated Anglo-American Tobacco cannot be tax-exempt from specific tax because these transactions were not done under the conditions prescribed by the regulations of the Department of Finance, a requisite stated in Section 137. One of this conditions is that the sale must be made by one L-7 manufacturer to another L-7 manufacturer. Foreign manufacturers of tobacco and tobacco products who are not engaged in trade or business in the Philippines cannot obtain an L-7 classification. Petitioner jointly construes Section 141 and 137 of the Tax Code as stating that stemmed leaf tobacco is subject to specific tax except when sold in bulk as raw material from one L-7 directly to another L-7. Section 141 lays down the general rule while Section 137, as implemented by Section 20(a) of RR No. V-39, provides the exception. Finally, petitioner calls to mind the timeless legal maxim in taxation law that tax exemptions are construed strictly against the taxpayer and liberally in favor of the government. Tax exemption cannot be made by inference or implication but rather must be proven by clear and convincing evidence. In case of doubt, the same shall be resolved against the grant of exemption. In its Comment to the arguments raised by the petitioner, respondent La Suerte Cigar and Cigarette Factory submits, in part, that: (1) The petitioner raises issues not raised at the administrative level or in the CTA. When the petitioner decided the protest of the private respondent on April 29, 1991, the petitioner denied the said protest on the sole ground that Section 141(b) of the Tax Code applied. Then, in the petitioner's Answer filed with the Court of Tax Appeals, the petitioner failed to raised as a defense any of the grounds that she now relies upon for her Petition for Review. (2) The buying and selling of stemmed leaf tobacco were covered by both Section 137 and Section 141(b) of the Tax Code. Respondent agrees with the Court of Tax Appeals that the sale of stemmed leaf tobacco in bulk, as raw material by one manufacturer to another is exempt from specific tax under Section 137 of the same Code. (3) Even assuming that the petitioner's contention that the stemmed leaf tobacco purchased by private respondent La Suerte from local and foreign suppliers were not exempt from specific tax on the ground that the sale was not made under the conditions prescribed by the Secretary of Finance, the provision cited by the petitioner in support of her contention is not applicable since Section 20(a) of RR No. V-39 was repealed by RR No. 17-67. (4) Even if still effective, RR No. V-39 does not apply to stemmed leaf tobacco because said regulation contained no provisions whatsoever concerning the payment of specific tax on stemmed-leaf tobacco. (5) RR No. V-39 was intended to govern only the holders of L-7 licenses and not intended to cover L-3 and L-6 permittees. (6) Even assuming that the RR No. V-39 is still in effect today and in the remote event it is determined that the real intentions behind Section 20(a) of Revenue Regulations No. V-39 was to limit the exemption from specific tax of a transfer of stemmed-leaf tobacco only to a transfer from one cigar or cigarette manufacturer to another, then such a limitation would amount to administrative legislation in direct contravention of the constitutional guarantees of due process. Section 137 of the Tax Code uses the term 'manufacture' which is broad enough to embrace all manufacturers of tobacco and tobacco products. Petitioner refuted the respondent's averments and contentions in its Comment with the following arguments: First , the issues raised in this appeal are not being raised for the first time. The principal issue in the administrative level at the BIR and raised in the pleadings filed with the Tax Court (petition, answer, reply, memorandum, motion for reconsideration) is whether the stemmed leaf tobacco in question is subject to specific tax under Section 141 of the Tax Code or exempt from specific tax under Section 137 of the same Code. All other issues raised in this appeal, which has also been raised in the Tax Court, such as, the applicability of Revenue Regulations No. V-39 and 17-67, are merely incidental to the main issue. Second , Section 20(a) of RR No. V-39 is still applicable because RR No. 17-67 does not repeal it. RR No. V-39 refers to the enforcement of the provisions of Title IV of the National Internal Revenue Code insofar as they affect the manufacture or importation of, and the collection and payment of the specific tax on, manufactured tobacco or products of tobacco. On the other hand, RR No. 17-67 are regulations relative to the enforcement of the provisions of Act No. 2613" which is "An Act to Improve the Method of Production and Quality of Tobacco in the Philippines and to develop the Export Trade Therein." In short, RR No. V-39 deals with the collection and payment of the specific tax on manufactured tobacco or products of tobacco while RR No. 17-67 deals with the grading, classification, inspection, shipments, exportation, importation and the manufacturers of manufactured tobacco and products of tobacco. Third , the government is not estopped from collecting legitimate taxes due to the mistake of its agent. Respondent points out that the prolonged practice of the Bureau of Internal Revenue in not collecting specific tax on stemmed leaf tobacco is an authoritative interpretation of the law, hence, entitled to great weight and highest respect. That is not correct. The prolonged practice of the BIR in not collecting specific tax on stemmed leaf tobacco was the result of an erroneous application and enforcement of the law. It is the established principle that erroneous application and enforcement of the law by public officers is not a bar to the subsequent correct application of the statute. The appeal is meritorious. The main issue is whether, under the circumstances, the respondent can avail of the exemption from the payment of the specific tax under Sec. 137 of the Tax Code. This issue has been laid to rest by the Supreme Court in the case of Commissioner of Internal Revenue vs. La Campana Fabrica de Tabacos, Inc. [G.R. No. 145275] decided on November 15, 2001. The case of La Campana involves kindred set of facts as the case at hand. Thus: La Campana is also a domestic corporation engaged in the importation and local purchase of stemmed leaf tobacco which it uses as raw material in the production and manufacture of cigar and cigarettes. On January 4, 1990, it received from a CIR a letter demanding payment of P2,785,338.75 representing deficiency specific tax on its purchases of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989. As in the case at bench, the assessment for deficiency specific tax was made pursuant to Section 141(b) of the National Internal Revenue Code. La Campana protested the deficiency assessment and argued that Section 141(b) of the NIRC should be read and interpreted in tandem with Section 137 thereof, which is the more specific provision expressly allowing the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without payment of excise tax. Upon denial by the BIR of its protest, La Campana sought annulment of the deficiency assessment before the Court of Tax Appeals. the Court of Tax Appeals found for La Campana and cancelled the assessment. The Commissioner of Internal Revenue appealed before the Court of Appeals which sided with La Campana and denied the appeal. The case went to the Supreme Court which eventually reversed the decision of the Court of Appeals. In deciding the case of La Campana, the Supreme Court took into consideration Section 137 as well as Section 20 of RR V-39 which enumerates the conditions under which stemmed leaf tobacco may be transferred from one factory to another without prepayment of specific tax, to wit: (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 removals. (c) Corresponding debit entry shall be made 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, form in which received, and the weight of the tobacco. The Supreme Court then held: "Thus, under Section 3 (h) of Revenue Regulations No. 17-67, L-7 refers to 'Manufacturers of tobacco products.' Hence, the transferor of the stemmed leaf tobacco must be an L-7 tobacco manufacturer. This is so because obviously only an L-7 tobacco manufacturer has an official L-7 invoice and an L-7 register and transferee of the stemmed leaf tobacco must also be an L-7 tobacco manufacturer because, to repeat, only an L-7 tobacco manufacturer has an L-7 registry book. In the case at bar, the stemmed leaf tobacco purchased by respondent came from Tobacco industries of the Philippines, NGC Trading and Philippine Tobacco Flue-curing Corporation, who are all L-6 permittees, Section 137 (now 140) of the Tax Code qualifies the term 'manufacturer' by the phrase 'under such conditions as may be prescribed in the regulations of the Department of Finance.' Under such regulations the term 'manufacturer' refers only to L-7. We agree with the petitioner that 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 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 suppliers to 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. Consequently, respondent's purchases of stemmed leaf tobacco were not exempt from specific tax." In light of the ruling in La Campana , herein respondent's purchases of stemmed leaf tobacco from local suppliers cannot be exempted from specific tax. It is not at all disputed that the respondent bought the stemmed leaf tobacco from local suppliers who were not classified as L-7 ( rollo, pp. 55 ), such as: Telengtan Bros. & Son (L-3R); Orient Leaf (L-6); Trans Manila (L-3R); Phil. Tobacco Flue-curing (L-6); La Union Tobacco Redrying (L-6); Fieldman Agricultural Tobacco (L-6); and Continental Leaf Tobacco (L-6). Now, regarding respondent's purchases of stemmed leaf tobacco from foreign suppliers, this Court agrees with the petitioner that the same is similarly not exempted from specific tax because foreign manufacturers of tobacco and tobacco products who are not engaged in trade or business in the Philippines cannot obtain an L-7 classification. Going now to the question of whether or not the sale of stemmed leaf tobacco by the private respondent to a local manufacturer, specifically the Associated Anglo-American Tobacco Corporation, is subject to specific tax, this Court answers in the affirmative. As correctly observed by the petitioner, there is nothing in the records of this case which shows that Associated Anglo-American Tobacco Corporation is an L-7 permittee. All that the assailed Decision stated is that the respondent has proven that said Associated Anglo-American Tobacco Corporation is a manufacturer of cigars and cigarettes as evidenced by its Mayor's permit ( rollo, p. 61 ). But then again, it was not established that it was an L-7 permittee. Going now to the issue of the petitioner's alleged belated introduction of certain arguments on appeal, this Court after carefully reading the records of this case, is convinced that the petitioner never deviated from its original theory that the stemmed leaf tobacco purchased and sold by the private respondent is subject to specific tax under Section 141(b) of the Tax Code. As petitioner said, this is the general rule. Yet, since private respondent attempted to shield itself behind the provisions of Section 137 in order to escape tax liability, it was incumbent upon the petitioner to defeat respondent's allegations by citing the loopholes in the latter's line of defense. Finally, let it be said now as it has been said time and again, that in this jurisdiction, taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly construed against the claimant. ( Cyanamid Philippines, Inc. vs. Court of Appeals, 322 SCRA 639; Light Rail Transit Authority vs. Central Board of Assessment Appeals, 342 SCRA 693 ). WHEREFORE, finding merit in the appeal, the Court REVERSES the Decision of the Court of Tax Appeals and enters one ordering the private respondent La Suerte Cigar and Cigarette Factory to pay the Bureau of Internal Revenue the amount of P11,757,275.25 as deficiency specific tax covering the period June 21, 1989 to November 20, 1990, on its local purchases and importations and on the sale of stemmed leaf tobacco, plus penalties incident to delinquency pursuant to Sections 248 and 249 of the National Internal Revenue Code. SO ORDERED. Carpio-Morales and Sabio, Jr . , JJ . , concur.