Philipppine Tobacco Flue-Curing and Redrying Corporation vs. Commissioner of Internal Revenue

DECISION

MINDARO-G RULLA, J.:

Submitted for decision is a Petition for Review for the Court en bane under Rule 8, Section 4 (b), of the 2005 Revised Rules of the Court of Tax Appeals, as amended, of the Decision l dated August 10, 2009, rendered by this Court's former Second Division2 in CTA Case No. 7377, and its Resolutio n3 dated Oc tober 30, 2009. 1 En bane Docket, pp. 27-5 1.

2 Penned by Associate Justice Olga Polanco-Enriquez, concurred in by Associa te Justice Juanito C. Castaneda, Jr. and Associa te Justice Erlinda P. Uy. 3 En bane Docket, pp. 53-54.

1358 Philippine Tobac co Flue-Curing and Redrying Corporation vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

Petitioner seeks a reversal of both the aforesaid Decision and Resolution, the dispositive portions of which, respectively, read as follows:

Decision dated August 10, 2009:

"WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED for lock of merit. Accordingly, petitioner is hereby ORDERED TO PAY the respondent the amount of ONE

MILLION SEVEN HUNDRED TWENTY THOUSAND

TWENTY TWO and 47 I 100 PESOS (P 1, 720,022.47), representing its deficiency excise tax for the period covering January 1, 2002 to March 31 , 2004.

In addition, petitioner is hereby ORDERED TO PAY a delinquency interest equivalent to twenty (20%) per annum on the amount of P 1,720.022.47 from March 1, 2005, until full payment thereof, pursuant to Section 249(C ) (3) of the NIRC of 1997, as amended.

so ORDERED. II Resolution dated October 30, 2009:

"WHEREFORE, premises considered, petitioner's "Motion for Reconsideration" is hereby DENIED for lock of merit. so ORDERED. II The undisputed facts are stated hereunder.

Petitioner

Philippine

Tobacco

Flue-Curing

and

Redrying

Corporation (or PTFC)

is a corporation primarily engaged in the business as a tobacco dealer and is classified as an L-6 permittee4. 4 Joint Stipulation o f Fac ts and Issues, this Court 's former Second Division Docket. pp. 133-136. 1359

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner o f Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

Respondent is the duly appointed Commissioner of Internal Revenue ("CIR") , vested with authority to exercise the functions of said office, including inter alia, the power to abate or cancel a tax assessments On February 7, 2005, petitioner received a Formal Letter of Demand dated January 19, 2005, with Details of Deficiency Excise Tax on Removals of Partially Manufactured Leaf Tobacco, and an Audit Result/ Assessment Notice dated January 18, 2005, for deficiency excise tax amounting to~ 1 ,720,022.476, computed as follows 7: Volume o f Rem ovals o f Partially Manufac tured Tobacco (in kgs.) l ,364,297 0.75

Multiplied by Tax Rate

Basic De fic ienc y Excise Tax Add: 25% Surc harge Interest up to 2-28-05 To tal De fic ienc y Excise Tax Due g l ,023,222.7 5 255,805.69 440 994.03 ~ l ,720,022.47 On February 28, 2005, petitioner filed an administrative protest against the abovementioned deficiency tax assessment. Thereafter, on April 28, 2005, petitioner filed a Supplemental Protest letter. On November 23, 2005, petitioner filed a petition for rev1ew before this Court due to respondent's inaction. The same was raffled to this Court's former Second Division.

5 Ibid.

6 Ibid.

The pa rties stipulated on the following issues for consideration: 7 Exhib it "H", this Court' s former Second Division Docket, pp. l 22-123 1360

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CT A EB Case No. 566 (CT A Case No. 7377)

"1.

Whether or not petitioner is liable for deficiency excise tax on stemmed leaf tobacco based on Sec. 144 of the NIRC of 1997.

2.

Whether or not the ruling in the case of Commissioner of Internal Revenue vs. La Campana Fobrico de Tobocos, Inc. is applicable to this case.

3.

Whether or not Sec. 130 (A)(2) of the NIRC of 1997 is applic able to the petitioner.

4.

Whether or not petitioner is liable to pay the amount of ~ I ,720,022.47 for the period beginning January I, 2002 up to Marc h 31 , 2004 as defic ienc y excise tax. 5.

Whether or not the Honorable Court of Tax Appeals has jurisdiction in this Case."

After trial, this Court's former Second Division rendered the assailed Decision 8 c iting Commissioner of Internal Revenue vs. La Campana Fabrica de Tabacos, lnc.9(La Campana Case), Campania General de Tabac os de Filipinos vs. Court of Appeals lO (Compania Case)and Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, lnc.ll (La Suerte Case). The pertinent portion of the assailed Decision reads: "Considering further that there is no showing that petitioner has been recognized as on

L-7

tobacco manufac turer, thus, it c annot be exempt from the payment of excise tax under Section 140.

Thus, petitioner c annot be exempt from the payment of excise tax under Section 144.

s This Court 's former Second Division Docket, pp. 446-470 9 G. R. No. 145275, Novemb er 15, 200 1, 369 SCRA 122 10 G.R. No. 14736 1. March 23, 2004, 426 SCRA 210 11 G .R. No. 139803, September 2, 2005, 469 SCRA 346. 1361

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

In sum, the Court finds petitioner liable for deficiency excise tax covering the period from January 1, 2002 to March 31 ,2004."

Petitioner filed therefrom a Motion for Reconsideration 12 which was denied in a Resolution 13 dated October 30, 2009. Hence, petitioner filed this Petition for Review before the Court en bane. At the outset, on September 9, 2010, petitioner filed a "Manifestation with Motion" alleging that it had applied for an abatement or cancellation of the delinquency interest and also paid the deficiency excise tax thereon.

Thus, petitioner prayed for the reduction of its surety bond. However, the records show that no evidence was presented to prove that petitioner's application for an abatement or cancellation of the delinquency interest was approved and granted by respondent. Thus, petitioner's motion for reduction of the surety bond is deemed moot and academic. In assailing the Decision and Resolution of this Court's Division, petitioner raised this sole issue:

"WITH DUE RESPEC T TO THIS HO NO RA BLE COURT'S (FORMER)2ND DIVISION , IT GRAVELY ERRED IN NOT FINDING THAT PETITIONER IS NOT LIABLE FOR DEFICIENCY EXCISE TAX ON STEMMED LEAF TOBACC O BASED ON SEC. 144 OF THE NIRC OF 1997." Simply stated, the issue raised is whether petitioner is subject to excise tax on stemmed leaf tobacco.

12 This Court' s former Second Division Docke t, p p . 473-493 13 This Court 's former Second Division Docket, p p. 50 1-502 136 2

L

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

DEC JSJON

Page 6 of 15

Petitio ner's arguments that it is no t liable fo r the deficiency excise tax on stemmed leaf tobacco are summarized as follows : 1.

Revenue Regulations No. 17-67 w hic h includes and classifies "stemmed leaf tobacco" as "partially manufactured tobacco" is unconstitutional, resulting to administrative legislation. The "partially manufactured tobacco" that Section 144 of the NIRC of 1997 subjected to excise tax is not the some as the stemmed leaf tobacco which Section 1 40 of the some Code exempted from payment. The prolonged practice in not subjecting stemmed leaf tobacco to excise tax proves tha t no excise taxes were intended to be imposed thereon and that the exemption from payment of excise tax under Sec. 140 is brood enough to cover a ll kinds of tobacco manufacturers, without distinction.

2.

The La Campana case is inapplicable. In the said case, the L-6 permittee (transferor) was not held liable for deficiency excise tax but rather the L-7 permitee (transferee) was held liable. Thus, in the present case it should be the transferee 14 (Philip Morris Phil Inc. and Mighty Corporation) that should be held liable for the excise tax. 3.

Pursuant to Sec. 130 (A) (2) of the NIRC of 1997, it is the manufacturer that should be held liable for the payment of excise tax. Petitioner, being in the c lass of "wholesale leaf tobacco dealers" is not a manufacturer or producer, thus, not liable for the payment of excise tax.

We find no merit in petitioner's arguments. Petitio ner is subject to excise tax on stemmed leaf tobacco. Petitioner was assessed pursuant to Revenue Memorandum Circular (RMC) No. 18-2002 15 and Section 14416 o f the NIRC o f 1997. 14 En Bane Docke t, p . 2 1 15 Interpretation o f the pertinent provision of Sec tion 140 of the National Internal Revenue Cod e of 1997 by the Supreme Court of the Philippines in G.R. No. 145275. 16 SEC.144. Tobac co Produc ts.- There shall be collec ted a tax of ( P0.75 on eac h kilogram of the following produc ts of tobacco:

136 .3 l..

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

Said Revenue Memorandum Circular cited the La Campana Case 17 the pertinent portion of which reads:

"We agree with the petitioner that the exemption from specific tax of the sole of stemmed leaf tobacco as row material by one L-7 directly to another L-7 is because such stemmed leaf tobacco has been subjected to specific tax when on L-7 manufacturer purchased the some from wholesale leaf tobacco dealers designated under Section 3, Chapter I, Revenue Regulations No. 17-67(supro) as L-3, L-3F, L-3R, L-4, or L- 6, the Iotter being also a stripper of leaf tobacco. These ore the sources of stemmed leaf tobacco to be used as row materials by on L-7 manufacturer which does not produce stemmed leaf tobacco. When on L-7 manufacturer sells the stemmed leaf tobacco purchased from the foregoing suppliers to another L-7 manufacturer as row material, such sole is not subject to specific tax under section 137(now

Section

140), as implemented by Section 20(o) of Revenue Regulations No. V-39. xxx' In view of the said Supreme Court decision, all removals of stemmed leaf tobacco by leaf tobacco dealers (i.e. L-3, L-3 '/.s, L-3R, L-4, L-6) are subject to the specific tax of ~ 0. 75 per kilogram imposed under Section 144 of the NIRC, in addition to the inspection fee imposed under Section 146 of the some Code. However, removals of said leaf tobacco product by an L- 7 (a manufacturer of tobacco products) shall be exempt from such specific tax pursuant to the said Supreme Court decision. xxx" (Emphasis supplied) (o) Tobacco tw isted by hand or reduc ed into a condition to be consumed in any manner o ther than the ordinary mode of drying and c uring; (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 tobacc o. Fine shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of w hole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of the excise tax herein provided for under such conditions os may be prescribed in the rules and regulations promulgated by the Secretory of · Finance, upon recommenda tion of the Commissioner, if the some ore to be exported or to be used in the manufacture of other tobacco produc ts on w hich the excise tax will eventually be paid on the finished product.

On tobacco specially prepared for chewing so os to be unsuitable for use in any manner, on eac h kilogram, Sixty c entavo (P0.60). 17 Supra. Note 9 136 4

L

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner o f Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

The abovementioned Revenue Memorandum Circular is in accord with Revenue Regulations No. 17-67 which classifies stemmed- leaf tobacco as "partially manufactured tobacco". The classification of stemmed leaf tobacco as "partially manufactured tobacco" was the rationale why petitioner was assessed pursuant to Sec 144 of the NIRC of 1997.

The validity of Revenue Regulations No. 17-67 has been upheld by the Supreme Court in Campania General de Tabacos de Filipinos vs. Court of Appealsls and Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, lnc.l9 We quote this Court's former Second Division: "Petitioner's contention that the classification of 'stemmed leaf tobacco' as "partially manufactured tobacco" is improper since Revenue Regulations No.

17-67 is on administrative legislation in a prohibited sense is untenable. This issue is not novel, as said issue hod already been settled by the Supreme Court in the case of Campania General de Tobocos de Filipinos vs. Court of Appeals, G.R. No. 147361 , March 23,2004, 426 SCRA 210, and reiterated in the subsequent case of Commissioner of Internal Revenue vs. La Suerte Cigar and Cigarette Factory, Inc., G.R, No. 139803, September 2, 2005, 469 SCRA 346. In the case of Campania General de Tobocos de Filipinos vs. Court of Appeals, the Supreme Court ruled: 'Petitioner's arguments impugning the validity of Revenue Regulations Nos. V-39 and 17- 67 deserve scant consideration.

First, both regulations were issued pursuant to Section 245 (now 244) of the Tax Code. The authority of the Secretory of Finance, in conjunction with the 18 Supra. Note 10 19 Supra. No te 1 1 136 5

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

DE C ISION

Commissioner of Internal Revenue, to promulgate needful rules and regulations for the effective enforcement of the internal revenue lows cannot be controverted. Such rules and regulations, os well os administrative op1n1ons and rulings, ordinarily deserve to be given weight and respect by the courts. 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 Section 137 (now 140) and 141 (now 144) but merely implemented and clarified said two provisions by providing certain conditions under which stemmed leaf tobacco may be exempted from prepayment of taxes.'

Page 9 of 15

Clearly, to be exempted from the payment of tax under Sec 140 and 144 of the Tax Code, the taxpayer must comply with the rules and regulations, as well as the administrative opinions and rulings set forth by the Secretary of Finance, in conjunc tion with the Commissioner of Internal Revenue, among others, Revenue Regulations No. 17-67, which the Supreme Court held to be valid. In relation to Section 144 of the Tax Code, there is no basis as to petitioner's claim of exemption under Section 140 of the Tax Code on grounds of the claim of inapplicability of the La Campana Case and the contention that petitioner, being merely a tobacco dealer and not a manufacturer exempts it from liability.

136 G

L

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CT A EB Case No. 566 (CT A Case No. 7377)

Admittedly, petitioner is an L-6 permittee2o_ defined in Revenue Regulations No. 17-97, as follows:

"(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;"

Based on the aforesaid definition, petitioner as an L-6 permittee, is considered a "manufacturer", as it handstripped and/or thresh whole leaf tobacco, re-process partially manufactured tobacco and sell their partially manufactured tobacco to other L-6 or L-7 permittees. Pursuant to Section 130(A) (2) , in relation to Section 144 of the NIRC of 1997, an L-6 permittee can be held liable for exc ise tax. We quote with approval this Court's former Second Division: "Considering that under Sec tion 130(A) (2) , the manufacturer or producer of d omestic product is liable to pay the excise tax before the removal from the place of production and the uncontroverted fac t that petitioner is engaged in the "manufac ture or partial manufac ture of tobacco" since it purchased cured leaf tobacco, removed the stems through the 20 Supra. Note 4 136 '7 (

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377) process of threshing, re-dried the threshed leaf, and then packed the re-dried products into cardboard cases or Hessian bales, clearly shows that it is liable xxx" Further, petitioner, being an L-6 permittee, is not entitled to the exemption of payment of tax under of Section 140 of the NIRC of 1997 which requires compliance with the conditions as may be prescribed by the Secretary of Finance .

We quote:

"Section 140.

Removal of Tobacco Products With o ut 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 short, the refuse of fine-cut c hewing tobacco, scraps, cuttings, clippings, stems or mid-ribs, and sweepings of tobacco may be sold in bulk as row material by one manufacturer directly to another without payment of th e tax, under such conditions as prescribed in the rules and regulations prescribed by th e Secretary of Finance. xxx." The interpretation of the abovementioned provision was expounded in the La Campana Case which was the basis of clarification in the Revenue Memorandum Circular (RMC) No. 18-200221. The Supreme Court held that:

" 'Stemmed leaf tobacco,' as herein used means leaf tobacco which has had the stem or mid-rib removed . The term does not include broken leaf tobacco.' 21 Interpretation o f the p ertinen t provisions of Sec tion 140 o f the National Internal Revenue Code o f 1997 by the Supreme Court of the Philippines in G .R. No. 145275. 136 8 (

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

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.

XXX

XXX

XXX

Thus, under Sec. 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.

XXX

XXX

XXX

We agree with the petitioner that the exemption from specific tax of the sale of stemmed leaf tobacco as raw material by one L-7 directly to another L-7 is because such stemmed leaf tobacco has been subjected to specific tax when an L-7 manufacturer purchased the same from wholesale leaf tobacco dealers designated under Section 3, Chapter I, Revenue Regulations No. 17-67 (supra) as L-3, L-3F, L-3R, L-4, or L- 6, the latter being also a stripper of leaf tobacco. These are the sources of stemmed leaf tobacco to be used as row materials by on L-7 manufacturer which does not produce stemmed leaf tobacco. When on L-7 manufacturer sells the stemmed leaf tobacco purchased from the foregoing suppliers to another L-7 manufac turer as row material, such sale is not subject to specific tax under Section 137 (now Section 140). as implemented by Section 20(o) of Revenue Regulations No. V-39. Consequently, respondent's purchases of stemmed leaf tobacco were not exempt from specific tax." 1369 l

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CT A EB Case No. 566 (CT A Case No. 7377)

Accordingly, a taxpayer is not subject to tax under Section 140 of the NIRC of 1997 when an L-7 manufac turer sells (transferor) the stemmed leaf tobacco to another L-7 manufacturer (transferee) , because only an L-7 permittee has an official L-7 invoice and an L-7 register.

Petitioner is an L-6 permitee, not an L-7 permittee. There is nothing in the said Supreme Court ruling which suggests, even by implication, that an L-6 permittee(transferor) is exempt from the payment of excise tax. Tax exemptions are never presumed.22 It is a settled rule that tax exemptions are construed strictissimi juris against the taxpoyer and liberally in favor o f the taxing power. He who would seek to be thus privileged must justify it by words too plain to be mistaken and too categ orical to be misinterpreted. 23 Taxes are the lifeblood of the nation, therefore statutes that allow exemptions are construed stric tly against the grantee and liberally in favor of the governmenP4 Evidently, petitioner is not exempt from the payment of excise tax on stemmed leaf tobacco.

In fine, we find no cogen t reason to reverse the findings of this Court's former Second Division.

22 Smart Communications, Inc . vs. Ci ty of Dava o, G .R. No. 155491 , September 16, 2008 23 Sea-Land Service Inc. vs. Court of Appeals, et al. G.R. No. 122605, April 30,200 1 24 Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue, G.R. No. 11 7359, July 23, 1998, 293SCRA 76, 77.

1370

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue CTA EB Case No. 566 (CTA Case No. 7377)

WHEREFORE, the instant Petition for Review is hereby DENIED. The Dec ision of this Court's former Second Division in CTA Case No. 7377, dated August 10, 2009, and its Resolution dated October 30, 2009, are AFFIRMED. No pronouncement as to costs.

Associate Justice

WE CONCUR:

L1#-c~ ERNESTO D. ACOSTA

Presiding Justice

~~'to c · ad-o.-U""' I P.: · q'uANITO C. CASTANEDA, JR.

Associate Justice

E~. UY

Associate Justice

~

~~J (_ A- -C-->-

OLGA ~~- ENRIQUEZ

Associate Justice

(On Leave)

LOVELL R. BAUTISTA

Associate Justice

~ /.' ~;. / J-- AM~~ . COTANGCO-MANALASTAS

Associate Justice

1371

Philippine Tobacco Flue-Curing and Redrying Corporation

vs. Commissioner of Internal Revenue

CTA EB Case No. 566 (CTA Case No. 7377)

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation among the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court En Bane. 137 2 ~ v -~ ERNESTO D. ACOSTA

Presiding Justice