Title
La Suerte Cigar and Cigarette Factory vs. Court of Appeals
Case
G.R. No. 125346
Decision Date
Nov 11, 2014
Cigarette manufacturers contested BIR's excise tax assessments on stemmed leaf tobacco under NIRC. SC ruled stemmed tobacco taxable, upheld RRs limiting exemptions to L-7 permittees, denied claims of double taxation.

Case Summary (G.R. No. 125346)

Petitioner(s), Respondent(s) and Procedural Posture

Petitioners: La Suerte, Fortune, Sterling (various petitions). Respondent: Commissioner of Internal Revenue. These matters are consolidated appeals from decisions of the Court of Appeals and prior decisions of the Court of Tax Appeals and raise challenges to deficiency assessments, denials of refund claims, and the validity/interpretation of implementing revenue regulations.

Key Dates and Periods In Dispute

Relevant assessment and transactional periods vary by petition: principally 1986–1990 for earlier deficiency assessments; specific importations in 1995 for refund claims. The dispositive decision was rendered by the Supreme Court in 2014; the operative statutory and regulatory framework considered is the 1986 Tax Code and implementing regulations in force during the periods in dispute (as developed from earlier tax codes and revenue regulations).

Applicable Law and Regulations

Primary statutory provisions: Sections 137 and 141 of the 1986 Tax Code (successors to earlier provisions in the 1939 and 1977 codes). Section 141 imposes a specific tax (P0.75 per kilogram under the pre-2012 law) on “tobacco prepared or partially prepared.” Section 137 provides that stemmed leaf tobacco “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 regulations.” Implementing rules: Revenue Regulations No. V-39 (1954) and Revenue Regulations No. 17-67 (1967, as amended), including registration/invoice requirements (L-7 register and L-7 invoices) and the classification of permittees (L-3, L-6, L-7).

Factual Background — Tobacco Processing and Industry Practice

The Court summarized tobacco cultivation, curing, redrying, stripping (de-stemming), and primary processing as industry practice: stem removal, threshing/cutting, re-drying and aging, and subsequent blending and cigarette manufacture. Manufacturers import leaf tobacco and purchase locally; stemmed leaf tobacco is produced by removing the stem/midrib and often involves threshing/redrying, showing that it is a processed product in the production chain.

Statutory and Regulatory History

The exemption permitting transfers of stemmed leaf tobacco “without prepayment” appears in successive tax codes (1939 Code §132; 1977/1986 Code provisions renumbered as §137), and was implemented by RR No. V-39 (1954), which expressly prescribes procedural conditions (L-7 invoice and register entries). RR No. 17-67 (1967) further categorizes types of permittees (L-3 wholesale dealers, L-6 processors, L-7 manufacturers) and defines “partially manufactured tobacco” to include “stemmed leaf” among other categories.

Core Legal Issues Presented

  1. Whether stemmed leaf tobacco is subject to specific excise tax under Section 141 as “partially prepared” tobacco.
  2. Whether the statutory exemption (Section 137) applies unqualifiedly to any manufacturer, including transfers from non-L-7 entities and importations, or whether it is qualified by implementing regulations limiting the exemption to transfers between L-7 permittees and subject to prescribed conditions.
  3. Whether RR No. V-39 (and RR No. 17-67) validly implement Section 137 or constitute impermissible delegation or substantive amendment.
  4. Whether importations of stemmed leaf tobacco are covered by the Section 137 exemption.
  5. Whether administrative practice and prior BIR rulings estop the government from assessing tax.
  6. Whether taxing stemmed leaf tobacco and taxing the finished product constitutes prohibited double taxation.

Parties’ Principal Arguments (Manufacturers)

  • Manufacturers argued that Section 137’s exemption is unqualified and therefore any “manufacturer” may receive stemmed leaf tobacco in bulk without prepayment of specific tax; the Department of Finance may only prescribe procedural conditions, not substantive restrictions.
  • They contended RR No. 17-67 could not properly narrow or alter the class of manufacturers entitled to exemption and that RR No. V-39’s references to L-7 documentation do not limit the exemption to transfers between L-7 permittees.
  • They relied on longstanding administrative practice and a 1972 BIR ruling to claim that stemmed leaf tobacco historically was not subject to excise tax; they argued that charging the tax on stemmed leaf and again on the finished cigarette produces prohibited double taxation.

Respondent’s Principal Arguments (Commissioner / BIR)

  • The Commissioner maintained Section 141 subjects partially prepared tobacco (including stemmed leaf) to specific tax; RR No. 17-67 properly defines “partially manufactured tobacco” and includes stemmed leaf.
  • The implementing regulations validly prescribe the conditions for the Section 137 exemption; RR No. V-39 and RR No. 17-67 limit the exemption to transfers between L-7 permittees (manufacturers of tobacco products licensed as such) and prescribe documentary requirements (L-7 invoice, register entries).
  • Importations are not “sales by one manufacturer directly to another” and therefore are not covered by the exemption.
  • Administrative practice and earlier rulings inconsistent with statutory/regulatory interpretation do not estop the government.
  • There is no constitutionally prohibited double taxation because distinct articles (stemmed leaf tobacco and finished cigarettes) are subject to distinct statutory taxes.

Court’s Analysis — Nature and Scope of the Excise Tax

  • The Court explained excise taxes are imposed on production, sale or consumption; a “specific tax” is one measured by physical unit (weight). Section 141’s language and legislative policy indicate that manufactured and partially prepared forms of tobacco are taxable.
  • The Court concluded stemmed leaf tobacco is a “partially prepared” tobacco and therefore prima facie subject to the specific tax in Section 141, given the ordinary meaning of the term and the processing steps (de-stemming, threshing, re-drying) reflected in the record.

Court’s Analysis — Interaction of Section 137 and Implementing Regulations

  • Section 137 creates a qualified exemption: stemmed leaf tobacco may be sold in bulk by one manufacturer directly to another “without payment of the tax under such conditions as may be prescribed in the regulations of the [Department of Finance].” The Court read that qualification as authorizing the Secretary/Department to prescribe substantive conditions for exemption, not merely procedural formalities.
  • RR No. V-39 transposes the statutory qualification into concrete documentary and recordkeeping conditions (L-7 invoice, L-7 register entries) and contemplates transfers between factories. RR No. 17-67 clarifies permit classifications and explicitly treats “manufacturers of tobacco products” as L-7 permittees while distinguishing wholesale leaf dealers and processors (L-3, L-6).
  • The Court held RR Nos. V-39 and 17-67 are a valid exercise of the Secretary’s rule-making authority: they are germane to the statute’s object, do not contradict statutory standards, and implement the statute’s requirement that conditions be prescribed. The regulations did not effect an invalid delegation or a substantive statutory change; instead they clarified the types of entities and procedural safeguards associated with the exemption. RR No. 17-67 did not create an unlawful restrictive classification but rather clarified distinctions implicit in RR No. V-39.

Court’s Analysis — Limitation to L-7 Permittees and Effect on Imports

  • The Court concluded the exemption applies to transfers between licensed domestic manufacturers (L-7 permittees) because RR No. V-39 conditions the tax-free removal on the use of L-7 invoices and L-7 registers, and RR No. 17-67 defines the L-7 category. Those documentary requirements presuppose factories operating within the Philippine regulatory regime; foreign manufacturers or importations do not satisfy those conditions.
  • Therefore, importations of stemmed leaf tobacco are not covered by the Section 137 exemption because the statutory phrase “sold in bulk as raw material by one manufacturer directly to another” contemplates a sale/transfer (not an importation) and the regulatory conditions contemplate domestic invoice/register mechanics. Chapter V of RR No. V-39 addresses taxes on imported cigars/cigarettes specifically but does not create an exemption for imported stemmed leaf under Section 137.

Court’s Analysis — Administrative Practice, Prior Rulings and Estoppel

  • The Court rejected the argument that longstanding BIR practice or a 1972 BIR ruling estops the government. It reaffirmed the principle that erroneous administrative implementation does not bind the government and that prior rulings or practices inconsistent with the true construction of the law may be corrected; government is not estopped by its agents’ mistakes. Implementing rulings that conflict with regulations properly promulgated pursuant to statute do not trump regulations or statute.

Court’s Analysis — Double Taxation

  • The Court rejected the manufacturers’ double-taxation claim. It explained that for prohibited double taxation to exist, the same property must be taxed twice for the same purpose by the same authority in the same taxing period; mere incidence of separate taxes on different stages or articles in the production chain does not satisfy that standard. The Code explicitly imposes taxes on partially prepared tobacco and on finished cigarettes as different taxable articles; thus, separate taxation of stemmed leaf tobacco and of the finished product is not unconstitutional double taxation.

Holdings and Dispositions (Case-by-Case)

  • G.R. No. 125346 (La Suerte): Petition denied; Court of Appeals’ decision affirmed. La Suerte’s challenge to assessments for the period Jan. 1, 1986–June 30, 1989 denied.
  • G.R. Nos. 136328-29 (Commissioner v. Fortune): Petition granted in favor of the Commissioner; Court reversed Court of Appeals decisions that had fa

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