La Suerte Cigar & Cigarette Factor v. Court of Appeals, Commissioner of Internal Revenue
Stemmed leaf tobacco is subject to the specific tax under Section 141(b).
G.R. Nos. 125346, 136328-29, 144942, 148605, 158197, 165499
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.
“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, 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.
“RR No. 17-67, as amended, supplements the law by delineating what products of tobacco are ‘prepared or manufactured’ and ‘partially prepared or partially manufactured.’
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“Different definitions of the term ‘stemmed leaf’ are unavoidable, especially considering that Section 2 (m)(1) is an implementing regulation of Act No. 2613, which was enacted in 1916 for purposes of improving the quality of Philippine tobacco products, while Section 137 defines the tobacco product only for the purpose of exempting it from the specific tax. Whichever definition is adopted, there is no doubt that stemmed leaf tobacco is a partially prepared tobacco.
“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.
“That the title of Section 137 uses the term ‘without prepayment’ while the body itself uses ‘without payment’ is of no moment. Both terms simply mean that stemmed leaf tobacco may be removed from the factory or place of production without prior payment of the specific tax.
Citing jurisprudence, “the exemption from specific tax of the sale of stemmed leaf tobacco is qualified by and is subject to ‘such conditions as may be prescribed in the regulations of the Department of Finance.’ These conditions were provided for in RR Nos. V-39 and 17-67. Thus, Section 137 must be read and interpreted in accordance with these regulations.
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“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.
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“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.
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“Importation of stemmed leaf tobacco not included in the exemption under Section 137… The transaction contemplated in Section 137 does not include importation of stemmed leaf tobacco for the reason that the law uses the word ‘sold’ to describe the transaction of transferring the raw materials from one manufacturer to another.
“The Tax Code treats an importer and a manufacturer differently. Section 123 clearly distinguishes between goods manufactured or produced in the Philippines and things imported. The law uses the proper term ‘importation’ or ‘imported’ whenever the transaction involves bringing in articles from foreign countries as provided under Section 125 (cf. Section 124). Whenever the Tax Code refers to importers and manufacturers, they are separately mentioned as two distinct persons or entities (Sections 156 and 160). Under Chapter II, whenever the law uses the word manufacturer, it only means local manufacturer or producer of domestic products (Sections 150, 151, and 152 of the 1939 Tax Code).
“Moreover, foreign manufacturers of tobacco products not engaged in trade or business in the Philippines cannot be designated as L-7 since these are beyond the pale of Philippine law and regulations. The factories contemplated are those located or operating only in the Philippines.
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There is no double taxation. “The contention that the cigarette manufacturers are doubly taxed because they are paying the specific tax on the raw material and on the finished product in which the raw material was a part is also devoid of merit.
“For double taxation in the objectionable or prohibited sense to exist, ‘the same property must be taxed twice, when it should be taxed but once.’ ‘[B]oth taxes must be imposed on the same property or subject-matter, for the same purpose, by the same… taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax.’
“At all events, there is no constitutional prohibition against double taxation in the Philippines…
“It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform.
“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.”