Commissioner of Internal Revenue vs. Fortune Tobacco Corporation (July 21, 2008 an !eptember 28, 2011" #$C%&R'()* F$CT!

Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products. Prior to January 1, 1997, the excises taxes on these products were in the form of ad valorem taxes, pursuant to ection 1!" of the 1977 #ational $nternal %e&enue 'ode ( 1977 Tax Code). *eginning January 1, 1997, %epublic +ct #o. ( RA) ,"!-./0 too1 effect and a shift from ad valorem to specific taxes was made. reads in part3 ec. 1!". Cigars and cigarettes. 4 x x x. ection 1!"(c) of the 1977 2ax 'ode, as amended by %+ ,"!-,

(c) 'igarettes pac1ed by machine. 4 2here shall be le&ied, assessed and collected on cigarettes pac1ed by machine a tax at the rates prescribed below3 (1) $f the net retail price (excluding the excise tax and the &alue5added tax) is abo&e 2en pesos (P1-.--) per pac1, the tax shall be 2wel&e pesos (P1".--) per pac16 (") $f the net retail price (excluding the excise tax and the &alue5added tax) exceeds ix pesos and fifty centa&os (P7.8-) but does not exceed 2en pesos (P1-.--) per pac1, the tax shall be 9ight pesos (P,.--) per pac16 (/) $f the net retail price (excluding the excise tax and the &alue5added tax) is :i&e pesos (P8.--) but does not exceed ix pesos and fifty centa&os (P7.8-) per pac1, the tax shall be :i&e pesos (P8.--) per pac16 (!) $f the net retail price (excluding the excise tax and the .&alue05added tax) is below :i&e pesos (P8.--) per pac1, the tax shall be ;ne peso (P1.--) per pac1. xxxx T+e specific ta, from any bran of ci-arettes .it+in t+e ne,t t+ree (/" years of effectivity of t+is $ct s+all not be lo.er t+an t+e ta, 0.+ic+1 is ue from eac+ bran on 'ctober 1, 1223 3 Pro&ided, howe&er, 2hat in cases where the specific tax rates imposed in paragraphs (1), ("), (/) and (!) hereinabo&e will result in an increase in excise tax of more than se&enty percent (7-<), for a brand of cigarette, the increase shall ta1e effect in two tranches3 fifty percent (8-<) of the increase shall be effecti&e in 1997 and one hundred percent (1--<) of the increase shall be effecti&e in 199,. xxxx T+e rates of specific ta, on ci-ars an ci-arettes un er para-rap+s (1", (2", (/" an (4" +ereof, s+all be increase by t.elve percent (125" on January 1, 2000. .emphases ours0

2o implement %+ ,"!- and pursuant to its rule5ma1ing powers, the '$% issued %e&enue %egulation #o. (RR) 1597 whose ection /(c) and (d) echoed the abo&e5=uoted portion of ection 1!" of the 1977 2ax 'ode, as amended..!0 2he 1977 2ax 'ode was later repealed by %+ ,!"!, or the #ational $nternal %e&enue 'ode of 1997 (1997 Tax Code), and ection 1!", as amended by %+ ,"!-, was renumbered as ection 1!8. 2his time, to implement the 1"< increase in specific taxes mandated under ection 1!8 of the

1997 2ax 'ode and again pursuant to its rule5ma1ing powers, the '$% issued %% 17599, which reads3 ection 1. New Rates of Specific Tax. 2he specific tax rates imposed under the following sections are hereby increased by twel&e percent (1"<) and the new rates to be le&ied, assessed, and collected are as follows3 Section Description of Articles Present Specific Tax Rates (Prior to an!ar" 1# $%%%& P1".--Bpac1 P,.--Bpac1 New Specific Tax Rates ('ffective an!ar" 1# $%%%& P1/.!!Bpac1 P,.97Bpac1

1!8

'$>+% and '$>+%9229 *) 'igarettes Pac1ed by ?achine (1) #et %etail Price (excluding @+2 A 9xcise) exceeds P1-.-- per pac1 (") #et %etail Price (excluding @+2 A 9xcise) is P7.81 up toP1-.-- per pac1 (/) #et %etail Price (excluding @+2 A 9xcise) is P8.-- toP7.8- per pac1 (!) #et %etail Price (excluding @+2 A 9xcise) is below P8.-- per pac1

P8.--Bpac1 P1.--Bpac1

P8.7-Bpac1 P1.1"Bpac1

6rovi e , +o.ever, t+at t+e ne. specific ta, rate for any e,istin- bran of ci-ars 0an 1 ci-arettes pac7e by mac+ine, istille spirits, .ines an fermente li8uors s+all not be lo.er t+an t+e e,cise ta, t+at is actually bein- pai prior to January 1, 2000. .emphasis ours0 T9: F$CT! 'F T9: C$!:

Pursuant to these laws, respondent :ortune 2obacco 'orporation ( (ort!ne To)acco) paid in ad&ance excise taxes for the year "--/ in the amount of P11.18 billion, and for the period co&ering January 1 to ?ay /1, "--! in the amount of P!.9- billion..80

$n June "--!, :ortune 2obacco filed an administrati&e claim for ta, refun

.it+ t+e CIR for

erroneously an ;or ille-ally collecte ta,es in t+e amount of 6421 million..70 Cithout waiting for the '$%Ds action on its claim, :ortune 2obacco filed with the '2+ a judicial claim for tax refund. .70 $n its decision dated ?ay "7, "--7, the '2+ :irst Ei&ision ruled in fa&or of :ortune 2obacco and granted its claim for refund. .,0 2he '2+ :irst Ei&isionDs ruling was upheld on appeal by the '2+ en )anc in its decision dated July 1", "--7. .90 2he '$%Ds motion for reconsideration of the '2+ en )anc*s decision was denied in a resolution dated ;ctober !, "--7. .1-0 T9: I!!(: Fortune Tobacco<s claim for refun consi ers as an =unaut+ori>e of overpai e,cise ta,es is base primarily on .+at it pecifically, it

a ministrative le-islation? on t+e part of t+e CIR.

assails t+e proviso in !ection 1 of RR 1@A22 that re=uires the payment of the Fexcise tax actually being paid prior to January 1, "---G if this amount is higher than the ne. specific ta, rate, i+e+, the rates of specific taxes imposed in 1997 for each category of cigarette, plus 1"<. $t claimed that by including the pro&iso, the '$% went beyond the language of the law and usurped 'ongressD power. +s mentioned, the '2+ sided with :ortune 2obacco and allowed the latter to claim the refund. 2he '$% disagrees with the '2+Ds ruling and assails it before this 'ourt through the present petition for re&iew on certiorari. T+e CIR posits t+at t+e inclusion of t+e proviso in !ection 1 of RR 1@A22 .as ma e to carry into effect t+e la.<s intent an is .ell .it+in t+e scope of +is ele-ate le-islative aut+ority..110 He claims that the '2+Ds strict interpretation of the law ignored 'ongressD intent Fto increase the collection of excise taxes by increasing specific tax rates on IsinD products.G .1"0 He cites portions of the enateDs deliberation on House *ill #o. 719, (the precursor of %+ ,"!-) that con&eyed the legislati&e intent to increase the excise taxes being paid..1/0 2he '$% points out that ection 1!8(c) of the 1997 2ax 'ode categorically declares that F.t0he

excise tax from any brand of cigarettes within the .three5year transition period from January 1, 1997 to Eecember /1, 19990 shall not be lower than the tax, which is due from each brand on ;ctober 1, 1997.G He posits that there is no plausible reason why the new specific tax rates due beginning January 1, "--- should not be subject to the same rule as those due during the transition period. 2o the '$%, the adoption of the Fhigher tax ruleG during the transition period unmista1ably shows the intent of 'ongress not to lessen the excise tax collection. 2hus, the '2+ should ha&e construed the ambiguity or omission in ection 1!8(c) in a manner that would uphold the lawDs policy and intent.

:ortune 2obacco argues otherwise. 2o it,

ection 1!8(c) of the 1997 2ax 'ode read and

interpreted as it is written6 it imposes a 1"< increase on the rates of excise taxes pro&ided under sub5 paragraphs (1), ("), (/), and (!) only6 it does not say that the tax due during the transition period shall continue to be collected if the amount is higher than the new specific tax rates. $t contends that the Fhigher tax ruleG applies only to the three5year transition period to offset the burden caused by the shift from ad valorem to specific taxes. T9: C'(RT<! R(BI)& 9xcept for the tax period and the amounts in&ol&ed, .1!0 the case at bar presents the same issue that the 'ourt already resol&ed in "--, in C,R v+ (ort!ne To)acco Corporation ..180 $n the "--, (ort!ne To)acco case, the 'ourt upheld the tax refund claims of :ortune 2obacco after finding in&alid the pro&iso in ection 1 of %% 17599. Ce ruled3 ection 1!8 states that during the transition period, i+e+, within the next three (/) years from the effecti&ity of the 2ax 'ode, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 ;ctober 1997. 2his =ualification, howe&er, is conspicuously absent as regards the 1"< increase which is to be applied on cigars and cigarettes pac1ed by machine, among others, effecti&e on 1 January "---. 'learly and unmista1ably, ection 1!8 mandates a new rate of excise tax for cigarettes pac1ed by machine due to the 1"< increase effecti&e on 1 January "--- without regard to whether the re&enue collection starting from this period may turn out to be lower than that collected prior to this date. *y adding the =ualification that the tax due after the 1"< increase becomes effecti&e shall not be lower than the tax actually paid prior to 1 January "---, %e&enue %egulation #o. 17599 effecti&ely imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (/)5year transition period and the specific tax under paragraph ', sub5paragraph (1)5(!), as increased by 1"< J a situation not supported by the plain wording of ection 1!8 of the 2ax 'ode. .170

:ollowing the principle of stare decisis,.170 our ruling in the present case should no longer come as a surprise. 2he pro&iso in ection 1 of %% 17599 clearly went beyond the terms of the law it was supposed to implement, and therefore entitles :ortune 2obacco to claim a refund of the o&erpaid excise taxes collected pursuant to this pro&ision. 2he amount in&ol&ed in the present case and the '$%Ds firm insistence of its arguments nonetheless compel us to ta1e a second loo1 at the issue, but our findings ultimately lead us to the same conclusion. $ndeed, we find more reasons to disagree with the '$%Ds construction of the law than those stated in our "--, (ort!ne To)acco ruling, which was largely based on the application of the rules of statutory construction.

Raising government revenue is not the sole objective of RA 8240

2hat %+ ,"!- (incorporated as

.1,0

ection 1!8 of the 1997 2ax 'ode) was enacted to raise

go&ernment re&enues is a gi&en fact, but this is not the sole and only objecti&e of the law. 'ongressional deliberations show that the shift from ad valorem to specific taxes introduced by the ince ad valorem taxes were based on the &alue of the goods, the prices of the goods were often law was also intended to curb the corruption that became endemic to the imposition of ad valorem taxes.
.190

manipulated to yield lesser taxes. 2he imposition of specific taxes, which are based on the &olume of goods produced, would pre&ent price manipulation and also cure the une=ual tax treatment created by the s1ewed &aluation of similar goods. Rule of uniformity of taxation violated by the proviso in Section 1 RR 1!"##

2he 'onstitution re=uires that taxation should be uniform and e=uitable. ."-0 Uniformity in taxation re=uires that all subjects or objects of taxation, similarly situated, are to be treated ali1e both in pri&ileges and liabilities.."10 2his re=uirement, howe&er, is unwittingly &iolated when the pro&iso in classified as lower5priced cigarettes under price is below P8.-- per pac13 (+) *rand.""0 (*) (') (E) (:" ection 1 of %% 17599 is applied in certain cases. 2o illustrate this point, we consider three brands of cigarettes, all ection 1!8(c)(!) of the 1997 2ax 'ode, since their net retail

'amel K 'hampion ? 1--

#et %etail Ad -alorem2ax pecific 2ax pecific 2ax #ew pecific )e. !pecific Price per Eue prior to under ection Eue Jan 1997 2ax imposing Ta, *ue by pac1 Jan 1997 1!8(')(!) to Eec 1999 1"< increase Jan 2000 by Jan "--- perRR 1@A22 !.71 8.81.--Bpac1 8.81.1"Bpac1 C.C0 !.87 /./1.--Bpac1 /./1.1"Bpac1 /./0

Union +merican *lend

!.7!

1.-9

1.--Bpac1

1.-9

1.1"Bpac1

1.12

+lthough the brands all belong to the same category, the pro&iso in the =ualification stated in the t+ir

ection 1, %% 17599 authoriLed the

imposition of different (and grossly disproportionate) tax rates (see column .E0). $t effecti&ely extended para-rap+ of !ection 14C(c" of t+e 122@ Ta, Co e that was supposed to apply only during the transition period3 2he excise tax from any brand of cigarettes within the next three (/) years from the effecti&ity of %.+. #o. ,"!- shall not be lower than the tax, which is due from each brand on ;ctober 1, 1997..0

$n the process, the '$% also perpetuated the une=ual tax treatment of similar goods that was supposed to be cured by the shift fromad valorem to specific taxes. $he omission in the la% in fact reveals the legislative intent not to adopt the &higher tax rule'

2he '$% claims that the proviso in !ection 1 of RR 1@A22 was patterned after the third paragraph of ection 1!8(c) of the 1997 2ax 'ode. ince the lawDs intent was to increase re&enue, it ection 1!8(c). Chat the '$% misses in his found no reason not to apply the same Fhigher tax ruleG to excise taxes due after the transition period despite the absence of a similar text in the wording of fermented li=uors3 Pro&ided, howe&er, that the new specific tax rate for any existing brand of cigars .and0 cigarettes pac1ed by machine, distilled spirits, wines and fermented li=uors shall not be lower than the excise tax that is actually being paid prior to January 1, "---. argument is that he applied the rule not only for cigarettes, but also for cigars, distilled spirits, wines and

Chen the pertinent pro&isions of the 1997 2ax 'ode imposing excise taxes on these products are read, howe&er, there is nothing similar to the third paragraph of ection 1!8(c) that can be found in the pro&isions imposing excise taxes on distilled spirits ( ection 1!1 ."/0) and wines ( ection 1!" ."!0). $n fact, the rule will also not apply to cigars as these products fall under ection 1!8(a). ."80 9&idently, the 1997 2ax 'odeDs pro&isions on excise taxes ha&e omitted the adoption of certain tax measures. 2o our mind, these omissions are telling indications of the intent of 'ongress not to adopt the omitted tax measures6 they are not simply unintended lapses in the lawDs wording that, as the '$%

claims, are ne&ertheless co&ered by the spirit of the law. Had the intention of 'ongress been solely to increase re&enue collection, a pro&ision similar to the third paragraph of ection 1!8(c) would ha&e been incorporated in ections 1!1 and 1!" of the 1997 2ax 'ode. 2his, howe&er, is not the case. Ce note that 'ongress was not unaware that the Fhigher tax ruleG is a pro&iso that should ideally apply to the increase after the transition period (as the '$% embodied in the pro&iso in Jesli MapuL ad&erted to the Fhigher tax ruleG after Decem)er .1# 1999 when he stated3 2his bill ser&es as a catch5up measure as go&ernment attempts to collect additional re&enues due it since "--1. ?odifications are necessary indeed to capture the loss proceeds and pre&ent further erosion in re&enue base. x x x. +s it is, it plugs a major loophole in the ambiguity of the law as e&idenced by recent disputes resulting in the go&ernment being ordered by the courts to refund taxpayers. 2his bill clarifies that the excise tax due on the products shall not be lower than the tax due as of the date immediately prior to the effecti&ity of the act or the excise tax due as of Eecember /1, 1999.."70 ection 1 of %% 17599). Euring the deliberations for the law amending ection 1!8 of the 1997 2ax 'ode (%+ 9//!), %ep.

2his remar1 notwithstanding, the final &ersion of the bill that became %+ 9//! contained no pro&ision similar to the pro&iso in ection 1 of %% 17599 that imposed the tax due as of Eecember /1, 1999 if this tax is higher than the new specific tax rates. 2hus, it appears that despite its awareness of the need to protect the increase of excise taxes to increase go&ernment re&enue, 'ongress ultimately decided against adopting the Fhigher tax rule. D9:R:F'R:, in &iew of the foregoing, the petition is *:)I:*. 2he decision dated July 1", "--7 and the resolution dated ;ctober !, "--7 of the 'ourt of 2ax +ppeals in '2+ 9.*. #o. "", are $FFIRE:*. #o pronouncement as to costs. !' 'R*:R:*.