Commissioner of Internal Revenue v. Island Redrying Corp.

TENTH DIVISION [CA-G.R. SP No. 50034. April 4, 2006.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ISLAND REDRYING CORPORATION , respondent . D E C I S I O N AREVALO-ZENAROSA, M. , J p : Before Us is a petition 1 for review under Rule 43 of the 1997 Rules of Civil Procedure seeking to reverse and set aside the Decision 2 dated September 14, 1998 of the Court of Tax Appeals, canceling and setting aside the assessment of Four Hundred Fifty-eight Thousand Eight Hundred Ninety-Six Pesos and Thirty-Eight Centavos (P458,896.38) as deficiency taxes for the period of June 11, 1990 to July 16, 1991 , issued against respondent, and the Resolution 3 dated December 1, 1998, denying petitioner's motion for reconsideration. The facts of the case are as follow: Private respondent Island Redrying Corporation is a domestic corporation engaged in business as a manufacturer and wholesale tobacco dealer. It is a L-3R 4 and L-6 5 permittee. On June 8, 1992, a letter, together with an assessment notice, was sent by petitioner Commissioner of Internal Revenue to the respondent demanding payment of the amount of Four Hundred Fifty-Eight Thousand Eight Hundred Ninety-Six Pesos and Thirty-Eight Centavos (P458,896.38) for deficiency taxes due upon removal of Four Hundred Twenty-One Thousand Thirty (421,030) kilograms of partially manufactured tobacco from its redrying plant for the period June 11, 1990 to July 16, 1991, computed as follows: Total Kilos Removed (6-11-90 to 7-16-91) P421,030.00 75% Specific Tax due thereon P315,772.50 Add: 25% surcharge 78,943.12 20% Interest (up to 5-28-92) 64,180.76 Total Amount Due & Collectible P458,896.38 An administrative protest or request for reinvestigation and reconsideration was filed by respondent on July 14, 1992, which petitioner denied in a letter, dated January 18, 1993. On March 1, 1993, respondent filed with Court of Tax Appeals (CTA) a petition for review seeking to cancel and nullify the Notice of Assessment No. F-4-91-002475 issued by petitioner to respondent. ISHaTA On September 14, 1998 , CTA rendered a decision, the pertinent portion of which reads: "It bears stressing that this case has been submitted for decision on May 30, 1996 but in a resolution promulgated on May 28, 1997, this Court resolved "to hold in abeyance the decision of this case considering that the same involves a similar issue that has been resolved by the Court of Appeals in the case of Commissioner of Internal Revenue versus La Suerte Cigar and Cigaretter Factory, Inc . December 29, 1995, CA-G.R. Sp No. 38107 and which is still pending adjudication before the Supreme Court." However, since the said case is not yet terminated as of this date, this Court has decided to rule on the particular controversy in the light of the recent decision promulgated by the Court of Appeals on January 30, 1998 in the case of Commissioner of Internal Revenue vs Fortune Tobacco Corporation , CA-SP Nos. 38219 and 40313, the pertinent portion of which are cited below: " There is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. The issue, therefore, is whether or not Revenue Regulations No. 17-67 is valid insofar as it interprets the statutory term "partially prepared tobacco" so as to include stemmed leaf tobacco . xxx xxx xxx Section 137 of the Tax Code, earlier cited, expressly defines "stemmed leaf tobacco" and excludes it from payment of the tax when sold in bulk as raw material by one manufacturer directly to another. While this particular section provides for removal of tobacco products without prepayment of tax. It is significant that the Tax Code defines and classifies stemmed leaf tobacco under its Section 137. When Revenue Regulations No. 17-67 undertakes to classify stemmed leaf tobacco under Section 141 in a manner different form the way it is treated in Section 137, it is no longer engaged in mere classification. It is already adding something to the law not in consonance with what the law itself specifically provides but contrary to it. It is not only engaged in amendment but in amendment contrary to a specific provision of the same law. xxx xxx xxx We are aware of the ruling in Commissioner of Internal Revenue vs La Suerte Cigar and Cigarette Factory, Inc ., CA-G.R. SP No. 38107 issued on December 29, 1995. We note, however, that this Court in the Case of La Suerte Cigar failed to take into account the limitations in the exercise of quasi-legislative powers by administrative agencies. True, the law in Section 141 and such conditions as way be prescribed in the regulations of the Department of Finance. However, the power to prescribe regulations is not a carte blanche giving the BIR full discretionary authority to add to the law. It is not a roving commission. It is subject to established and basic principles of Administrative Law enunciated in scores of Supreme Court decisions. There is no discrepancy between the principles enunciated in this decision and in the La Suerte decision except that the latter stopped short and did not go into the powers of administrative agencies. If it had gone fully and far enough into the quasi-legislative powers of the Bureau of Internal Revenue, it would have arrived at conclusions fully consonant with our findings." WHEREFORE, in view of all the foregoing, the petition is granted. Respondent's assessment of P458,896.38 as deficiency specific taxes for the period June 11, 1990 to July 16, 1991 is hereby ordered cancelled and set aside. SO ORDERED." (Emphasis Supplied) On September 30, 1998, petitioner filed a motion for reconsideration which was denied by CTA in its Resolution dated December 1, 1998 . Hence, this petition. ETIDaH Petitioner argues that under Section 141 of the Tax Code, partially manufactured tobacco is subject to specific tax; that under section 137 of the tax code, stemmed leaf tobacco is exempt from specific tax when sold as raw material by one L-7 directly to another L-7; that the tax exemptions are strictly construed against the tax payer; and that respondent is not one those exempted from payment of specific tax. On the other hand, respondent argues that the decision of the CTA dated September 14, 1998 is no longer appealable because of the failure of petitioner herein to comply with the requirements of Sections 1 and 2 of Rule 37 of the 1997 Rules of Civil Procedure in filing with the court a quo its motion for reconsideration dated September 30, 1998; that petitioner's failure to comply with the requirements of proof of service of the petition for review and of the documents which should accompany said petition constitutes sufficient ground for the dismissal thereof under Section 7 of Rule 43; and that the petition for review is patently without merit, prosecuted manifestly for delay, and that the questions raised therein are to unsubstantial as to require consideration. 6 The only issue for our resolution is whether respondent is liable for the amount of Four Hundred Fifty-eight Thousand Eight Hundred Ninety-Six Pesos and Thirty-Eight Centavos (P458,896.38) on specific taxes on stemmed tobacco . The issue raised in the instant case is not novel. We rule to reverse the decision of the CTA . Petitioner based its assessment on Section 141 (b) of the 1991 National Internal Revenue Code (NIRC), as amended. Petitioner further argues that under Section 1 of Revenue Regulation No. 17-67, stemmed leaf tobacco has been considered as partially prepared tobacco within the ambit of Section 141 of the National Internal Revenue Code (NIRC). It avers that Section 137 of the NIRC does not grant automatic exemption from tax and respondent should comply first with the conditions prescribed in the regulations of the Department of Finance. Petitioner further asserts that under Section 137 of the NIRC, as implemented by Section 20 (a) of Revenue Regulations No. V-39, in order to be exempt from specific tax, stemmed leaf tobacco must be sold in bulk as raw materials by one L-7 directly to another L-7. Considering that respondent is L-3R and L-6 there is no showing that the stemmed leaf tobacco was sold to L-7, thus, the exemption under Section 137 does not apply. Respondent, on the other hand, does not agree. It contends that the applicable provision is Section 137 of the 1991 NIRC. It avers that since Section 137 broadly grants specific tax exemption for tobacco products sold as raw material by one manufacturer directly to another without qualification, it must be considered as covering all manufacturers of tobacco products. Respondent therefore claims that from the above definitions and for being a L-3R permittee, it is a manufacturer of tobacco products with respect to stemmed leaf tobacco which is re-dried and baled at its plant, and then sold in bulk as raw material directly to other manufacturers of tobacco, or L-6 and L-7 permittees. It is the assertion of respondent that when the law and regulations enumerate and define various classes of manufacturer subject to specific tax and thereafter exempt from specific tax the sale in bulk of stemmed leaf tobacco as raw material by one manufacturer directly to another, this broad and unqualified provision manifestly covers the removal of tobacco redried at respondent's plant and sold in bulk as raw material to other manufacturers of tobacco. We agree with the petitioner. Section 131 7 of the Tax Code reads in part: "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. cHAaEC "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." Moreover, Section 141 8 of the Tax Code , reads: "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 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 sweetened; and 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 Secretary 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 products. On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos. Thus, the conditions under which stemmed leaf tobacco may be transferred from one factory to another without prepayment of specific tax are as follows: (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. 9 Parenthetically, under Revenue Regulations No. 17-67 , 10 leaf tobacco dealers and manufacturers of tobacco products are administratively designated as follows: "CHAPTER I ADMINISTRATIVE DESIGNATION, SCHEDULES, PARAGRAPH AND ASSESSMENT NUMBER xxx xxx xxx Section 3. (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-3 1/4 Buyers for wholesale leaf of 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 fluecuring the tobacco . DcCASI (f) L-5 Tobacco planters selling to consumers part or the whole of their tobacco productions. (g) L-6 Wholesale leaf tobacco dealers who, 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 for 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 1/4 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). (Emphasis Supplied) Thus, under Sec. 3(h) of Revenue Regulations No. 17-67, L-7 refers " 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 the 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. Furthermore, Section 137 11 Tax Code, which provides: "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 sweepings 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." While we agree with respondent that both Sections 137 and 141 of the former Tax Code allowed the sale of stemmed leaf tobacco without any pre-payment of tax, it must be stressed, however, that a careful reading of the aforementioned provisions shows that such sale is qualified by and is subject to " such conditions as may be prescribed in the regulations of the Department of Finance ." Said conditions were provided for in Revenue Regulations Nos. V-39 and 17-67, which were issued to clarify and implement the foregoing provisions of the Tax Code. Hence, said provisions of the Tax Code must be read and interpreted in accordance with said regulations. Section 20 of Revenue Regulations No. V-39 , which specifically lays the rules for tax exemption on tobacco products states: "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 sweeping of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of the specific tax. EcTaSC Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cutting, 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 for removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under heading "Refuse, etc., received from other factory", showing date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, and the net weight of the tobacco. . . ." Section 20 must be construed in relation to Revenue Regulations No. 17-67, which classifies, stemmed leaf tobacco as "partially manufactured tobacco" , and different designations for persons dealing with tobacco, to wit: L-3, L-4, L-6, L-7, etc. Section 3(h) of Revenue Regulations No. 17-67 describes an L-7 as a " manufacturer of tobacco products ." From the foregoing, it is clear that an entity claiming exemption from specific tax under Section 137, must prove that both the entity and the transferee are categorized as L-7 manufacturers since only an L-7 tobacco manufacturer has an L-7 invoice and an L-7 registry book. Here, respondent is engaged in the export, domestic sale and re-drying of tobacco leaves, activities which are designated as falling either under L-3R or L-6 under Revenue Regulations No. 17-67. Thus, not being designated as an L-7 tobacco manufacturer, respondent cannot claim any exemption from payment of the specific tax on its stemmed leaf tobacco. In other words, respondent, as a non-L-7 tobacco dealer of stemmed leaf tobacco, is liable to pay the specific tax thereon. Hence, respondent is not entitled to any refund of the specific taxes paid. Respondent's arguments impugning the validity of Revenue Regulations Nos. V-39 and 17-67 deserve scant consideration. These regulations were issued pursuant to Section 245 12 of the Tax Code . The authority of the Secretary of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Such rules and regulations, as well as administrative opinions and rulings, ordinarily deserve to be given weight and respect by the courts. These regulations have been affirmed by the Supreme Court to be valid in the case of COMPANIA GENERAL DE TABACOS DE FILIPINAS vs. HON. COURT OF APPEALS, 13 where the High Court said: "Second, our scrutiny of Revenue Regulations Nos. V-39 and 17-67 clearly shows that said regulations did not modify or deviate from the text of Sections 137 and 141 but merely implemented and clarified said two provisions by providing certain conditions under which stemmed leaf tobacco may be exempted from prepayment of specific tax." In fine, we rule to affirm the assessment made by petitioner. WHEREFORE, the instant petition is hereby GRANTED. ACCORDINGLY, the Decision dated September 14, 1998 and the Resolution dated December 1, 1998, respectively, of the Court of Tax Appeals are hereby REVERSED. The respondent is ordered to pay the amount of Four Hundred Fifty-eight Thousand Eight Hundred Ninety-Six Pesos and Thirty-Eight Centavos (P458,896.38) as deficiency specific taxes for the period of June 11, 1990 to July 16, 1991 plus 25% surcharges and 20% interest per annum from June 8, 1992 until fully paid. aHICDc SO ORDERED. Reyes, Jr. and Carandang, JJ., concur. Footnotes Rollo received on March 28, 2005. 1. Rollo , pp. 12-27. 2. Annex A, Rollo , pp. 28-35. 3. Annex B, Rollo , p. 36. 4. Wholesale tobacco leaf dealer. 5. Manufacturer or wholesale leaf tobacco dealer which strips tobacco exclusively for export. 6. Rollo , p. 97. 7. Now Sec. 140 of the 1997 Tax Code. 8. Now Section 144 of 1997 Tax Code. 9. COMMISSIONER OF INTERNAL REVENUE vs. LA CAMPANA FABRICA DE TABACOS, INC., G.R. No. 145275, November 15, 2001. 10. Otherwise known as "Tobacco Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and Other Tobacco Products; Grading, Classification, Inspection, Shipments, Exportation, Importation and the Manufacture thereof under the provisions of Act No. 2613, as amended. 11. Now Section 140 of the 1997 Tax Code. 12. Now Section 244 of the 1997 Tax Code. It states that: SEC. 245. Authority of Secretary of Finance to promulgate rules and regulations. The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. xxx xxx xxx 13. G.R. No. 147361, March 23, 2004.