Commissioner of Internal Revenue v. Compania General De Tabaccos De Filipinas

TWELFTH DIVISION [CA-G.R. SP No. 48797. October 16, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . COMPANIA GENERAL DE TABACCOS DE FILIPINAS , respondent . D E C I S I O N DE LOS SANTOS , E. , J p : Before this court is a Petition for Review of the Decision (dated June 15, 1998) and Resolution (dated August 17, 1998) of the Court of Tax Appeals in C.T.A. Case No. 5294 entitled Compania General de Tabaccos de Filipinas vs. Commissioner of Internal Revenue, which granted respondent herein a refund of its payment of specific tax for stemmed leaf tobacco. It appears from the records that respondent is engaged in business as a redrying plant. From June 1993 to August 1994, petitioner imposed upon respondent the payment of specific taxes on stemmed leaf tobacco or stripped tobacco prior to removal, sale or transfer in the total amount of P1,051,050.00 In a letter dated 06 December 1994, respondent filed with petitioner a claim for refund of the collected amount of P1,051,050.00 as the same were allegedly illegally paid excise tax on stripped tobacco it sold to various cigar and cigarette manufacturers. However, prior to the resolution of its claim respondent filed with the Court of Tax Appeals, on 02 February 1995, a petition for review seeking the refund of the aforesaid amount. In a Decision dated June 15, 1998, the Court of Tax Appeals resolved respondent's petition, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED. Accordingly, respondent is hereby ORDERED to REFUND the amount of P1,051,050.00 to the petitioner immediately. "SO ORDERED." On 03 July 1998 petitioner moved to reconsider the said decision. In a Resolution dated August 17, 1998, the Court of Tax Appeals denied petitioner's motion. TSaEcH The sole issue at hand is whether or not respondent is entitled to its claim for a tax refund. Petitioner posits the view that under Revenue Regulations No. 17-67, Section 2, "stemmed leaf tobacco" is considered partially manufactured tobacco hence, subject to a specific tax of seventy-five centavos per kilogram under Section 141 of the Tax Code. Petitioner further argues that pursuant to Section 137 of the said Code, ". . . the sale of among others, stemmed leaf tobacco in bulk as raw material by one manufacturer to another is exempt from specific tax under such conditions as may be prescribed in the regulations of the Department of Finance" (p.5, Petition for Review), which conditions were laid down in Revenue Regulations No. V-39, Section 20(a). Petitioner also argues that since respondent is not classified as L-7, it being a redrying plant, it cannot be considered a manufacturer and therefore should not be entitled to any tax exemption. Respondent on the other hand argues that Sections 137 and 141 of the Tax Code should be considered together to "obtain a better perspective of the present dispute" (p.2, Comment). It further argues that the cases relied upon by petitioner is erroneous since the "judicial pronouncement in these cases is no longer good law and therefore inapplicable" (p. 3, ibid .). It must be stated that it is a prerequisite for the determination of the foregoing issue that the validity of the pertinent rules and regulations cited by both parties be subject to scrutiny if it pass muster the following requisites: (1) That the rules and regulations must have been issued on the authority of law; (2) That the rules and regulations must be within the scope and purview of the law; and (3) That said rules and regulations must be reasonable (Gonzales, N.A., Administrative Law: A Text, 1979, p. 53). Anent the first requirement, Revenue Regulation No. V-39 was issued to implement the provisions of the National Internal Revenue Code and Revenue Regulation No. 17-67 was issued to implement the Tobacco Inspection Law. Therefore, both were issued on authority of law. Mr. Neptali Gonzales provides an elucidation of the second requisite in his book "Administrative rules and regulations to be valid must be within the authority conferred upon the administrative agency. A rule which is broader than the statute empowering the making of rules cannot be sustained. Administrative authorities must strictly adhere to the standards, policies and limitations provided in the statutes vesting power to them. . . ." (p. 54, ibid) The following are the relevant provisions of the National Internal Revenue Code cited by both parties, to wit: "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 Department of Finance. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweeping 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 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 "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 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 pre-payment of the 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 or other tobacco products on which the excise tax will eventually be paid on the finished product. . . ." Section 141 is a general provision covering all sales of tobacco products enumerated therein by anyone, whereas Section 137 is a specific provision covering only the sale of tobacco products by one manufacturer directly to another. (Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. SP No. 38107 [December 29, 1995]. Included in both provisions of law is the qualificative phrase "under such conditions as may be prescribed in the regulations of the Department of Finance", and on the basis of which Revenue Regulations No. V-39 was issued. Revenue Regulations No. V-39, specifically Section 20(a), was issued to specify the conditions under which stemmed leaf tobacco may be transferred from one manufacturer to another without prepayment of specific tax. The said section provides that ". . . Exemption from tax of tobacco products intended for agricultural or industrial purposes . (a) Sale of stemmed leaf tobacco, etc. by one factory or another Subject to the limitation 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 material by one manufacturer directly to another, without the prepayment of specific tax. "Stemmed leaf tobacco, . . . may be transferred from one factory to another under an official I-7 invoice on which shall be entered the exact weight of the tobacco at the time of its removal, an 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 receipts, assessment and invoice numbers, name and address of the consignor, form in which received, and the weight of the tobacco . . . ." (Emphasis ours.) As correctly found by the Court in Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. No. 38107, promulgated December 29, 1995 "What is the significance of the conditions prescribed in Section 20(a) of Revenue Regulations No. V-39 that the transfer of stemmed leaf tobacco from one factory to another shall be 'under an official L-7 invoice' and that 'entry shall be made in the L-7 register?' It simply means, we submit, that the transferor of the stemmed leaf tobacco must be L-7. This is so because obviously only L-7 as an official I-7 invoice and L-7 register. Furthermore, what is the significance of the condition that the 'corresponding debit entry shall be made in the L-7 register book of the factory receiving the tobacco?' again, it simply means, we submit, that the transferee of the stemmed leaf tobacco must also be L-7 because, to repeat, only I-7 has an I-7 register book." (pp. 8-9) As necessitated by the second requisite, the standards, policies and limitations for the issuance of the rules can be clearly culled from the provisions of Sections 137 and 141 and, the foregoing revenue regulations set out the conditions for availment of the exemption, within the limits provided by the law. As to compliance with the third requisite, in order to be considered reasonable, rules and regulations "must be reasonably directed to the accomplishment of the purpose of the statute under which they are made, tend to its enforcement, or be reasonably adapted to secure the end in view." (Gonzales, N.A., p. 55, supra ) EHASaD Administrative rules and regulations are reasonable when it aids in the implementation and achieves the purpose of the statute or law. In the instant case the purpose of the law was to allow exemption from prepayment of specific tax on the sale, removal or transfer of stemmed leaf tobacco. However, the law expressly provides that the grant or availment of the exemption was subject to the conditions to be promulgated by the Secretary of Finance. With the foregoing, the relevant rules and regulations were issued, providing a framework for the availment of the exemption. As held in the case of Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. No. 38107, promulgated December 29, 1995 "While the law, by itself, then does not distinguish, nevertheless, it authorizes the making of proper distinctions through the issuances of the Department of Finance." Clearly, the rules and regulations subject of the instant case are valid. Prescinding from the foregoing and after a careful consideration of the factual circumstance and applicable jurisprudence, this Court finds the petition meritorious. It has been generally held that rules and regulations of an administrative agency are subject to the same principles of construction as applied to the construction of statutes (Agpalo, R.E., Statutory Construction 1995, 3rd Ed., p. 131). Every word in an issued rule or regulation should be construed as to give effect to its every word pursuant to the legal maxim ut mauis valeat quam pereat or that construction is to be sought which gives effect to the whole of the statute its every word. DcIHSa If Congress had intended that availment or grant of the exemption is dependent solely on the provision of the law it would not have included the qualificative phrase in Sections 137 and 141. To strike down administrative rules and regulations for being issued in excess of the quasi-legislative power of an administrative body would render nugatory the purpose of Congress in including the said phrase. In addition, Sections 137 and 141 of the National Internal Revenue Code, as well as pertinent rules and regulations must be construed and read together with Act No. 2613, as amended by R.A. No. 31, (The Tobacco Inspection Law) pursuant to the maxim interpretare et concorde legibus est optimus interpretandi . More specifically Section 6 thereof, thus "SECTION 6. The Collector of Internal Revenue shall have the power and it shall be his duty: "(a) To establish the 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 as of the same quality as when it is not of the same class and origin. xxx xxx xxx" Pursuant to the foregoing, Revenue Regulations No. 17-67 was issued and, Section 2(m) thereof provides: xxx xxx xxx "(m) ' Partially Manufactured Tobacco ' includes (1) ' Stemmed Leaf handstripped tobacco, clean, good, partially broken leaf only free from mold and dust. xxx xxx xxx" The same regulation, likewise, designates the different leaf tobacco dealers and manufacturer of tobacco products, thus Section 3 provides "CHAPTER I ADMINISTRATIVE DESIGNATION, SCHEDULES, PARAGRAPH AND ASSESSMENT NUMBER SECTION 3. (a) L-3 - Wholesale leaf tobacco dealers. (b) L-3F - Wholesale leaf tobacco dealers. Issued only in favor of Farmer's Cooperative Marketing association (Fa Co Mas) duly organized in accordance with law. xxx xxx xxx (c) L-3R - Wholesale leaf tobacco dealers. Issued only in favor of 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 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-R permits after flu-curing the tobacco. (f) L-5 - Tobacco planters selling to consumers part of the whole of their tobacco productions. (g) L-6 - Wholesale leaf tobacco dealers, who exclusively for export, except s otherwise provided for in these regulations, perform the following functions: xxx xxx xxx (h) L-7 - Manufacturers of tobacco products. (L-71/4 designates all auxiliary registered book [bale books], for manufacturers of tobacco products). (i) B-14 - Wholesale leaf tobacco dealers (Privilege tax receipt) (j) B-14(a) - Retail leaf tobacco dealers (Privilege tax receipt)" xxx xxx xxx Act No. 2613, as amended, is a law that sought to improve the methods of production and quality of tobacco for domestic sale or use and export thereof and, the National Internal Revenue Code exempts from prepayment of specific tax the removal or transfer of tobacco products subject to the conditions as prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue. EcICSA The rule is that a statute should be so construed not only to be consistent with itself but also to harmonize with other laws on the same subject, as to form a complete, coherent and intelligible system. Application of the rule, as previously stated, is expressed in the maxim interpretare et concorde legibus est optimus interpretandi , or every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence. Statute should be construed together to attain the purpose of an express national policy (Agpalo, R.E. supra , pp. 209-210). Logically, rules and regulations issued pursuant to the implementation of the said statutes should be construed and harmonized together. Revenue Regulations No. 17-67 defined 'partially manufactured tobacco' and included within its definition stemmed leaf tobacco, hence its being subject to tax under Section 141 of the NIRC. The same regulation, likewise, designated, a tobacco manufacturer as L-7 thus providing for a narrower definition of the term "manufacturer" relative to Section 137 of the NIRC. The foregoing more than sufficiently sets the basis for the assessment and payment of the amount sought to be refunded. This Court further considered that a tax refund being in the nature of a claim for exemption must be construed strictly against the taxpayer and liberally in favor of the government "We agree with the petitioner that a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. Likewise, there can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund." (Commissioner of Internal Revenue vs. Tokyo Shipping Co. Ltd., 244 SCRA 333 [1995]) "And because taxes constitute the lifeblood of the government, through which its agencies continue to operate and with which the State effects its functions for the welfare of its constituents, tax exemptions (and, we might add, refunds in the nature of exemptions) must be strictly construed against the tax payer and liberally in favor of the state." (Magsaysay Lines, Inc. vs. Court of Appeals, 260 SCRA 513 [1996]). "It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed in strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law." (Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 [1999]). Not only must a claim for refund be strictly construed against the taxpayer, the latter has the burden of proving that he is entitled to his claim. A perusal of the record of the instant case did not show that respondent is entitled to a refund of the amount of P1,051,050.00. Petitioner alleged that respondent has a redrying plant and designated respondent as L-3, L-3R or L-6 (Petition, p. 9). Respondent did not deny the foregoing allegation neither did it prove otherwise, therefore the same is deemed admitted. Neither did respondent prove that the entity to which it sold its stemmed leaf tobacco is L-7. Logically, respondent not being an L-7 and there being no proof that the transferee of the stemmed leaf tobacco was L-7, respondent is not entitled to its claim for refund. As a ratiocination by the Court in the same La Suerte Cigar and Cigarette case "The rationale of the exemption from specific tax of the sale of the stemmed leaf tobacco as raw material by one L-7 directly to another L-7 is because such stemmed leaf tobacco has already been subjected to specific tax when L-7 purchased the same from L-3R to L-6 suppliers. As earlier point out, L-3R is a wholesale leaf tobacco dealer, while L-6 is not only a wholesale leaf tobacco dealer but also a stripper of leaf tobacco. They are the source of stemmed leaf tobacco to be used as raw materials by L-7 who does not produce stemmed leaf tobacco. When L-7 sells the stemmed leaf tobacco purchased from L-3R or L-6 suppliers to another L-7 as raw material, such sale is subject to specific tax." (p. 9, CIR vs. La Suerta Cigar and Cigarette Factory) The same Court further held in this wise "We find that private respondent has utterly failed to discharge its burden. In deference to the qualificative phrase contained in sections 141 and 137 of the Tax Code, the stemmed leaf tobacco purchased by Respondent from local suppliers and stemmed leaf tobacco sold by Respondent to Associated Anglo-American Tobacco Corporation are not exempt from the specific tax because the sale thereof was not made under the conditions prescribed in the regulations of the Department of Finance. We do not tarry to defer to the regularity of petitioner's deficiency assessment in the absence of proof on the part of Respondent to substantiate exemption from the assailed assessment. After all "All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the state in the various counties who have to do with the assessment of property for taxation will knowingly violate the duties imposed upon them by all . . ." This Court is of the view that the decisions in Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, CA-G.R. No. 38107, promulgated on December 29, 1995 and Commissioner of Internal Revenue vs. La Campana Fabrica de Tabacos, Inc., CA-G.R. SP No. 40773, promulgated on July 22, 1996 is the applicable law on the subject in issue as it sought to harmonize and give effect to the applicable statutes and its corresponding rules and regulations in accordance with the policy of the state to provide a uniform policy of prepayment of specific tax for the removal, sale or transfer of stemmed leaf tobacco subject only to exemptions after compliance with the conditions prescribed by the Secretary of Finance and/or through the recommendation of the Collector of Internal Revenue. WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision and resolution of the Court of Tax Appeals is hereby ANNULLED and SET ASIDE. SO ORDERED. Labitoria and Bello, Jr., JJ., concur.