G.R. No.

125346, November 11, 2014

LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, v. COURT OF APPEALS

AND COMMISSIONER OF INTERNAL REVENUE, Respondents.

FACTS: These cases involve the taxability of stemmed leaf tobacco imported and locally
purchased by cigarette manufacturers for use as raw material in the manufacture of their
cigarettes. Under the National Internal Revenue Code of 1997 (1997 NIRC), before it was
amended on December 19, 2012 through Republic Act No. 10351 (Sin Tax Law), stemmed
leaf tobacco is subject to an excise tax of P0.75 for each kilogram thereof. The 1997 NIRC
further provides that stemmed leaf tobacco — “leaf tobacco which has had the stem or
midrib removed” — “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.”

This is a consolidation of six petitions for review of several decisions of the Court of Appeals,
involving three cigarette manufacturers and the Commissioner of Internal Revenue. La
Suerte Cigar & Cigarette Factory (La Suerte), Fortune Tobacco Corporation (Fortune), and
Sterling Tobacco Corporation (Sterling) are domestic corporations engaged in the production
and manufacture of cigars and cigarettes. These companies import leaf tobacco from foreign
sources and purchase locally produced leaf tobacco to be used in the manufacture of cigars
and cigarettes.

The CA held petitioner La Suerte Cigar & Cigarette Factory (La Suerte) liable for deficiency
specific tax on its purchase of imported and locally produced stemmed leaf tobacco and sale
of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation (AATC) during
the period from January 1, 1986 to June 30, 1989.

Fortune Tobacco Corporation (Fortune) was not obliged to pay the excise tax on its
importations of stemmed leaf tobacco for the from January 1, 1986 to June 30, 1989 and
July 1, 1989 to November 30, 1990.

Sterling Tobacco Corporation (Sterling) appeals the decision of the Court of Appeals that
reversed the Court of Tax Appeals’ decision and held it liable to pay deficiency excise taxes
on its importation and local purchases of stemmed leaf tobacco from November 1986 to
June 24, 1989.

The Court of Tax Appeals’ decision and ordered the refund of specific taxes paid by La
Suerte on its importation of stemmed leaf tobacco in April 1995.

La Suerte sought to appeal the decision of the Court of Appeals holding it liable for
deficiency specific tax on its local and imported purchases of stemmed leaf tobacco and
those it sold for the period from June 21, 1989 to November 20, 1990.

La Suerte again sought to appeal by certiorari the decision of the Court of Appeals reversing
the Court of Tax Appeals and holding it liable for deficiency specific tax on its importation of
stemmed leaf tobacco in March 1995.

CONTENTIONS:
The cigarette manufacturers claim that since Section 137 of the 1986 Tax Code and Section
20(a) of RR No. V-39 do not distinguish “as to the type of manufacturer that may sell
stemmed-leaf tobacco without the prepayment of specific tax[,] [t]he logical conclusion is
that any kind of tobacco manufacturer is entitled to this treatment.” The authority of the
Secretary of Finance to prescribe the “conditions” refers only to procedural matters and
should not curtail or modify the substantive right granted by the law. The cigarette
manufacturers add that the reference to an L-7 invoice and L-7 register book in the second
paragraph of Section 20(a) cannot limit the application of the tax exemption provision only
to transfers between L-7 permittees because (1) it does not so provide; and (2) under the
terms of RR No. V-39, L-7 referred to manufacturers of any class of tobacco products,
including manufacturers of stemmed leaf tobacco.

They further argue that, going by the theory of the Commissioner, RR No. 17-67 would
have unduly restricted the meaning of “manufacturers” by limiting it to a few manufacturers
such as manufacturers of cigars and cigarettes. Allegedly, RR No. 17-67 cannot change the
original meaning of L-7 in Section 20(A) of RR No. V-39 without exceeding constitutional
limits of delegated legislative power La Suerte further points out that RR No. 17-67 was not
even issued for the purpose of implementing the Tax Code but for the sole purpose of
implementing Act No. 2613; and Section 3 of RR No. 17-67 restricts the new designations
only for administrative purposes.

Moreover, the cigarette manufacturers contend “that Section 132 does not operate as a tax
exemption” because “prepayment means payment of obligation in advance or before it is
due.” Consequently, the rules of construction on tax exemption do not apply According to
them, “the absence of tax prepayment for the sale of stemmed leaf tobacco impliedly
indicates the underlying policy of the law: that stemmed leaf tobacco shall not be taxed
twice, first, as stemmed leaf tobacco and, second, as a component of the finished products
of which it forms an integral part.”

Fortune, for its part, claims that stemmed leaf tobacco is not subject to excise tax. It argues
that stemmed leaf tobacco cannot be considered prepared or partially prepared tobacco
because it does not fall within the definition of a “processed tobacco” under Section 1-b of
Republic Act No. 698, as amended.

Sterling argues that since locally manufactured stemmed leaf tobaccos are not subject to
specific tax, it follows that imported stemmed leaf tobaccos are also not subject to specific
tax.

La Suerte claims that Section 20(A) of RR No. V-39 does not apply to its imports because
the applicable provision is Section 128(b) of the 1986 Tax Code, which states that “imported
articles shall be subject to the same tax and the same rates and basis of excise taxes
applicable to locally manufactured articles,” and Chapter V of RR No. V-39 (Payment of
specific taxes on imported cigars, cigarettes, smoking and chewing tobacco).

ISSUE: Whether or not the Department of Finance has the power to promulgate its own
rules and regulations on taxation and has the authority to enforce the same.

RULING: The Supreme Court ruled that RR Nos. V-39 and 17-67 did not exceed the
allowable limits of legislative delegation. The cigarette manufacturers contend that the
authority of the Department of Finance to prescribe conditions is merely procedural. Its
rule-making power is only for the effective enforcement of the law, which implicitly rules out
substantive modifications. The Secretary of Finance cannot, by mere regulation, limit the
classes of manufacturers that may be entitled to the tax exemption. Otherwise, Section 137
(Section 132 in the 1939 Tax Code) would be invalid as an undue delegation of legislative
power without the required standards or parameters.

The power of taxation is inherently legislative and may be imposed or revoked only by the
legislature. Moreover, this plenary power of taxation cannot be delegated by Congress to
any other branch of government or private persons, unless its delegation is authorized by
the Constitution itself.169 Hence, the discretion to ascertain the following — (a) basis,
amount, or rate of tax; (b) person or property that is subject to tax; (c) exemptions and
exclusions from tax; and (d) manner of collecting the tax — may not be delegated away by
Congress.

However, it is well-settled that the power to fill in the details and manner as to the
enforcement and administration of a law may be delegated to various specialized
administrative agencies like the Secretary of Finance in this case.

The court in Maceda v. Macaraig, Jr. explained the rationale behind the permissible
delegation of legislative powers to specialized agencies like the Secretary of Finance:

The latest in our jurisprudence indicates that delegation of legislative power has
become the rule and its non-delegation the exception. The reason is the increasing
complexity of modern life and many technical fields of governmental functions as in
matters pertaining to tax exemptions. This is coupled by the growing inability of the
legislature to cope directly with the many problems demanding its attention. The
growth of society has ramified its activities and created peculiar and sophisticated
problems that the legislature cannot be expected reasonably to comprehend.
Specialization even in legislation has become necessary. To many of the problems
attendant upon present day undertakings, the legislature may not have the
competence, let alone the interest and the time, to provide the required direct and
efficacious, not to say specific solutions.

Thus, rules and regulations implementing the law are designed to fill in the details or to
make explicit what is general, which otherwise cannot all be incorporated in the provision of
the law. Such rules and regulations, when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by law, “deserve to be given weight and
respect by the courts in view of the rule-making authority given to those who formulate
them and their specific expertise in their respective fields.” To be valid, a revenue regulation
must be within the scope of statutory authority or standard granted by the legislature.
Specifically, the regulation must (1) be germane to the object and purpose of the law; (2)
not contradict, but conform to, the standards the law prescribes; and (3) be issued for the
sole purpose of carrying into effect the general provisions of our tax laws.

Section 338 authorizes the Secretary of Finance to promulgate all needful rules and
regulations for the effective enforcement of the provisions of the 1939 Tax Code.

The specific authority of the Department of Finance to issue regulations relating to the
taxation of tobacco products is found in Section 4 (Specific provisions to be contained in
regulations); Section 125 (Payment of specific tax on imported articles to customs officers
prior to release from the customhouse); Section 132 (Removal of tobacco products without
prepayment of tax); Section 149 (Extent of supervision over establishments producing
taxable output); Section 150 (Records to be kept by manufacturers; Assessment based
thereon); and Section 152 (Labels and form of packages) of the 1939 Tax Code.

RR No. V-39 was promulgated to enforce the provisions of Title IV (Specific Taxes) of the
1939 Tax Code relating to the manufacture and importation of, and payment of specific tax
on, manufactured tobacco or products of tobacco. By an explicit provision in Section 132,
the lawmakers defer to the Department of Finance to provide the details upon which the
removal of stemmed leaf tobacco may be exempt from the specific tax in view of its
supposed expertise in the tobacco trade. Section 20(a) of RR No. V-39 adhered to the
standards because it provided the conditions — the proper documentation and recording of
raw materials transferred from one factory to another — for a tax-free removal of stemmed
leaf tobacco, without negating the imposition of specific tax under Section 137. The
“effective enforcement of the provisions of [the Tax Code]” in Section 338
provides a sufficient standard for the Secretary of Finance in determining
the conditions for the tax-free removal of stemmed leaf tobacco. Section 4 further
provides a limitation on the contents of revenue regulations to be issued by the
Secretary of Finance.

On the other hand, RR No. 17-67 was promulgated “[i]n accordance with the provisions of
Section 79 (B) of the Administrative Code, as amended by Act No. 2803.”184 Among the
specific administrative powers conferred upon a department head under the Administrative
Code is that of promulgating rules and regulations, not contrary to law, “necessary to
regulate the proper working and harmonious and efficient administration of each and all of
the offices and dependencies of his Department, and for the strict enforcement and proper
execution of the laws relative to matters under the jurisdiction of said Department.” Under
the 1939 Tax Code, the Secretary of Finance is authorized to prescribe regulations affecting
the business of persons dealing in articles subject to specific tax, including the mode in
which the processes of production of tobacco and tobacco products should be conducted and
the records to be kept by manufacturers. Clearly then, the provisions of RR No. 17-67
classifying and regulating the business of persons dealing in tobacco and tobacco
products are within the rule-making authority of the Secretary of Finance.

Excise tax is a tax on the production, sale, or consumption of a specific commodity in a

country. Section 110 of the 1986 Tax Code explicitly provides that the “excise taxes on
domestic products shall be paid by the manufacturer or producer before [the] removal [of
those products] from the place of production.” “It does not matter to what use the article[s]
subject to tax is put; the excise taxes are still due, even though the articles are removed
merely for storage in some other place and are not actually sold or consumed.” The excise
tax based on weight, volume capacity or any other physical unit of measurement is referred
to as “specific tax.” If based on selling price or other specified value, it is referred to as “ad
valorem” tax.

Excise taxes are essentially taxes on property because they are levied on certain specified
goods or articles manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition, and on goods imported. In this case, there is no
double taxation in the prohibited sense because the specific tax is imposed by explicit
provisions of the Tax Code on two different articles or products: (1) on the stemmed leaf
tobacco; and (2) on cigar or cigarette.

As such, the Supreme Court denied the petitions for review by the cigarette manufacturers
and ordered the payment of their respective taxes.
OTHER TOPICS:

Section 141 subjects partially prepared tobacco, such as stemmed leaf tobacco, to
excise tax. It is evident that when tobacco is harvested and processed either by hand or by
machine, all its products become subject to specific tax. Section 141 reveals the legislative
policy to tax all forms of manufactured tobacco — in contrast to raw tobacco leaves —
including tobacco refuse or all other tobacco which has been cut, split, twisted, or pressed
and is capable of being smoked without further industrial processing.

Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a partially
prepared tobacco. The removal of the stem or midrib from the leaf tobacco makes the
resulting stemmed leaf tobacco a prepared or partially prepared tobacco. The following is La
Suerte’s own illustration of how the stemmed leaf tobacco comes about: In the process of
removing the stems, the whole leaf tobacco breaks into pieces; after the stems or midribs
are removed, the tobacco is threshed (cut by machine into fine narrow strips) and then
undergoes a process of redrying,160 undoubtedly showing that stemmed leaf tobacco is a
partially prepared tobacco.

Since the Tax Code contained no definition of “partially prepared tobacco,” then the term
should be construed in its general, ordinary, and comprehensive sense.

The onus of proving that stemmed leaf tobacco is not subject to the specific tax lies with the
cigarette manufacturers. Taxation is the rule, exemption is the exception. Accordingly,
statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. The cigarette manufacturers must justify their
claim by a clear and categorical provision in the law. Otherwise, they are liable for the
specific tax on stemmed leaf tobacco found in their possession pursuant to Section 127 of
the 1986 Tax Code, as amended.

Stemmed leaf tobacco transferred in bulk between cigarette manufacturers are

exempt from excise tax under Section 137 of the 1986 Tax Code in conjunction
with RR No. V-39 and RR No. 17-67. Section 137 authorizes a tax exemption subject to
the following: (1) that the stemmed leaf tobacco is sold in bulk as raw material by
one manufacturer directly to another; and (2) that the sale or transfer has complied with
the conditions prescribed by the Department of Finance.

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 for removals;
and
(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.
Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau of Internal
Revenue with an L-7 permit refer to "manufacturers of tobacco products." Hence, the
transferor and transferee of the stemmed leaf tobacco must be an L-7 tobacco
manufacturer.

There is no new product when stemmed leaf tobacco is transferred between two L-7 permit
holders. Thus, there can be no excise tax that will attach. The regulation, therefore, is
reasonable and does not create a new statutory right.