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)

Petitioners and Respondents

Petitioners: La Suerte Cigar & Cigarette Factory; Fortune Tobacco Corporation; Sterling Tobacco Corporation
Respondent: Commissioner of Internal Revenue

Key Dates

– Relevant tax periods: January 1, 1986–June 30, 1989; July 1, 1989–November 30, 1990; March–April 1995
– En banc decision date: November 11, 2014
– Applicable constitution: 1987 Philippine Constitution

Applicable Law

– National Internal Revenue Code of 1986, as amended by Executive Order No. 273 (1987) and later by Republic Act No. 8424 (1997) and Republic Act No. 10351 (Sin Tax Law, 2012)
– Commonwealth Act No. 466 (1939 Tax Code), re-enacted by Presidential Decree No. 1158-A (1977 Code) and Presidential Decree No. 1994 (1986 Code)
– Revenue Regulations No. V-39 (1954) and No. 17-67 (1969), implementing tobacco-specific tax provisions
– Act No. 2613 (1916 Tobacco Inspection Law)

Factual Background

Cigarette manufacturers import or locally purchase cured tobacco leaves, which undergo re-drying, de-stemming (removal of midrib), cutting, and aging. The product after de-stemming—“stemmed leaf tobacco”—is used as filler in cigarette blending. The manufacturers processed, sold, or transferred such stemmed leaf tobacco, and the Bureau assessed deficiency specific taxes at P0.75 per kilogram pursuant to Section 141 of the Tax Code.

Development of Tax Provisions

Originally, the 1939 Tax Code imposed specific taxes on manufactured tobacco products (Section 136) but exempted “stemmed leaf tobacco” when sold in bulk between manufacturers without prepayment (Section 132). Under subsequent codes (1977, 1986), Sections 132/144/137 continued to authorize tax-free transfers of stemmed leaf tobacco “by one manufacturer directly to another” subject to conditions in Department of Finance regulations. Section 141 of the 1986 Code imposed a specific tax on “tobacco prepared or partially prepared,” at P0.75/kg.

BIR Assessments

• La Suerte was assessed roughly P34.9 million (1986–1989), P11.8 million (1989–1990), and paid P175,909.50 (April 1995) and P325,410.00 (March 1995) under protest.
• Fortune was assessed P28.9 million (1986–1989) and P1.99 million (1989–1990).
• Sterling was assessed P5.19 million (November 1986–June 1989).
All taxpayers protested denial of exemption and sought judicial relief from the Court of Tax Appeals and the Court of Appeals.

Issues Presented

  1. Whether stemmed leaf tobacco is subject to specific tax under Section 141 of the 1986 Tax Code.
  2. Whether Section 137’s exemption for bulk sales “by one manufacturer directly to another” applies unqualifiedly, including to transfers involving non-L-7 permittees.
  3. Whether importations of stemmed leaf tobacco qualify for the Section 137 exemption.
  4. Whether Revenue Regulations No. V-39 and No. 17-67 validly confer conditions on the exemption or impermissibly delegate legislative power.
  5. Whether acquisition-based liability under Section 127 attaches even if the manufacturer was not assessed.
  6. Whether a prior BIR ruling (December 1972) or long-standing practice estops the Bureau from assessing tax.
  7. Whether specific tax on stemmed leaf tobacco and again on the finished cigarette constitutes prohibited double taxation.

Excise Tax and Specific Tax

An excise tax is a tax on production, sale, or consumption of specified goods; it is “specific” when measured by physical units. Section 141 unambiguously subjects “tobacco prepared or partially prepared” (including stemmed leaf tobacco) to a P0.75/kg tax, reflecting legislative intent to tax all processed tobacco forms.

Interpretation of Section 141

The removal of the stem or midrib transforms raw leaf into a “partially prepared” product. Absent any statutory definition, “prepared or partially prepared” must bear its ordinary meaning. Implementing regulations (RR 17-67) expressly classify “stemmed leaf tobacco” as a category of “partially manufactured tobacco,” confirming its taxability under Section 141(b).

Exemption under Section 137

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,” but only “under such conditions as may be prescribed” in Department of Finance regulations. The exemption is therefore qualified, not absolute, and applies only to intra-manufacturer transfers complying with regulatory formalities.

Regulations V-39 and 17-67

Revenue Regulations No. V-39 (1954) prescribes conditions for tax-free transfers: an official L-7 invoice, entries in L-7 registers of both transferor and transferee, specifying weight, consignor, consignee, and related data. RR 17-67 (1969) classifies permittees: L-7 as “manufacturers of tobacco products” (cigars, cigarettes, smoking/chewing tobacco) versus L-6 and L-3 for dealers or partial processors. Only transfers between L-7 permittees satisfy the regulation’s conditions.

Delegation of Rule-making Authority

Sections 132/137 and related code provisions authorize the Secretary of Finance to prescribe “conditions” for tax-free removal of stemmed leaf tobacco, a legitimate delegation limited by the requirement of “effective enforcement.” Regulations that implement the statute by detailing procedural requirements do not usurp legislative power.

Harmonization of Regulations

RR V-39 and RR 17-67, both issued under the same statutory authority, must be read in pari materia to effectuate the law’s dual objectives: taxing prepared tobacco products while exempting intra-manufacturer bulk transfers that have already borne tax at the point of initial acquisition.

Import Transactions

Section 137 contemplates domestic “sale” or “transfer” of stemmed leaf tobacco, not importation. Import transactions are governed by separate code provisions requiring payment of specific tax on imported articles (Section 125 of the 1939 Code, Section 128 of the 1977 Code

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