Case Digest: CIR v. CA and Fortune Tobacco Corporation, 261 SCRA 236, G.R. No. 119761, August 29, 1996
Taxation | Constitutional Limitation: Due Process of Law
Facts: .
- Fortune Tobacco Corporation (Fortune Tobacco) holds trademark registrations for "Champion," "Hope," and "More" cigarettes.
- These were considered local brands subjected to an ad valorem tax at the rate of 20-45%.
- Effective July 3, 1993, Republic Act No. 7654 amended the National Internal Revenue Code, modifying the tax rates on cigarettes.
- On July 1, 1993, BIR issued Revenue Memorandum Circular No. 37-93, issued reclassified certain cigarette brands, including those of Fortune Tobacco, as locally manufactured but bearing foreign brands subject to 55% ad valorem tax on cigarettes.
- On July 2, 1993, BIR Deputy Commissioner sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular.
- On July 15, 1993, Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93.
- Fortune Tobacco requested a review of RMC 37-93, which was denied.
- As a consequence, Fortune Tobacco was assessed an ad valorem tax deficiency.
- Court of Tax Appeals: Cancelled the tax assessment.
- CTA held that the brands were not currently classified and taxed at 55% under the amended Tax Code, as implemented by R.A. No. 7654.
- Court of Appeals: Affirmed the ruling of the CTA.
Held:
In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which can thus become effective without any prior need for notice and hearing, nor publication, and that its issuance is not discriminatory since it would apply under similar circumstances to all locally manufactured cigarettes.
The Court must sustain both the appellate court and the tax court.
Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative powers.
Let us first distinguish between two kinds of administrative issuances — a legislative rule and an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance Secretary, the Court expressed:
. . . a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof . In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:
Public Participation. — If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two (2) weeks before the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be observed.
In addition such rule must be published. On the other hand, interpretative rules are designed to provide guidelines to the law which the administrative agency is in charge of enforcing. 12
It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations
It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on "due process of law" and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).
In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances:
(1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations.
(2) Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed.
Due notice of the said issuances may be fairly presumed only after the following procedures have been taken;
x x x x x x x x x
(5) Strict compliance with the foregoing procedures is enjoined.
Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned circular.
Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.
Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities. Thus, all taxable articles or kinds of property of the same class must be taxed at the same rate and the tax must operate with the same force and effect in every place where the subject may be found.
Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and "Champion" cigarettes and, unless petitioner would be willing to concede to the submission of private respondent that the circular should, as in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his separate opinion, be considered adjudicatory in nature and thus violative of due process following the Ang Tibay doctrine, the measure suffers from lack of uniformity of taxation. In its decision, the CTA has keenly noted that other cigarettes bearing foreign brands have not been similarly included within the scope of the circular, such as —
1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.
(a) "PALM TREE" is listed as manufactured by office of Monopoly, Korea (Exhibit "R")
2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY
(a) "GOLDEN KEY" is listed being manufactured by United Tobacco, Pakistan (Exhibit "S")
(b) "CANNON" is listed as being manufactured by Alpha Tobacco, Bangladesh (Exhibit "T")
3. Locally manufactured by LA PERLA INDUSTRIES, INC.
(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U")
(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks, Sweden (Exhibit "V-1")
4. Locally manufactured by MIGHTY CORPORATION
(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U-1")
5. Locally manufactured by STERLING TOBACCO CORPORATION
(a) "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia and Brown and Williamson, USA (Exhibit "U-3")
(b) "WINNER" is listed as being manufactured by Alpha Tobacco, Bangladesh; Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit "U-4").
The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the Committee on Ways and Means of the House of Representatives; viz:
THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have specific information on other tobacco manufacturers. Now, there are other brands which are similarly situated. They are locally manufactured bearing foreign brands. And may I enumerate to you all these brands, which are also listed in the World Tobacco Directory . . . Why were these brand not reclassified at 55 if your want to give a level playing filed to foreign manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular that was supposed to come after RMC No. 37-93 which have really named specifically the list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all these brands that you mentioned at 55 percent except that at that time, when we had to come up with this, we were forced to study the brands of Hope, More and Champion because we were given documents that would indicate the that these brands were actually being claimed or patented in other countries because we went by Revenue Memorandum Circular 1488 and we wanted to give some rationality to how it came about but we couldn't find the rationale there. And we really found based on our own interpretation that the only test that is given by that existing law would be registration in the World Tobacco Directory. So we came out with this proposed revenue memorandum circular which we forwarded to the Secretary of Finance except that at that point in time, we went by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that on locally manufactured cigarettes which are currently classified and taxed at 55 percent. So we were saying that when this law took effect in July 3 and if we are going to come up with this revenue circular thereafter, then I think our action would really be subject to question but we feel that . . . Memorandum Circular Number 37-93 would really cover even similarly situated brands. And in fact, it was really because of the study, the short time that we were given to study the matter that we could not include all the rest of the other brands that would have been really classified as foreign brand if we went by the law itself. I am sure that by the reading of the law, you would without that ruling by Commissioner Tan they would really have been included in the definition or in the classification of foregoing brands. These brands that you referred to or just read to us and in fact just for your information, we really came out with a proposed revenue memorandum circular for those brands. (Emphasis supplied)
(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).
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MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I felt that we . . . I wanted to come up with a more extensive coverage and precisely why I asked that revenue memorandum circular that would cover all those similarly situated would be prepared but because of the lack of time and I came out with a study of RA 7654, it would not have been possible to really come up with the reclassification or the proper classification of all brands that are listed there. . . (emphasis supplied) (Exhibit "FF-2d," page IX-1)
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HON. DIAZ. But did you not consider that there are similarly situated?
MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memorandum Circular No. 37-93, the other brands came about the would have also clarified RMC 37-93 by I was saying really because of the fact that I was just recently appointed and the lack of time, the period that was allotted to us to come up with the right actions on the matter, we were really caught by the July 3 deadline. But in fact, We have already prepared a revenue memorandum circular clarifying with the other . . . does not yet, would have been a list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes which would include all the other brands that were mentioned by the Honorable Chairman. (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18
All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and effective administrative issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED. No costs.