Commissioner of Internal Revenue v. Fortune Tobacco Corp.

SEVENTEENTH DIVISION [CA-G.R. SP Nos. 38219 & 40313. January 30, 1998.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . FORTUNE TOBACCO CORPORATION , respondent . D E C I S I O N IBAY-SOMERA , C. , J p : These two petitions question the decisions of the Court of Tax Appeals on whether or not the Commissioner of Internal Revenue (CIR) may levy deficiency excise taxes on the importation of stemmed leaf tobacco. The two petitions were consolidated on November 28, 1996 involving as they do the same parties and common issues. CA-G.R. No. 38219 covers alleged deficiency tax payments from January 1, 1986 to June 30, 1989 while CA-G.R. No. 40313 covers the succeeding period from July 1, 1989 to November 30, 1990. In both cases, the Court of Tax Appeals (CTA) set aside the decision of the Commissioner of Internal Revenue as contrary to law and the long standing construction and practice of the Bureau of Internal Revenue (BIR) itself. prLL Except for the dates covered and the amounts involved in each particular instance, the facts of the petitions are similar. The facts of the cases are stated in the October 6, 1994 decision in CA-G.R. No. 40313 as follows: This is a petition contesting a deficiency specific tax assessment on the importation of a stemmed-leaf tobacco in the amount of P1,989,821.86 covering the period from July 1, 1989 to November 30, 1990. Petitioner, Fortune Tobacco Corporation, is a domestic corporation engaged in the manufacture of cigarettes. On March 20, 1991, petitioner received from the respondent Bureau a letter, dated March 1, 1991, demanding payment of the amount of P1,989,821.86 representing deficiency specific tax, inclusive of increments, on petitioner's importation of stemmed leaf tobacco covering the period from July 1, 1989 to November 30, 1990. In answer to this letter of demand, petitioner, in a letter dated April 2, 1991, protested this "new assessment" contending that: "1. Imported stemmed leaf tobacco is not subject to the P0.75/kg. tax levied under Section 141 of the Tax Code considering that (i) stemmed leaf tobacco is not included in the enumeration of products subject to tax under said Section 141; (ii) stemmed leaf tobacco, particularly when imported, cannot be deemed "partially prepared" tobacco under Section 141, (iii) Section 141 itself provides that certain products therein enumerated may be sold without payment of the tax therein of other tobacco products; and, (iv) Section 137 of the Tax Code categorically exempts from the excise tax stemmed leaf tobacco when sold in bulk as raw material by one manufacturer directly to another. 2. The instant purported assessment of P1,989,821.86 was issued against my client without observing procedural due process mandated in Section 229 of the Tax Code, as implemented by Revenue Regulations No. 12-85. 3. The silent yet nonetheless implied revocation (with retroactive effect) of the previous BIR ruling and long standing practice regarding stemmed leaf tobacco (particularly imported stemmed leaf tobacco) is violative of Section 246 of the Tax Code." thus concluding and requesting that respondent cancel and withdraw said assessment. On April 18, 1991, respondent stood pat on his decision on the taxability of stemmed leaf tobacco in the inventory of petitioner and therefore considered the deficiency tax assessment final. Administrative remedies having been closed to it, petitioner appealed the final decision of the assessment of respondent Bureau before this Court assigning three "errors" committed by respondent in its decisions which are reiterations of the grounds raised in its administrative protest. In his Answer to the Petition, respondent considered stemmed leaf tobacco, subject of the deficiency tax assessment, as "partially manufactured or prepared tobacco" as provided for in Revenue Regulations 17-67 (Sec. 1 (i)). If so, it is subject to a tax of P0.75 for each kilogram (Sec. 141, National Internal Revenue Code). It further averred that Section 137 of the Tax Code pertains to transfer of stemmed leaf tobacco as raw materials from one manufacturer of tobacco products (L-7) to another manufacturer of tobacco products (L-7). Revenue Regulations No. V-39, Sec. 20 thereof, refers explicitly to transfers from one L-7 directly to another L-7, but not from L-6 (stripper or thresher) to L-7. While imported leaf tobacco has never been subject to tax, partially manufactured tobacco is subject to the specific tax of P0.75/g. Finally, that the assessment in question was issued in accordance with law and revenue regulations and all presumptions are in favor of the correctness of the assessment. On November 23, 1994 the CTA issued a decision in the CA-G.R. No. 38219 case with the dispositive portion as follows: "WHEREFORE, in view of all the foregoing judgment is hereby rendered setting aside respondent's decision demanding payment of P28,938,446.25 as deficiency excise tax from petitioner without pronouncements as to costs." The CTA decision in the CA-G.R. No. 40313 case was rendered earlier on October 6, 1994. The dispositive portion of the decision reads: "WHEREFORE, judgment is hereby rendered setting aside respondent's assessment of P1,989,821.26 as deficiency excise tax from the petitioner. No costs. The grounds for the petitions are stated as follows: I. UNDER SECTION 141(b) OF THE TAX CODE, STEMMED LEAF TOBACCO, BEING PARTIALLY PREPARED OR MANUFACTURED TOBACCO, IS SUBJECT TO SPECIFIC TAX. II. THE CLASSIFICATION OF STEMMED LEAF TOBACCO AS PARTIALLY MANUFACTURED TOBACCO UNDER REVENUE REGULATIONS NO. 17-67 PREVAILS OVER THE DEFINITION OF PROCESSED TOBACCO UNDER RA 698. III. THE FACT THAT UNDER SECTION 137 OF THE TAX CODE STEMMED LEAF TOBACCO IS EXEMPT FROM SPECIFIC TAX UNDER CERTAIN CONDITIONS PRESUPPOSES THAT IT IS SUBJECT TO SPECIFIC TAX IN THE ABSENCE OF SUCH CONDITIONS. IV. THERE IS NO SHOWING THAT THE STEMMED LEAF TOBACCO IMPORTED BY RESPONDENT IS EXEMPT FROM SPECIFIC TAX UNDER THE CONDITIONS SET FORTH IN SECTION 137 OF THE TAX CODE. V. 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. VI. THE GOVERNMENT IS NOT STOPPED FROM COLLECTING LEGITIMATE TAXES DUE TO THE MISTAKE OF ITS AGENTS. The petitioner relies on the provisions of Section 141 of the Tax Code as interpreted by the BIR's Revenue Regulations No. 17-67. "The statute provides: "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 or 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, 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 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 product . (Emphasis ours) Under Revenue Regulations No. 17-67, otherwise known as "Tobacco Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and Other Tobacco Products; Grading, Classification, inspection, Shipments, Exportation, Importation and the Manufacturers thereof under the provisions of Act No. 2613, as amended" (Section 1, Revenue Regulations No. 17-67), partially manufactured tobacco includes, among others, stemmed leaf tobacco 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. xxx xxx xxx Respondent Fortune states that the applicable provision is Section 137 of the same Tax Code. The statute provides: "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 , Fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cutting, 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." (emphasis supplied) The principal argument of the petitioner is premised on stemmed leaf tobacco being subject to specific tax under Section 141(b) of the Tax Code because it has been classified by the Commissioner of Internal Revenue (CIR) as "partially manufactured tobacco." LLpr The argument goes as follows. The Collector (now Commissioner) of Internal Revenue is empowered under Section 6 of Act No. 2613 as amended by Rep. Act No. 31, the Tobacco Inspection Law "to establish general and local rules respecting the classification . . . of tobacco for domestic sale or factory use and for exportation . . ." Under this power to classify tobacco, the Commissioner of Internal Revenue promulgated Revenue Regulations No. 17-67. Section 2(m) (1) of Revenue Regulations 17-67 provides, as earlier stated, that stemmed leaf tobacco is included in the term "Partially Manufactured Tobacco." Since partially prepared tobacco is taxable under Sec. 141 of the Tax Code, it follows that stemmed leaf tobacco is taxable and should pay excise taxes of 75 centavos on each kilogram of the product. The private respondent, however, states that "stemmed leaf tobacco" is specifically mentioned in certain provisions of the Tax Code but not in its Section 141 which specifies the particular tobacco products liable to the 75 centavos per kilogram tax. Fortune says that it is a cardinal rule of taxation that those not enumerated in a particular tax provision are not liable for the tax therein prescribed and if it was the intention of the law to include stemmed leaf tobacco as subject to the Section 141 tax, it should have done so. Fortune asks, why should "stemmed leaf tobacco" be couched in such amorphous term as "partially prepared tobacco" when the other tobacco products, e.g. fine-cut shorts, stems, etc., are identified with particularity and specificity as to leave no room for doubt on the coverage of Section 141? 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. It is an elementary principle of Administrative Law that in interpreting or implementing a provision of law, a government agency cannot go beyond the terms and provisions of the basic law. Much less can it go against the law itself. Administrative rules and regulations issued by a particular department or agency must be in harmony with the provision of law and should be for the sole purpose of carrying into effect the statutory provisions which it is construing or implementing. An administrative agency cannot extend, diminish, or otherwise amend the general provision of law (Fernando Juan vs. Musngi, 155 SCRA 133 [1987]; U.S. vs. Tupasi Molina, 29 Phil. 119; Director of Forestry vs. Munoz, 23 SCRA 1183 [1968]; Gonzalo Sy vs. Central Bank, 70 SCRA 570 [1976]; Bautista vs. Juinio, 127 SCRA 342 [1984]. There are limitations to the rule making power of administrative agencies. When Congress authorizes an administrative body to promulgate rules and regulations to implement a given legislation, all that is required is that the regulation must not contravene that statute, but must conform to the standards it prescribed (Tayug Rural Bank vs. Central Bank, 146 SCRA 120 [1986]; Del Mar vs. Philippine Veterans Administration, 52 SCRA 340 [1973]. A Supreme Court decision clearly illustrating this point is found People vs. Maceren (79 SCRA 450 [1977]). The Fisheries Law punished the use of "obnoxious or poisonous substances" for fishing in fresh water fisheries. The Department of Agriculture and Natural Resources and the Commissioner of Fisheries issued Fisheries Administrative Order No. 84 and 84-1 penalizing "electro-fishing" and stating that it was included in the statutory provision "obnoxious or poisonous substance." The Supreme Court ruled that electro- fishing is not in the law. The administrative agency, therefore, under its power to classify and implement the law added an item which is not in the law. The Court stated, "Had the lawmaking body intended to punish electro fishing, a penal provision to this effect could have been easily embodied in the old Fisheries Law." Only after a Presidential Decree was promulgated in 1975 expressly adding "electro-fishing" to the punishable methods under the Fisheries Law could it be included. The administrative agency could not, under its power of classification and enforcement, add something new to the law. The same thing happened in Del Mar vs. Philippine Veterans Administration, 51 SCRA 340 [1973]. The PVA issued rules and regulations implementing Republic Act No. 65, Section 9 of the law provides life pensions for veterans with various permanent disabilities "unless they are receiving a similar pension from other Government funds." The PVA suspended the pensions of veterans receiving pensions from the United States Veterans Administration on the ground that "a similar pension from other Government funds" included USVA benefits. The Supreme Court ruled that the administrative agency had no power to amend or expand the statutory requirements. The rules and regulations cannot embrace additional matters not covered by the statute. In Bautista vs. Junio (127 SCRA 342 [1984], the Land Transportation Commission added "impounding" to the statutory penalties of fine and suspension of registration for erring vehicles. Again, the Court ruled that the administrative agency was adding something not found in the statute. There are many decisions illustrating the same principle but one more case should suffice. In Tayug Rural Bank vs. Central Bank, 146 SCRA 120 [1986], the Monetary Board under the powers given to it by law provided for additional penalty rate to be meted out to rural banks which do not pay past due accounts. Notwithstanding the broad supervisory powers given to the Monetary Board over banks, the Supreme Court ruled that the question CB Memorandum Circular No. DRC-8 was ultra vires . The Court stated: "A rule shaped out by jurisprudence is that when Congress authorizes promulgation or administrative rules and regulations to implement given legislation, all that is required is that the regulation be not in contradiction with it, but conform to the standards that the law prescribes (Director of Forestry v. Munoz, 23 SCRA 1183). The rule delineating the extent of the binding force to be given to administrative rules and regulations was explained by the Court in Teoxon vs. Member of the Board of Administrators (33 SCRA 588), thus: "The recognition of the power of Administrative officials to promulgate rules in the implementation of the statute, as necessarily limited to what is provided for in the legislative enactment, may be found as early as 1908 in the case of United States v. Barrias (11 Phil. 327) in 1914 U.S. v. Tupasi Molina (29 Phil. 119), in 1936 People vs. Santos (63 Phil. 300), in 1951 Chinese Flour Importers Ass. v. Price Stabilization Board (89 Phil. 439), and in 1962 Victorias Milling Co. Inc. v. Social Security Commission (4 SCRA 627). The Court held in the same case that "A rule is binding on the courts so long as the procedure fixed for its promulgation is followed and its scope is within the statute granted by the legislature, even if the courts are not in agreement with the policy stated therein or its innate wisdom . . . " On the other hand, administrative interpretation of the law is at best merely advisory, for it is the courts that finally determine what the law means." Indeed, it cannot be otherwise as the Constitution limits the authority of the President, in whom all executive power resides, to take care that the laws be faithfully executed. No lesser administrative, executive office, or agency then can, contrary to the express language of the Constitution, assert for itself a more extensive prerogative. Necessarily, it is bound to observe the constitutional mandate. There must be strict compliance with the legislative mandate. The rule has prevailed over the years, the latest restatement of which was made by the Court in the case of Bautista v. Junio (L-50908, January 31, 1984, 127 SCRA 342). In case of discrepancy between the basic law and a rule or regulation issued to implement it, the basic law prevails. The regulation cannot go beyond the provisions and terms of the basic law (Shell Philippines Inc. vs. Central Bank, 162 SCRA 628 [1988]). After a careful study of all aspects of the law and the revenue regulation involved in this case, We come to the conclusion that the Commissioner of Internal Revenue has not engaged in mere interpretation but has gone into unauthorized modification or amendment of the law. Only Congress can do this. Section 2(M)(1) of Revenue Regulations No. 17-67 is, therefore, ultra vires and invalid. 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 from 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. LLphil The petitioner argues that Section 137 is for one tax purpose while Section 141 is for another. The fact is that the reason for one provision is also present in the other and must, therefore, be treated in the same light. Section 141 of Tax Code specifically excludes "fine cut shorts and refuse, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco" from the 75 centavos per kilogram tax when disposed of or sold. The condition in the statute is that the above must be exported or used in the manufacture of other tobacco products. The reason for the exclusion is that the excise tax will eventually be paid on the finished product. The same reason applies to stemmed leaf tobacco which is intended solely as a raw material in the manufacture of cigarettes and other tobacco products. After the cigarettes are manufactured, excise taxes will be paid. In effect, what the petitioner has provided in the disputed regulation is double taxation the payment of excise taxes on the raw material and later, the payment of excise taxes on the manufactured product. Double taxation must be specifically and clearly provided by law. It cannot be imposed by administrative rule-making body. If specifically excluded under the last paragraph of Section 141, taxes cannot be included under paragraph 2 of the same section by a mere interpretation of the petitioner. It is elementary that any taxes not specifically imposed by law cannot be mandated on the strength of an administrative regulation which purports to implement the said law. Only Congress, not the BIR, can provide for additional taxes. Revenue Regulations No. 17-67 is correct when it provides for the procedure in enforcing the statute. It can state the rules, taxation-wise, on securing permits, putting up factories and machineries, procuring raw materials, recording production, and disposing of the finished product. But the petitioner's powers are limited to procedure and implementation and not substantive law which seeks to add new taxes in addition to those specifically taxed under the law. This is especially true when the particular product being taxed by regulation is expressly excluded from taxes in another section of the same law and also in another law. The petitioner is arrogating powers to itself which it does not possess. The argument that stemmed leaf tobacco used as raw material is exempt from taxation only when it is from one L-7 manufacturer to another L-7 manufacturer suffers from the same infirmity. It is based on the BIR's own Revenue Regulations V-39 which add to the law something which is not there. Using its power of classification, the petitioner has ventured into an amendment and amplification of the basic law. Section 141 taxes fine cut shorts and refuse, scraps, clippings, stems and sweepings but the unnumbered paragraph after Sec. 141 (c) exempts these items if they are used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. The law defines and exempts certain raw materials on condition that excise taxes will eventually be paid on the finished manufactured product. The BIR has classified these raw materials in a restrictive manner only from one L-7 to another L-7 when all that the law requires is that the excise taxes not collected at the start will eventually be paid once the tobacco product comes out in final form. For a wide variety of raw materials, there is double imposition by the BIR of excise taxes when the law obviously removes taxes at the start of the manufacturing process and imposes them only once when the process is completed. Again, double taxation is valid but only when it is provided by statute. It cannot be imposed through an interpretative rule. The petitioner's contention that the classification of stemmed leaf tobacco as "partially manufactured tobacco" under Revenue Regulations No. 17-67 prevails over the definition of processed tobacco under Rep. Act 698 is fanciful to say the least. Revenue Regulations No. 17-67 is not a basic law. It is simply an implementation of the statutory provision of the Tax Code. A mere regulation of a quasi-legislative agency cannot prevail over the express definition under a law passed by Congress itself. It is elementary that an administrative regulation cannot amend or repeal the express provisions of statutes enacted by Congress. How can the petitioner argue that an administrative regulation prevails over a statute or law? The petitioner states that Section 141 and 137 of the Tax Code must be read and construed together. It explains that under Section 141 stemmed leaf tobacco, being partially prepared tobacco is subject to specific tax. However, under Section 137 if the stemmed leaf tobacco is sold in bulk directly from one manufacturer to another in accordance with the conditions prescribed in Section 20 (a) of Revenue Regulation No. V-39, it is exempt from specific tax. It is very obvious that it is not the Tax Code which taxes on one hand and exempts from taxes on the other hand the tobacco involved. It is the addition of a definition of partially manufactured tobacco which clashes with the law itself and the regulatory conditions of BIR which restrict the application of the law to an extremely limited class that form the basis of BIR action. The petitioner engages in legislation and then uses its own administrative or quasi-legislative powers to add a certain class of tax which is neither expressed nor contemplated in the basis law. We are aware of the ruling in Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory , CA-G.R. SP No. 38107 issued on December 29, 1995. We note, however, that this Court in the case of La Suerte failed to take into account the limitations in the exercise of quasi-legislative powers by administrative agencies. True, the law in Sections 141 and 137 of the Tax Code contains the phrase "under such conditions as may be prescribed in the regulations of the Department of Finance." However, the power to prescribed 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 Bureau of Internal Revenue, it would have arrived at conclusions fully consonant with our findings. WHEREFORE, the consolidated petitioner are hereby DISMISSED. The decisions of the Court of Tax Appeals are AFFIRMED. cdll SO ORDERED. Agcaoili and Cosico, JJ . , concur.