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

FOURTH DIVISION [CA-G.R. SP No. 50241. October 10, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . LA SUERTE CIGAR AND CIGARETTE FACTORY, INC. , respondent . D E C I S I O N JACINTO , J p : This is an appeal, by Petition for Review, from the decision of the Court of Tax Appeals (CTA) in CTA Case No. 5466, entitled LA SUERTE CIGAR AND CIGARETTE FACTORY, INC., Petitioner, versus COMMISSIONER OF INTERNAL REVENUE, Respondent, which ordered petitioner herein to refund to respondent the amount of P325,410.0 representing purportedly erroneously paid specific taxes on importations of stemmed-leaf tobacco for the month of March 1995, and CTA's Resolution dated December 15, 1998 denying petitioner's Motion for Reconsideration. The relevant facts are as follows: Respondent, LA SUERTE CIGAR AND CIGARETTE FACTORY, INC. (La Suerte for short), is 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 various dates in March 1995, the Commissioner of Internal Revenue (herein petitioner) collected from La Suerte the aggregate amount of THREE HUNDRED TWENTY-FIVE THOUSAND FOUR HUNDRED TEN PESOS (P325,410.00) for specific taxes on La Suerte's bulk purchases of stemmed-leaf tobacco from foreign tobacco manufacturers. La Suerte paid the said amount under protest. Listed hereunder are the amounts of specific taxes on La Suerte's bulk purchases of stemmed-leaf tobacco from foreign tobacco manufacturers, to wit: DATE AMOUNT ATAPET 1 SERIAL NUMBER AMOUNT 03/02/95 69,401 kgs. 2044548 52,050.75 03/02/95 59,400 kgs. 2044545 44,550.00 03/02/95 69,401 kgs. 2044543 52,050.75 03/03/95 46,540 kgs. 2045006 34,905.00 03/08/95 83,281 kgs. 2045021 62,460.75 03/08/95 31,026 kgs. 2045019 23,269.50 03/10/95 39,191 kgs. 2045052 29,393.25 03/20/95 35,640 kgs. 2045050 26,730.00 TOTAL P 325,410.00 On September 27, 1996 and October 2, 1996, La Suerte instituted with the Commissioner of Internal Revenue (herein petitioner) and with Revenue District No. 52, a claim for refund of specific taxes said to have been erroneously paid on its importations of stemmed-leaf tobacco for the period of November 1994 up to May 1995, including the amount of Three Hundred Twenty Five Thousand Four Hundred Ten Pesos (P 325,410.00) which had been paid by way of specific tax for the month of May 1995. AECcTS Inasmuch as its claim for refund was not acted upon by petitioner and in order to toll the running of the two-year reglementary period within which to file a judicial claim for such refund as provided under Section 229 of the 1997 National Internal Revenue Code, as amended, La Suerte filed on February 8, 1997 a petition for review with the CTA. On September 23, 1998, the CTA rendered judgment, the decretal 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 P 325,410.00 to the petitioner immediately. No pronouncement as to costs. SO ORDERED. On October 5, 1998, petitioner filed a Motion for Reconsideration of the aforesaid decision, but this was denied in a Resolution of the CTA dated December 15, 1998. Hence, this recourse. The lone issue raised by petitioner is: WHETHER OR NOT RESPONDENT IS ENTITLED TO THE REFUND OF THE AMOUNT OF P 325,410.00 ALLEGEDLY REPRESENTING ERRONEOUSLY PAID SPECIFIC TAXES ON VARIOUS IMPORTATIONS OF STEMMED LEAF TOBACCO FOR THE PERIOD MARCH 2, 1995 TO MARCH 20, 1995. We find for petitioner. Section 144 of the 1997 National Internal Revenue Code (NIRC), 2 provides: SECTION 144. Tobacco Products . There shall be collected a tax of seventy-five centavos (P0.75) 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 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 prepayment of the excise tax herein provided for under such conditions as may be prescribed in the rules and 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 product. SaCIAE On tobacco specially prepared for chewing so as to be unsuitable far use in any other manner, on each kilogram, Sixty centavos (P0.60). (emphasis added) Under Revenue Regulations No. 17-67, otherwise known as the "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," the following products of tobacco are defined, thus: SECTION 2. Definition of Terms xxx xxx xxx (m) Partially Manufactured Tobacco includes: (1) Stemmed Leaf handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust. (2) Long-filler handstripped tobacco of good, long pieces of broken leaf usable as filler for cigars without further preparation, and free from mold, dust stems and cigar cuttings. THcaDA (3) Short-filler handstripped or machine-stripped tobacco, clean, good, short pieces of broken leaf, which will not pass through a screen of two inches (2") mesh. (4) Cigar-cuttings clean cuttings or clippings from cigars, unsized with any other form of tobacco. (5) Machine-scrap tobacco machine threshed, clean, good tobacco, not included in any of the above terms, usable in the manufacture of tobacco products. (6) Stems midribs of leaf tobacco removed from the whole leaf or broken leaf either by hand or machine. (7) Waste tobacco denatured tobacco, unfit for human consumption; discarded materials in the manufacture of tobacco products, which may include stems. (n) Manufactured products of tobacco includes cigars, cigarettes, smoking tobacco, chewing tobacco, snuff, and all other forms of manufactured tobacco. (1) Cigars any rolls or bunches of tobacco, wholly made of natural and/or reconstituted tobacco. (2) Cigarettes any rolls of tobacco or any substitute thereof, wrapped in paper or any substance other than tobacco. (3) Chewing tobacco (Mascada) all rolls of Batek or other heavy type of tobacco (Mascada) or treated coke of pressed, flattened tobacco intended for chewing only. (4) Smoking tobacco any fine or rough-cut tobacco not rolled or wrapped, and ready for smoking. (5) Snuff tobacco any specially prepared powdered tobacco intended to be inhaled. xxx xxx xxx Stemmed-leaf tobacco falls under "partially manufactured" or "partially prepared" tobacco, thus, subject to specific tax imposed under Section 144 of the NIRC. In Commissioner of Internal Revenue v. La Campana Fabrica de Tabacos, Inc. , 3 the High Court ruled as follows: Section 137 (now Section 140) of the Tax Code reads in part: 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 rules and regulations prescribed by the Secretary 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 rules and regulations prescribed by the Secretary 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 . (emphasis added) Thus, the conditions under which stemmed leaf tobacco may be transferred from one factory to another without prepayment of specific tax are as follows: 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 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 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. 4 Parenthetically, under Revenue Regulations No. 17-67 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. DcTaEH (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 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, 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 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) 5 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 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. In the instant case, the transferors were foreign tobacco manufacturers who definitely are not holders of L-7 invoice and register. 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. Consequently, respondent's purchases of stemmed leaf tobacco were not exempt from specific tax. Laws granting tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. 6 WHEREFORE, in the context of the aforesaid jural touchstone and in light of the foregoing considerations, the petition is GRANTED and the assailed decision of the Court of Tax Appeals is hereby REVERSED and SET ASIDE. SEAHID SO ORDERED. Asuncion and Bersamin, JJ ., concur. Footnotes 1. Authority to Accept Payment. 2. R.A. 8424, effective January 1, 1998. 3. 369 SCRA 118 [2001]. 4. Rollo , p. 20. 5. Ibid ., pp. 2021. 6. Sea-Land Service, Inc. v. CA , 357 SCRA 441 [2001].