CASE DIGEST: La Suerte Cigar vs. CA (G.R. No. 125346; November 11, 2014)


These cases involve the taxability of stemmed leaf tobacco imported and locally purchased by cigarette manufacturers for use as raw material in the manufacture of their cigarettes. Under the Tax Code, if it is to be exported or to be used in the manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will eventually be paid on the finished product.

La Suerte was assessed by the BIR for excise tax deficiency amounting to more than 34 million pesos. La Suerte protested invoking the Tax Code which allows the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without payment of the excise tax. However, the CIR insisted that stemmed leaf tobacco is subject to excise tax "unless there is an express grant of exemption from [the] payment of tax."

La Suerte petitioned for review before the CTA which cancelled the assessment. The CIR appealed to the CA which reversed the CTA. The CIR invoked a revenue regulation (RR) which limits the exemption from payment of specific tax on stemmed leaf tobacco to sales transactions between manufacturers classified as L-7 permittees.

[1] Is stemmed leaf tobacco subject to excise (specific) tax?
[2] Is purchase of stemmed leaf tobacco from manufacturers who are not classified as L-7 permittees subject to tax?
[3] Is the RR valid?
[4] Is the possessor or owner, or importer or exporter, of stemmed leaf tobacco liable for the payment of specific tax if such tobacco product is removed from the place of production without payment of said tax?
[5] Does the imposition of excise tax on stemmed leaf tobacco under Section 141 of the 1986 Tax Code constitute double taxation, considering they are paying the specific tax on the raw material and on the finished product in which the raw material was a part?
[1] Yes, excise taxes on domestic products shall be paid by the manufacturer or producer before[the] removal [of those products] from the place of production." "It does not matter to what use the article[s] subject to tax is put; the excise taxes are still due, even though the articles are removed merely for storage in someother place and are not actually sold or consumed.

When tobacco is harvested and processed either by hand or by machine, all itsproducts become subject to specific tax. Section 141 reveals the legislative policy to tax all forms of manufactured tobacco — in contrast to raw tobacco leaves — including tobacco refuse or all other tobacco which has been cut, split, twisted, or pressed and is capable of being smoked without further industrial processing.

Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It is a partially prepared tobacco. The removal of the stem or midrib from the leaf tobacco makes the resulting stemmed leaf tobacco a prepared or partially prepared tobacco.

Despite the differing definitions for "stemmed leaf tobacco" under revenue regulations, the onus of proving that stemmed leaf tobacco is not subject to the specific tax lies with the cigarette manufacturers. Taxation is the rule, exemption is the exception.

[2] Stemmed leaf tobacco transferred in bulk between cigarette manufacturers are exempt from excise tax under the Tax Code vis-a-vis RRs.

Section 137 authorizes a tax exemption subject to the following: (1) that the stemmed leaf tobacco is sold in bulk as raw material by one manufacturer directly to another; and (2) that the sale or transfer has complied with the conditions prescribed by the Department of Finance.

The conditions under which stemmed leaf tobacco may be transferred from one factory to another without prepayment of specific tax are as follows: (a) The transfer shall be under an official L-7 invoice on which shall be entered the exact weight of the tobacco at the time of its removal; (b) Entry shall be made in the L-7 register in the place provided on the page for removals; and (c) Corresponding debit entry shall bemade in the L-7 register book of the factory receiving the tobacco under the heading, "Refuse, etc.,received from the other factory," showing the date of receipt, assessment and invoice numbers, name and address of the consignor, formin which received, and the weight of the tobacco.

[3] Yes, valid. Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau of Internal Revenue with an L-7 permit refer to "manufacturers of tobacco products." Hence, the transferor and transferee of the stemmed leaf tobacco must be an L-7 tobacco manufacturer.

The reason behind the tax exemption of stemmed leaf tobacco transferred between two L-7 manufacturers is that the same had already been previously-taxed when acquired by the L-7 manufacturer from dealers of tobacco. There is no new product when stemmed leaf tobacco is transferred between two L-7 permit holders. Thus, there can be no excise tax that will attach. The regulation, therefore, is reasonable and does not create a new statutory right.

Moreover, although delegation is not allowed as a rule, the power to fill in the details and manner as to the enforcement and administration of a law may be delegated to various specialized administrative agencies.

[4] Importation of stemmed leaf tobacco not included in the exemption. The transaction contemplated in Section 137 does not include importation of stemmed leaf tobacco for the reason that the law uses the word "sold" to describe the transaction of transferring the raw materials from one manufacturer to another.

[5] In this case, there is no double taxation in the prohibited sense because the specific tax is imposed by explicit provisions of the Tax Code on two different articles or products: (1) on the stemmed leaf tobacco; and (2) on cigar or cigarette.