Commissioner of Internal Revenue v. Continental Leaf Tobacco (Phils.), Inc.

SECOND DIVISION [CA-G.R. SP. Nos. 49546 & 50942. October 26, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CONTINENTAL LEAF TOBACCO (PHILS.), INC. , respondent . D E C I S I O N BRAWNER , R . , J p : For Our resolution are the consolidated cases of CA-G.R. Sp. Nos. 49546 and 50942, both petitions for review, of the Decisions rendered by the Court of Tax Appeals (CTA) in favor of respondent, dated 20 January 1999, in consolidated C.T.A. Cases Nos. 4961 and 4992, and dated 11 August 1998, in C.T.A. Case No. 5138. The antecedent facts giving rise to the instant controversy are as follows: Respondent is a corporation engaged in the manufacture of tobacco by removing the stems from whole leaf tobacco and selling partially manufactured tobacco in bulk to other tobacco manufacturers, particularly to manufacturers of cigarettes, as raw materials for the production and manufacture of cigars and cigarettes. It is a holder of both L-3 and L-6 tobacco license from the Bureau of Internal Revenue (BIR). For consolidated C . T . A . Cases Nos . 4961 and 4992 : On 24 June 1992, respondent received an assessment notice from the BIR for deficiency specific tax covering the period from July 1989 to July 1991 amounting to P4,381,492.26 itemized as follows: Total Kls Removed (7-1-89 to 7-17-91) P4,160,950.00 75% Specific Tax Due 3,120,712.50 Less: Specific Tax Paid 105,750.00 Deficiency Specific Tax 3,014,962.50 Add: 25% surcharge 753,740.63 20% Interest (up to 5-28-92) 612,791.13 Total Amount Due and Collectible P4,381,494.26 ========= Instead of paying the said amount, respondent filed a protest on 16 July 1992 with the Assistant Commissioner for Collection, invoking Section 137 of the Tax Code which allegedly allows the local sale and purchases of stemmed-leaf tobacco from one manufacturer to another without payment of specific tax. On 26 January 1993, the then Commissioner of Internal Revenue denied the protest contending that, in previous similar cases, the BIR had maintained that sales of partially manufactured tobacco, more particularly stemmed-leaf tobacco, are subject to tax under paragraph (b) of Section 141 of the Tax Code. Thus, a petition for review was thereafter filed with the CTA on 23 February 1993, docketed as C.T.A. Case No. 4961. On 26 May 1993, during the pendency of C.T.A. Case No. 4961, respondent filed a judicial claim for refund of specific taxes on the same transactions amounting to P1,046,850.00 covering the period from 28 May 1991 to March 1992, before the CTA, docketed as C.T.A. Cases No. 4992. For C . T . A . Case No . 5138 : During the month of August 1992, respondent sold stemmed-leaf tobacco to other tobacco manufacturers whereby the sum of P96,800.00 for specific taxes due were subsequently assessed and collected by petitioner. On 15 July 1994, petitioner filed a claim for refund of the amount with the Commissioner of Internal Revenue, invoking exemption under Section 137 of the National Internal Revenue Code (NIRC). Without waiting for petitioner to resolve its claim, respondent filed a petition for review with the CTA on 11 August 1994, seeking the refund of the aforesaid amount. It subsequently filed an Amended Petition for Review on 27 September 1994. In both cases, the CTA rendered for respondent and ordered a refund. Hence, resort to this Court. In the petitions at bar, petitioner maintains the view that stemmed-leaf tobacco may be sold without prepayment of the specific tax only if the sale or purchase is made by one manufacturer directly to another but qualified otherwise that such manufacturers of tobacco products should be both holders of L-7 license as classified under Revenue Regulations No. 17-67 in order to exempt from the particular specific tax. At the crux, thereof, of both cases is the interpretation of Sections 137 and 141(b) of the National Internal Revenue Code. Which provision should be applied in the case of manufacturers of tobacco who remove the stems from its whole leaf and sell these partially manufactured tobacco in bulk to other tobacco manufacturers. Section 137 of the NIRC reads, in part: "Section 137. Removal of tobacco products without prepayment of tax . . . 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." (Emphasis Ours) Section 141 (b) of the same Code, on the other hand, reads, in part: "Section 141. Tobacco products . There shall be collected a tax of seventy-five centavos on each kilogram in the following products of tobacco: "xxx xxx xxx "(b) Tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened. "(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 specific tax herein provided for under 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." (Emphasis Ours) Along with the above-quoted Section 141(b), petitioner primarily relies upon Revenue Regulations No. 17-67, to prove the liability of respondent for specific taxes. Section 2(m) of said revenue regulation provides: "SECTION 2. Definition of terms xxx xxx xxx "(m) ' Partially Manufactured Tobacco ' includes: (1) ' Stemmed Leaf ' handstripped tobacco, clean, gold, partially broken leaf only, free from mold and dust. xxx xxx xxx pursuant to the Commissioner of Internal Revenue's power to classify tobacco under Section 6 of Act No. 2613, known as the "Tobacco Inspection Law," as amended by Republic Act No. 31, to wit: "SECTION 6. The Collector of Internal Revenue shall have the power and it shall be his duty: "(a) To establish 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 the leaf tobacco be not mixed, packed, marked as of the same quality when it is not of the same class and origin." (emphasis ours) To further bolster his contention, petitioner invokes Section 20 (a) of Revenue Regulations No. V-39, relative to the "enforcement of the provisions of Title IV of the NIRC insofar as they affect the manufacture or importation of, and the collection of specific tax on, manufactured tobacco products." 1 Said section provides: "SECTION 20. 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 limitations herein established , . . . 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, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, and sweepings of tobacco or partially manufactured or other refuse of tobacco may be transferred 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 receipts, assessment and invoice numbers, name and address of the consignor, form in which received, and the weight of the tobacco. . . . A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the tax is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. 2 It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law. 3 A tax exemption must be construed strictissimi juris . Tax (and, we might add, refunds in the nature of exemptions) must be strictly construed against the taxpayer and liberally in favor of the State. 4 A claimant has the burden of proof to establish the factual bass for his or her claim for a tax credit or refund. 5 Tax exemptions are to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption. 6 Hence, the need for a preliminary examination of the validity of the pertinent provision of Revenue Regulation 17-67, i . e ., the conditions prescribed to entitle a manufacturer or tobacco to exemption from excise tax provided under Section 137 of the NIRC. Said Section 137 leaves it to the Secretary of Finance to promulgate the regulation prescribing the conditions for exemption from payment of the specific tax on the manufacture of certain tobacco products. Under Revenue Regulation 17-67, stemmed-leaf tobacco, when sold by an L-7 permittee to another L-7 permittee, is exempt from prepayment of specific tax. Is this a valid condition? Again, Section 137 of the NIRC, reads, in part: "Section 137. Removal of tobacco products without prepayment of tax . . 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." (emphasis and italics ours) What then is contemplated here? In our considered opinion, it is the sale which is subject to the condition to be prescribed by the Secretary of Finance. By requiring that both the seller and the buyer be L-7 permittees, the Secretary of Finance had overstepped his bounds as he is now imposing a condition "beyond the ordinary and reasonable intendment of the language actually used by the legislative authority." While Section 137 authorizes the Secretary of Finance to pass the regulation prescribing the conditions for exemption, with regard to the sale, the same Section 137 did not distinguish as to the class of manufacturer who may avail of the exemption. Presumably, the manufacturers contemplated are the manufacturers of those tobacco products enumerated in the provision. The provision, likewise, did not undertake to distinguish the class of manufacturer to which the tobacco products mentioned may be sold. May the Secretary of Finance arrogate upon himself to classify the manufacturers covered by the exemption? We think not . Where the law makes no distinctions, one does not distinguish. 7 View that stemmed-leaf tobacco was defined in Section 137, while Section 141 omitted it altogether. Thus, it may reasonably be concluded that for stemmed-leaf tobacco, "exemption is the rule and taxation the exception," so to speak. Thus the rule must be reversed, i . e ., the provision must be strictly construed against the government and liberally in favor of the taxpayer. This is especially true because Section 137 already mentioned and defined stemmed-leaf tobacco and henceforth, it may reasonably be presumed that if the legislature intends for stemmed-leaf tobacco to be covered by any of the succeeding provisions, it would expressly mention it and not merely allude to it. Thus, stemmed-leaf tobacco is not covered by the provision of Section 141(b) of the NIRC imposing a tax of P0.75 on each kilogram, among others, of tobacco partially prepared with or without the use of any machine or instrument or without being pressed or sweetened, as Revenue Regulations No. 17-67 would like it to be. Administrative rules and regulations are intended to carry out, not supplant or modify the law. 8 With this in mind, We cannot but hold with disapprobation Section 2(m) of Revenue Regulations No. 17-67, which classified stemmed-leaf tobacco as " partially manufactured tobacco ." To recall, said Section 2(m) provides: "SECTION 2. Definition of Terms . "xxx xxx xxx "(m) ' Partially Manufactured Tobacco ' includes: (2) ' Stemmed Leaf ' handstripped tobacco, clean, gold, partially broken leaf only , free from mold and dust. "xxx xxx xxx" (italics and emphasis ours) while the second paragraph of Section 137 of the NIRC provides: "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 ." (italics and emphasis ours) STIHaE Clearly therefore, stemmed leaf tobacco contemplated by Section 2(m) of Revenue Regulations No. 17-67 is different from that contemplated by Section 137 of the NIRC for purposes of exemption. The Court of Tax Appeals is a highly specialized body specifically created for the purpose of receiving tax cases and, through its expertise, it is undeniably competent to determine the issue of whether respondent is covered by the exemption and therefore entitled to a refund of what it had paid. The findings of the Court of Tax Appeals will not ordinarily be reviewed absent a showing of gross error or abuse on its part. 9 A review of the rollo and an analysis of the arguments advanced by both parties would disclose no error warranting reversal of the challenged Decisions. We quote with approbation the following pronouncements of the CTA, lifted from the Decision of this Court in Commissioner of Internal Revenue vs. Fortune Tobacco Corporation 10 promulgated on 30 January 1998: "There is no disputing the fact that stemmed leaf tobacco is not among the tobacco products expressly mentioned in Section 141. "xxx xxx xxx ". . . , 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 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 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 ". . . 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 . . . 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. . . "xxx xxx xxx ". . . It is the addition of a definition of partially manufactured tobacco which clashes with the law itself and the regulatory conditions . . . which restrict the application of the law to an extremely limited class that form the basis of the BIR action (i.e., a deficiency assessment). EcDSTI xxx xxx xxx" (words in parenthesis Ours) We apply the verba legis rule or the plain meaning rule which rests on the valid presumption that the words employed by the legislature in a statute correctly expresses its intent or will and preclude the court from construing it differently, 11 in adopting the ratiocination followed by the CTA in the above-cited case. Moreover, it is expressly provided under the last sentence of Section 10, Rule 43 (entitled "Appeals from the Court of Tax appeals and Quasi-Judicial Agencies to the Court of Appeals") of the 1997 Rules of Civil Procedure: "(t)he findings of fact of the court of agency concerned, when supported by substantial evidence, shall be binding on the Court of Appeals." WHEREFORE, the challenged Decisions rendered by the Court of Tax Appeals, dated 20 January 1999, in consolidated C.T.A. Cases Nos. 4961 and 4992, and dated 11 August 1998, in C.T.A. Case No. 5138, are hereby AFFIRMED. SO ORDERED. Garcia and Reyes, Jr., JJ., concur. Footnotes 1. Section 1, Revenue Regulations No. V-39. 2. Davao Gulf Lumber Corporation vs. Commissioner of Internal Revenue , 293 SCRA 76 (1998). 3. Afisco Insurance Corporation vs. Court of Appeals , 302 SCRA 1 (1999). 4. Magsaysay Lines, Inc. vs. Court of Appeals , 260 SCRA 513. 5. Citibank, N.A. vs. Court of Appeals , 280 SCRA 459 (1997). 6. Paper Industries Corporation of the Philippines vs. Court of Appeals , 250 SCRA 434 (1995). 7. Ramirez vs. Court of Appeals , 248 SCRA 590 (1995). 8. Grego vs. Commission on Elections , 274 SCRA 481 (1997). 9. Philippine Refining Company vs. Court of Appeals , 256 SCRA 667 (1996). 10. Docketed as CA-G.R. SP Nos. 38219 and 40313. 11. Republic vs. Court of Appeals , 299 SCRA 199 (1998).