G.R. No. L-36130 - La Suerte Cigar and Cigarette Factory vs. Court of Tax Appeals

Case Summary (G.R. No. L-36130)

Factual Background

The Commissioner collected tobacco inspection fees from petitioners over their objections. In CTA Case No. 2031, the Commissioner collected P199,632.19 for the period from September 1967 to April 1969. In CTA Case No. 2048, the Commissioner collected P1,406,877.64 for the period from September 1967 to August 1969. Petitioners then filed separate claims for refund, contending that the fees were unlawfully collected.

Court of Tax Appeals Proceedings

In CTA Case No. 2031, petitioners sought summary judgment. On November 28, 1970, the Court of Tax Appeals denied the refund claim of P199,632.19. Before that decision became final, petitioners moved for reconsideration and asked that the case be reopened to receive evidence supporting their argument that no inspection had been conducted by the Bureau of Internal Revenue and that no inspection labels had been affixed to the boxes and packages of the cigars and cigarettes, which petitioners asserted would have warranted the imposition of inspection fees. On September 28, 1971, the Court of Tax Appeals granted the motion to reopen, but denied the motion for reconsideration. The Court also ordered that CTA Cases Nos. 2048 and 2031 be heard jointly.

After hearing, the Court of Tax Appeals, on December 15, 1972, denied both refund claims.

Petitioners’ Contentions on Appeal

Petitioners advanced multiple grounds. First, they argued that the Court of Tax Appeals reached a conclusion contrary to their position that inspection fees were collected illegally and therefore should be refunded.

Second, they assailed the validity and binding force of Revenue Memorandum Circular No. 30-67. They claimed it was not a regulation promulgated by the Secretary of Finance as allegedly required by Sections 4(j) and 338 of the NIRC, and that it had never been published in the Official Gazette, which they argued was required by Art. 2 of the Civil Code and Section 79(b) of the Revised Administrative Code.

Third, petitioners asserted that undisputed evidence showed that no actual inspection of the cigars and cigarettes was conducted, and that, accordingly, no inspection fees were legally warranted.

Fourth, they claimed the statutory coverage under the Tobacco Inspection Law (particularly Section 6(c)) extended only to leaf tobacco, not to cigars and cigarettes for domestic consumption. On this theory, they argued the memorandum circular was ultra vires and void.

Statutory Interpretation of Section 6(c) of the Tobacco Inspection Law

The Court noted that prior to the amendment by Republic Act No. 31, Section 6(c) of Act No. 2613 empowered the Commissioner to require inspection and the affixture of inspection labels to tobacco removed from the province of its origin to another province. After amendment by Republic Act No. 31 (October 1, 1946), the provision expanded the Commissioner’s power to require inspection and affixture of labels to tobacco removed from province to another or to tobacco for domestic sale or factory use.

Petitioners contended that the phrase “tobacco for domestic sale” referred only to leaf tobacco for domestic sale or factory use and did not include cigars and cigarettes for domestic consumption. The Supreme Court rejected that restrictive reading. It reasoned that, before amendment, Sections 6 and 7 of the Tobacco Inspection Law had already covered inspection of leaf tobacco and partially manufactured tobacco for local sale, and leaf tobacco and its products for export. If Congress intended the amendment to apply only to items already covered, the Court observed that Congress could easily have included the word “leaf.” The omission, in the Court’s view, signified Congress’s intent to include a new item—manufactured tobacco products for domestic sale and imported tobacco for factory use. The Court further adopted the Court of Tax Appeals’ construction that “tobacco,” as used by Congress, must be taken in its general sense and could not be limited to “leaf tobacco” without judicial legislation.

The Court emphasized the settled rule that when the law does not distinguish, the Court should not distinguish.

Validity and Effect of Revenue Memorandum Circular No. 30-67

The Court then addressed petitioners’ attack on Revenue Memorandum Circular No. 30-67 as lacking the procedural requisites for regulations and as being unpublished.

The record described that when General Circular No. V-27 was issued on October 29, 1946 by then Collector Bibiano L. Meer to implement Sections 6, 7, and 14 of Act No. 2613, the word “leaf” was erroneously included, causing long-term losses to the Government because inspection fees on cigars and cigarettes for domestic sale and imported leaf and partially manufactured tobacco for factory use were not collected for more than twenty years. The error was discovered when an Assistant Chief of the Tobacco Inspection Service appeared in a public legislative-executive tax hearing. The Philippine Tobacco Board then adopted Resolution No. 2-67, which interpreted “tobacco for domestic sale” to mean the wholesale disposal of tobacco products by cigar and cigarette factories to their dealers and “tobacco for factory use” to mean imported leaf tobacco intended for use by the factories in the manufacture of tobacco products. Respondent Commissioner promulgated Memorandum Circular No. 30-67, approved by the then Secretary of Finance Eduardo Z. Romualdez. Its effectivity was dated September 1, 1967, and it was not made dependent on publication in the Official Gazette.

The Court characterized the circular as one intended to rectify the prior misinterpretation and to provide a construction and interpretation of Act No. 2613 as amended, which the Commissioner was duty-bound to enforce. It was described as an opinion on how the law should be construed, not an instrument seeking to enlarge or restrict statutory meaning.

On publication, the Court held that the circular, being a circular or memorandum for the internal administration of the Bureau, fell under Section 79(b) of the Revised Administrative Code, which allowed circulars for the government of officers and employees in the interior administration of the business of a bureau or office not to be published. The Court further held that since the memorandum was an interpretation of a pre-existing law, publication in the Official Gazette was not necessary for validity. The Court also observed that counsel for petitioners admitted that petitioners had been furnished a copy of the circular, and that they treated it as a memorandum for internal purposes. It nonetheless concluded that the circular, having been issued by the Commissioner with the Secretary’s approval for implementation of the Tobacco Inspection Law, possessed the force and effect of law.

Finally, the Court applied the principle that executive construction of a law, while not binding on courts, must be given weight because the construction came from the branch charged with implementation.

Nature of Tobacco Inspection Fees and Lack of Legal Basis for Refund

The Court treated tobacco inspection fees as National Internal Revenue taxes, consistent with the provisions on miscellaneous taxes under the Tax Code. It cited Section 228 (formerly Section 302) on the collection and manner of payment of inspection fees. It stated that the Commissioner had the power and duty to collect the fees even without inspection if tobacco products were removed clandestinely or surreptitiously from the establishment of wholesalers, manufacturers, or redrying plants, or from customs custody in the case of imported leaf tobacco.

The Court also rejected the notion that errors, omissions, or flaws by Bureau inspectors could estop the Government from collecting taxes legally due. It further explained the regulatory and revenue purposes of the fees. Fifty percent of the fees were said to accrue to the Tobacco Inspection Fee Fund created by Section 12 of Act No. 2613, as amended, while the other fifty percent were to go to the Cultural Center of the Philippines, under Section 88, Chapter VII, NIRC. Given these features, the Court held that a refund of fees collected from petitioners was not legally warranted.

Evidence of Inspection and the Court of Tax Appeals’ Findings

The Court upheld the Court of Tax Appeals’ evaluation of the evidence regarding whether inspection had actually been conducted. It noted that the parties had ag

Case Syllabus (G.R. No. L-36130)

The petitioners filed a Petition for Review on Certiorari of the Court of Tax Appeals decisions in CTA Cases Nos. 2048 and 2031.
The petitioners sought the refund of P1,606,509.83 that the Commissioner of Internal Revenue collected as tobacco inspection fees on cigars and cigarettes manufactured for domestic sale and/or consumption.
The CTA heard the two cases jointly because they were represented by the same counsel and involved the same legal issues.
The parties did not dispute the amounts involved.

Parties and Procedural Posture

The petitioners in G.R. No. L-36130 consisted of multiple tobacco manufacturers, and the petitioners in G.R. No. L-36131 consisted of other tobacco entities, both naming the Court of Tax Appeals and Hon. Misael P. Vera, in his capacity as Commissioner of Internal Revenue, as respondents.
The respondent Commissioner issued Memorandum Circular No. 30-67 on August 22, 1967 as the basis for collecting the contested fees.
In CTA Case No. 2031, the petitioners sought summary judgment and the CTA denied the refund claim by decision dated November 28, 1970.
Before that decision became final, the petitioners moved for reconsideration while praying that CTA Case No. 2031 be reopened for evidence on alleged absence of BIR inspection and inspection labels.
On September 28, 1971, the CTA granted the motion to reopen but denied reconsideration.
The CTA ordered that CTA Cases Nos. 2048 and 2031 be heard jointly after the reopening.
After hearing, the CTA denied both claims on December 15, 1972, prompting the present petitions.

Key Factual Allegations

The Commissioner of Internal Revenue collected inspection fees from the petitioners despite their protests.
In CTA Case No. 2031, the collected inspection fees amounted to P199,632.19 for the period from September 1967 to April 1969.
In CTA Case No. 2048, the collected inspection fees amounted to P1,406,877.64 for the period from September 1967 to August 1969.
The petitioners contended that no inspection was actually conducted and no inspection labels were affixed to the relevant cigar and cigarette packages.
The record showed that the parties agreed that Mr. Vicente Chua, the production manager of La Suerte Cigar & Cigarette Factory, would have his testimony considered as the procedure of inspection followed in all factories of the petitioners.
The agreed procedure described invoicing by revenue agents before cigarettes were removed, checking of quantities, recording, and verification of strip stamps.
Other petitioners’ witnesses testified that revenue agents and tobacco inspectors saw to proper recording of raw materials and segregation of tobacco products found unfit for sales under the supervision of revenue agents.

Statutory and Regulatory Framework

The Memorandum Circular No. 30-67 required inspection and collection of corresponding inspection fees for specified tobacco matters intended for domestic sale, factory use, or export.
The case centered on the interpretation of Section 6(c) of Act No. 2613 (Tobacco Inspection Law) before and after its amendment by Republic Act No. 31.
Before amendment, Section 6(c) empowered the Commissioner to require inspection and affixture of inspection labels to tobacco removed from one province to another.
After amendment by Republic Act No. 31 (October 1, 1946), Section 6(c) expanded the duty to require inspection and affixture of labels for tobacco removed for domestic sale or factory use, in addition to removal between provinces.
The Court considered the explanatory note to the amendatory bill that clarified the legislative intent to extend regulatory power to leaf tobacco intended for factory use and addressed coverage of manufactured products in prior export regulation.
The petitions also assailed the validity of Memorandum Circular No. 30-67 on publication and issuance-authority grounds, referencing Sections 4(j) and 338 of the NIRC and Article 2 of the Civil Code and Section 79(b) of the Revised Administrative Code.
The decision treated tobacco inspection fees as National Internal Revenue taxes, specifically as miscellaneous taxes under the Tax Code.
The Court referred to Section 228 (formerly Section 302), Chapter VII of the Tax Code for collection and payment mechanisms for inspection fees.
The Court also identified the statutory allocation of tobacco inspection fees, with fifty percentum (50%) accruing to the Tobacco Inspection Fee Fund created by Section 12 of Act No. 2613, as amended, and the remaining fifty percentum (50%) accruing to the Cultural Center of the Philippines under Section 88, Chapter VII, NIRC.

Issues Raised

The petitioners asserted that the CTA erred in finding contrary to the petitioners’ position that inspection fees were collected illegally and therefore should be refunded.
The petitioners argued that Revenue Memorandum Circular No. 30-67 had no binding effect because it allegedly was not a regulation promulgated by the Secretary of Finance as required by Section 4(j) and 338 of the NIRC, and because it allegedly was not published in the Official Gazette as required by Article 2 of the Civil Code and Section 79(b) of the Revised Administrative Code.
The petitioners argued that undisputed evidence showed no inspection of the relevant cigars and cigarettes was conducted, so the collection of inspection fees lacked legal warrant.
The petitioners contended that Section 6(c) of the Tobacco Inspection Law referred only to leaf tobacco for domestic sale or factory use and not to cigars and cigarettes for domestic consumption, making the revenue circular ultra vires and void.
The case required determination of the statutory meaning of the term “tobacco for domestic sale or factory use” and the legal effect of an administrative revenue memorandum circular on the validity of fee collection.

Arguments of Petitioners

The petitioners maintained that inspection fees were illegally collected on cigars and cigarettes manufactured for domestic sale and consumption, and that such illegality required refund.
The petitioners argued that Memorandum Circular No. 30-67 lacked binding authority because it was allegedly not issued as a regulation b