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British American Tobacco Corporation v.

Finance Secretary Camacho, BIR


Commissioner Parayno (2008)

Doctrine: Classification if rational in character is allowable. The taxing power has the
authority to make reasonable and natural classifications for purposes of taxation.

Facts:
 British American Tobacco is the distributor of Lucky Strike Cigarette in the
Philippines
 The company is questioning the constitutionality of RA 8240, entitled "An Act
Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other
Purposes," which took effect on January 1, 1997
 The law provided a legislative freeze on brands of cigarettes introduced between
the period January 2, 1997 to December 31, 2003, such that said cigarettes shall
remain in the classification under which the BIR has determined them to belong as
of December 31, 2003, until revised by Congress.
 In effect: older brands or existing brands will have, in the long term, lower price and
tax rate as inflation and price appreciation were not factored in.
o Their tax rate shall remain until Congress changes it
o Hence, a legislative freeze in the class of cigarettes
Net Retail 2005 Tax 2007 Tax 2009 Tax 2011 Tax Supreme
Price Court
(excluding Classification
excise tax
and VAT
Less than P2/pack P2.23/pack P2.47/pack P2.72/pack Low-priced
P5 per
pack
Bet P5- P6.35/pack P6.74/pack P7.14/pack P7.56/pack Medium-
P6.50 priced
Bet P6.50- P10.35/pack P10.88/pack P11.43/pack P12/pack High-priced
P10
Above P25/pack P26.06/pack P27.16/pack P28.30/pack Premium-
P10 priced
 New brands shall be classified according to current net retail price
 New brands are the ones registered after January 1, 1997
 In 2001, Lucky Strike was introduced in the market
 Lucky Strike was classified as premium-priced hence was imposed the Above P10
tax rate
 Lucky Strike protested the P22.77M tax assessment pegged at P25/pack
 Lucky Strike interposes that the legislative freeze is discriminatory against new
brands and poses barrier to entry in the cigarette industry
o Legislative freeze means: existing or "old" brands shall be taxed based on
their net retail price as of October 1, 1996.
o Hence, the classification based on pricing is lower for older brands
compared to new entrants
 Lucky Strike found it unfair that Philip Morris and Marlboro are classified only as
High-priced while it is classified as Premium Priced.
WON:

1. The pertinent portions of RA 8240, as amended by RA 9334, discriminates


against new cigarette brands and favors old cigarette brands?
2. The classification freeze provision unduly favors older brands over newer
brands?

Held: In applying the rational basis test, the Court found the questioned law Constitutional.
 A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws.
 The classification is considered valid and reasonable provided that:
(1) it rests on substantial distinctions;
(2) it is germane to the purpose of the law;
(3) it applies, all things being equal, to both present and future conditions; and
(4) it applies equally to all those belonging to the same class.
 classification freeze provision uniformly applies to all newly introduced brands in the
market,
 Finding that the assailed law seems to derogate, to a limited extent, one of its
avowed objectives (i.e. promoting fair competition among the players in the
industry) would suggest that, by Congress’s own standards, the current excise tax
system on sin products is imperfect. But the Court cannot declare a statute
unconstitutional merely because it can be improved or that it does not tend to
achieve all of its stated objectives.

 The classification freeze provision was inserted in the law for reasons of practicality and
expediency.
o since a new brand was not yet in existence at the time of the passage of RA
8240, then Congress needed a uniform mechanism to fix the tax bracket of a
new brand.
o The current net retail price, similar to what was used to classify the brands
under Annex “D” as of October 1, 1996, was thus the logical and practical
choice
 The classification freeze provision was in the main the result of Congress’s earnest
efforts to improve the efficiency and effectivity of the tax administration over sin
products while trying to balance the same with other State interests

Principles:
It has been held that "in the areas of social and economic policy, a statutory
classification that neither proceeds along suspect lines nor infringes constitutional...
rights must be upheld against equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification.
A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws.
A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in
its... operation.
The uniformity rule does not prohibit classification for purposes of taxation
Although it concedes that the Court utilized the rationality test and that the
classification freeze provision was necessitated by several legitimate State interests,
however, it refuses... to accept the justifications given by Congress for the
classification freeze provision.
this line of argumentation revolves around the wisdom and expediency of the
assailed law which we cannot inquire into, much less... overrule
Equal protection is not a license for courts to judge the wisdom, fairness, or logic of
legislative choices.
We reiterate, therefore, that petitioner's remedy is with Congress and not this Court.
Well-settled is the rule that points of law, theories, issues and arguments not
adequately brought to the attention of the lower court will not be ordinarily
considered by a reviewing court as they cannot be raised for the first time on appeal
This Court, which is not a trier of facts, cannot take judicial notice of the factual
premises of these arguments as petitioner now seems to... suggest
The evidence should have been presented before the trial court to allow it to
examine and determine for itself whether such factual premises, as supported by
sufficient documentary evidence, provide reasonable basis for petitioner's conclusion
that there arose an... unconstitutional unfair competition due to the operation of the
classification freeze provision
Petitioner should be reminded that it appealed this case from the adverse ruling of
the trial court directly to this Court on pure questions of law instead of resorting to
the
Court of Appeals.
It is a basic postulate that the one who challenges the constitutionality of a law...
carries the heavy burden of proof for laws enjoy a strong presumption of
constitutionality as it is an act of a co-equal branch of government.
R]egressivity is not a negative standard for courts to enforce. What Congress is
required by the Constitution to do is to "evolve a progressive system of taxation."
The rule is that a party is bound by the theory he adopts and by the cause of action
he stands on. He cannot be permitted after having lost... thereon to repudiate his
theory and cause of action, and thereafter, adopt another and seek to re-litigate the
matter anew either in the same forum or on appeal

ISSUE:

1. W/N the RTC rather than the CTA has jurisdiction.


2. W/N RA 9334 of the classification freeze provision is unconstitutional for violating
the equal protection and uniformity provisions of the Constitution
3. W/N RR Nos. 1-97, 9-2003, 22-2003 and RA 8243 even prior to its amendment by RA
9334 can authorize the BIR to conduct resurvey and reclassification.
HELD:
1. Yes. The jurisdiction of the CTA id defined in RA 1125 which confers on the CTA
jurisdiction to resolve tax disputes in general. BUT does NOT include cases where
the constitutionality of a law or rule is challenged which is a judicial power belonging
to regular courts.

2. No. In Sison Jr. v. Ancheta, the court held that "xxx It suffices then that the laws
operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different, both
in the privileges conferred and the liabilities imposed. If the law be looked upon in
tems of burden on charges, those that fall within a class should be treated in the
same fashion, whatever restrictions cast on some in the group equally binding on the
rest. xxx" Thus, classification if rational in character is allowable. In Lutz v. Araneta:
"it is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that 'inequalities which result from a singling out of
one particular class for taxation, or exemption infringe no constitutional
limitation" SC previously held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation"

Under the the rational basis test, a legislative classification, to survive an equal
protection challenge, must be shown to rationally further a legitimate state
interest. The classifications must be reasonable and rest upon some ground of
difference having a fair and substantial relation to the object of the legislation

A legislative classification that is reasonable does not offend the constitutional


guaranty of the equal protection of the laws. The classification is considered valid
and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane
to the purpose of the law; (3) it applies, all things being equal, to both present and
future conditions; and (4) it applies equally to all those belonging to the same class.

Moreover, petitioner failed to clearly demonstrate the exact extent of such impact as
the price is not the only factor that affects competition.

3. NO. Unless expressly granted to the BIR, the power to reclassify cigarette brands
remains a prerogative of the legislature which cannot be usurped by the
former. These are however modified by RA 9334.

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