Tax Excise

G.R. No.
163583 August 20, 2008
BRITISH AMERICAN TOBACCO, petitioner,

vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue, respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY CORPORATION, and JT
InTERNATIONAL, S.A., respondents-in-intervention.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the validity of: (1) Section 145 of the National Internal Revenue Code (NIRC), as recodified by
Republic Act (RA) 8424; (2) RA 9334, which further amended Section 145 of the NIRC on January 1, 2005; (3) Revenue
Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) Revenue Memorandum Order No. 6-2003. Petitioner argues that the
said provisions are violative of the equal protection and uniformity clauses of the Constitution.
RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other Purposes,"
took effect on January 1, 1997. In the same year, Congress passed RA 8424 or The Tax Reform Act of 1997, re-codifying the
NIRC. Section 142 was renumbered as Section 145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net retail price per pack of cigarettes. To
determine the applicable tax rates of existing cigarette brands, a survey of the net retail prices per pack of cigarettes was
conducted as of October 1, 1996, the results of which were embodied in Annex "D" of the NIRC as the duly registered,
existing or active brands of cigarettes.
Paragraph (c) of Section 145, 1 states –
SEC. 145. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes packed by machine
a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per
pack, the tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty
centavos (P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos and ninety-
six centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does
not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos and sixty centavos
(P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per
pack, the tax shall be One peso and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of this Act
shall be taxed under the highest classification of any variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in 20 major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover
the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as
set forth in Annex "D" of this Act, shall remain in force until revised by Congress. (Emphasis supplied)
As such, new brands of cigarettes shall be taxed according to their current net retail price while existing or "old" brands shall
be taxed based on their net retail price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-97,2 which classified the
existing brands of cigarettes as those duly registered or active brands prior to January 1, 1997. New brands, or those
registered after January 1, 1997, shall be initially assessed at their suggested retail price until such time that the appropriate
survey to determine their current net retail price is conducted. Pertinent portion of the regulations reads –
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes – shall include duly registered, existing or active brands of
cigarettes, prior to January 1, 1997.
xxxx
6. New Brands – shall mean brands duly registered after January 1, 1997 and shall include duly registered, inactive
brands of cigarette not sold in commercial quantity before January 1, 1997.
Section 4. Classification and Manner of Taxation of Existing Brands, New Brands and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price. In the meantime that the current net retail
price has not yet been established, the suggested net retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in 20 major supermarkets or retail outlets in Metro Manila (for
brands of cigarette marketed nationally) or in five (5) major supermarkets or retail outlets in the region (for brands
which are marketed only outside Metro Manila) at which the cigarette is sold on retail in reams/cartons, three (3)
months after the initial removal of the new brand to determine the actual net retail price excluding the excise tax and
value added tax which shall then be the basis in determining the specific tax classification. In case the current net
retail price is higher than the suggested net retail price, the former shall prevail. Any difference in specific tax due
shall be assessed and collected inclusive of increments as provided for by the National Internal Revenue Code, as
amended.
In June 2001, petitioner British American Tobacco introduced into the market Lucky Strike Filter, Lucky Strike Lights and
Lucky Strike Menthol Lights cigarettes, with a suggested retail price of P9.90 per pack.3 Pursuant to Sec. 145 (c) quoted
above, the Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 9-2003,4 amended Revenue Regulations No. 1-97 by providing, among
others, a periodic review every two years or earlier of the current net retail price of new brands and variants thereof for the
purpose of establishing and updating their tax classification, thus:
For the purpose of establishing or updating the tax classification of new brands and variant(s) thereof, their current
net retail price shall be reviewed periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new brands shall remain in force until the same is
altered or changed through the issuance of an appropriate Revenue Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-20035 was issued on March 11, 2003, prescribing the guidelines and
procedures in establishing current net retail prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-20036 was issued on August 8, 2003 to implement the revised tax classification
of certain new brands introduced in the market after January 1, 1997, based on the survey of their current net retail price. The
survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, are sold at the current net retail
price of P22.54, P22.61 and P21.23, per pack, respectively.7 Respondent Commissioner of the Bureau of Internal Revenue
thus recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky Strike’s average net retail price is above
P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition for
injunction with prayer for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed
as Civil Case No. 03-1032. Said petition sought to enjoin the implementation of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they discriminate
against new brands of cigarettes, in violation of the equal protection and uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition8 to the application for the issuance of a TRO. On
September 4, 2003, the trial court denied the application for TRO, holding that the courts have no authority to restrain the
collection of taxes.9 Meanwhile, respondent Secretary of Finance filed a Motion to Dismiss,10 contending that the petition is
premature for lack of an actual controversy or urgent necessity to justify judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to dismiss and issued a writ of preliminary injunction to
enjoin the implementation of Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-
2003.11 Respondents filed a Motion for Reconsideration12 and Supplemental Motion for Reconsideration.13 At the hearing on
the said motions, petitioner and respondent Commissioner of Internal Revenue stipulated that the only issue in this case is the
constitutionality of the assailed law, order, and regulations.14
On May 12, 2004, the trial court rendered a decision15 upholding the constitutionality of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial court also lifted the writ of
preliminary injunction. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the instant Petition is hereby DISMISSED for lack of merit. The Writ of
Preliminary Injunction previously issued is hereby lifted and dissolved.
SO ORDERED.16
Petitioner brought the instant petition for review directly with this Court on a pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates Imposed on Alcohol And Tobacco
Products, Amending For The Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took
effect on January 1, 2005. The statute, among others,–
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according to their suggested net retail price, until such
time that their correct tax bracket is finally determined under a specified period and, after which, their classification shall
remain in force until revised by Congress;
(3) retained Annex "D" as tax base of those surveyed as of October 1, 1996 including the classification of brands for the same
products which, although not set forth in said Annex "D," were registered on or before January 1, 1997 and were being
commercially produced and marketed on or after October 1, 1996, and which continue to be commercially produced and
marketed after the effectivity of this Act. Said classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the period January 2, 199717 to December 31,
2003, such that said cigarettes shall remain in the classification under which the BIR has determined them to belong as of
December 31, 2003, until revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed and collected on cigarettes packed by machine
(1) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack, the
tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not
exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack,
the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail price as defined herein and determine
the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997 [should be January 2,
1997]and December 31, 2003 shall remain in the classification under which the Bureau of Internal Revenue
has determined them to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an act of
Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the cigarette is sold in retail in at least twenty (20) major
the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila, the
"net retail price" shall mean the price at which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as
set forth in Annex "D", including the classification of brands for the same products which, although not set
forth in said Annex "D", were registered and were being commercially produced and marketed on or after
October 1, 1996, and which continue to be commercially produced and marketed after the effectivity of this
Act, shall remain in force until revised by Congress. (Emphasis added)
Under RA 9334, the excise tax due on petitioner’s products was increased to P25.00 per pack. In the implementation thereof,
respondent Commissioner assessed petitioner’s importation of 911,000 packs of Lucky Strike cigarettes at the increased tax
rate of P25.00 per pack, rendering it liable for taxes in the total sum of P22,775,000.00.18
Hence, petitioner filed a Motion to Admit Attached Supplement19 and a Supplement20 to the petition for review, assailing the
constitutionality of RA 9334 insofar as it retained Annex "D" and praying for a downward classification of Lucky Strike
products at the bracket taxable at P8.96 per pack. Petitioner contended that the continued use of Annex "D" as the tax base
of existing brands of cigarettes gives undue protection to said brands which are still taxed based on their price as of October
1996 notwithstanding that they are now sold at the same or even at a higher price than new brands like Lucky Strike. Thus,
old brands of cigarettes such as Marlboro and Philip Morris which, like Lucky Strike, are sold at or more than P22.00 per pack,
are taxed at the rate of P10.88 per pack, while Lucky Strike products are taxed at P26.06 per pack.
In its Comment to the supplemental petition, respondents, through the Office of the Solicitor General (OSG), argued that the
passage of RA 9334, specifically the provision imposing a legislative freeze on the classification of cigarettes introduced into
the market between January 2, 1997 and December 31, 2003, rendered the instant petition academic. The OSG claims that
the provision in Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes introduced during said
period, "cured’ the perceived defect of Section 145 considering that, like the cigarettes under Annex "D," petitioner’s brands
and other brands introduced between January 2, 1997 and December 31, 2003, shall remain in the classification under which
the BIR has placed them and only Congress has the power to reclassify them.
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a Motion for Leave to Intervene with attached
Comment-in-Intervention.21 This was followed by the Motions for Leave to Intervene of Fortune Tobacco Corporation,22Mighty
Corporation, 23 and JT International, S.A., with their respective Comments-in-Intervention. The Intervenors claim that they are
parties-in-interest who stand to be affected by the ruling of the Court on the constitutionality of Section 145 of the NIRC and its
Annex "D" because they are manufacturers of cigarette brands which are included in the said Annex. Hence, their intervention
is proper since the protection of their interest cannot be addressed in a separate proceeding.
According to the Intervenors, no inequality exists because cigarettes classified by the BIR based on their net retail price as of
December 31, 2003 now enjoy the same status quo provision that prevents the BIR from reclassifying cigarettes included in
Annex "D." It added that the Court has no power to pass upon the wisdom of the legislature in retaining Annex "D" in RA
9334; and that the nullification of said Annex would bring about tremendous loss of revenue to the government, chaos in the
collection of taxes, illicit trade of cigarettes, and cause decline in cigarette demand to the detriment of the farmers who
depend on the tobacco industry.
Intervenor Fortune Tobacco further contends that petitioner is estopped from questioning the constitutionality of Section 145
and its implementing rules and regulations because it entered into the cigarette industry fully aware of the existing tax system
and its consequences. Petitioner imported cigarettes into the country knowing that its suggested retail price, which will be the
initial basis of its tax classification, will be confirmed and validated through a survey by the BIR to determine the correct tax
that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR issuances should have been brought by
petitioner before the Court of Tax Appeals (CTA) and not the RTC because it is the CTA which has exclusive appellate
jurisdiction over decisions of the BIR in tax disputes.
On August 7, 2006, the OSG manifested that it interposes no objection to the motions for intervention.24 Therefore,
considering the substantial interest of the intervenors, and in the higher interest of justice, the Court admits their intervention.
Before going into the substantive issues of this case, we must first address the matter of jurisdiction, in light of Fortune
Tobacco’s contention that petitioner should have brought its petition before the Court of Tax Appeals rather than the regional
trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act No. 9282.
Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. — The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National
Internal Revenue or other laws administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; xxx.25
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where
the constitutionality of a law or rule is challenged. Where what is assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the
power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine in an appropriate action the validity of the acts of the political
departments. Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting
to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.26
In Drilon v. Lim,27 it was held:
We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this
authority being embraced in the general definition of the judicial power to determine what are the valid and binding
laws by the criterion of their conformity to the fundamental law. Specifically, B.P. 129 vests in the regional trial courts
jurisdiction over all civil cases in which the subject of the litigation is incapable of pecuniary estimation, even as the
accused in a criminal action has the right to question in his defense the constitutionality of a law he is charged with
violating and of the proceedings taken against him, particularly as they contravene the Bill of Rights. Moreover,
Article X, Section 5(2), of the Constitution vests in the Supreme Court appellate jurisdiction over final judgments and
orders of lower courts in all cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section 145(C) of the
NIRC, as amended, and the validity of its implementing rules and regulations. In fact, the RTC limited the resolution of the
subject case to the issue of the constitutionality of the assailed provisions. The determination of whether the assailed law and
its implementing rules and regulations contravene the Constitution is within the jurisdiction of regular courts. The Constitution
vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.28 Petitioner, therefore,
properly filed the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from assailing the authority of the Commissioner of Internal
Revenue. Fortune Tobacco raises this objection by pointing out that when petitioner requested the Commissioner for a ruling
that its Lucky Strike Soft Pack cigarettes was a "new brand" rather than a variant of an existing brand, and thus subject to a
lower specific tax rate, petitioner executed an undertaking to comply with the procedures under existing regulations for the
assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of the Commissioner of Internal Revenue, cannot later on
turn around when the ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents persons from going back on their own acts and
representations, to the prejudice of others who have relied on them.29 The principle is codified in Article 1431 of the Civil
Code, which provides:
Through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied or
disproved as against the person relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:
Sec. 2. Conclusive presumptions. — The following are instances of conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration,
act or omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually must have knowledge, notice or suspicion of the true facts,
communicates something to another in a misleading way, either by words, conduct or silence; second, the other in fact relies,
and relies reasonably or justifiably, upon that communication; third, the other would be harmed materially if the actor is later
permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees that the
other would act upon the information given or that a reasonable person in the actor's position would expect or foresee such
action.30
In the early case of Kalalo v. Luz,31 the elements of estoppel, as related to the party to be estopped, are: (1) conduct
amounting to false representation or concealment of material facts; or at least calculated to convey the impression that the
facts are other than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation that this conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or
constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it made the undertaking to comply with all issuances of the BIR, which
at that time it considered as valid, petitioner did not commit any false misrepresentation or misleading act. Indeed, petitioner
cannot be faulted for initially undertaking to comply with, and subjecting itself to the operation of Section 145(C), and only later
on filing the subject case praying for the declaration of its unconstitutionality when the circumstances change and the law
results in what it perceives to be unlawful discrimination. The mere fact that a law has been relied upon in the past and all that
time has not been attacked as unconstitutional is not a ground for considering petitioner estopped from assailing its validity.
For courts will pass upon a constitutional question only when presented before it in bona fide cases for determination, and the
fact that the question has not been raised before is not a valid reason for refusing to allow it to be raised later.32
Now to the substantive issues.
To place this case in its proper context, we deem it necessary to first discuss how the assailed law operates in order to
identify, with precision, the specific provisions which, according to petitioner, have created a grossly discriminatory
classification scheme between old and new brands. The pertinent portions of RA 8240, as amended by RA 9334, are
reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed and collected on cigarettes packed by machine
tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not
exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30) per pack.
xxxx
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240.
manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail price as defined herein and determine
the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997 [should be January 2, 1997] and
December 31, 2003 shall remain in the classification under which the Bureau of Internal Revenue has determined
them to belong as of December 31, 2003. Such classification of new brands and brands introduced between January
1, 1997 and December 31, 2003 shall not be revised except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the cigarette is sold in retail in at least twenty (20) major
the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila, the
"net retail price" shall mean the price at which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth
in Annex "D", including the classification of brands for the same products which, although not set forth in said Annex
"D", were registered and were being commercially produced and marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed after the effectivity of this Act, shall remain in force until revised
by Congress.
As can be seen, the law creates a four-tiered system which we may refer to as the low-priced,33 medium-priced,34 high-
priced,35 and premium-priced36 tax brackets. When a brand is introduced in the market, the current net retail price is
determined through the aforequoted specified procedure. The current net retail price is then used to classify under which tax
bracket the brand belongs in order to finally determine the corresponding excise tax rate on a per pack basis. The assailed
feature of this law pertains to the mechanism where, after a brand is classified based on its current net retail price, the
classification is frozen and only Congress can thereafter reclassify the same. From a practical point of view, Annex "D" is
merely a by-product of the whole mechanism and philosophy of the assailed law. That is, the brands under Annex "D" were
also classified based on their current net retail price, the only difference being that they were the first ones so classified since
they were the only brands surveyed as of October 1, 1996, or prior to the effectivity of RA 8240 on January 1, 1997.37
Due to this legislative classification scheme, it is possible that over time the net retail price of a previously classified brand,
whether it be a brand under Annex "D" or a new brand classified after the effectivity of RA 8240 on January 1, 1997, would
increase (due to inflation, increase of production costs, manufacturer’s decision to increase its prices, etc.) to a point that its
net retail price pierces the tax bracket to which it was previously classified.38 Consequently, even if its present day net retail
price would make it fall under a higher tax bracket, the previously classified brand would continue to be subject to the excise
tax rate under the lower tax bracket by virtue of the legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and Philip Morris brands, which were permanently
classified under Annex "D." As of October 1, 1996, Marlboro had net retail prices ranging from P6.78 to P6.84 while Philip
Morris had net retail prices ranging from P7.39 to P7.48. Thus, pursuant to RA 8240,39 Marlboro and Philip Morris were
classified under the high-priced tax bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then presented
evidence showing that after the lapse of about seven years or sometime in 2004, Marlboro’s and Philip Morris’ net retail prices
per pack both increased to about P15.59.40 This meant that they would fall under the premium-priced tax bracket, with a
higher excise tax rate of P13.44 per pack,41 had they been classified based on their 2004 net retail prices. However, due to
the legislative classification freeze, they continued to be classified under the high-priced tax bracket with a lower excise tax
rate. Petitioner thereafter deplores the fact that its Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights
cigarettes, introduced in the market sometime in 2001 and validated by a BIR survey in 2003, were found to have net retail
prices of P11.53, P11.59 and P10.34,42 respectively, which are lower than those of Marlboro and Philip Morris. However,
since petitioner’s cigarettes were newly introduced brands in the market, they were taxed based on their current net retail
prices and, thus, fall under the premium-priced tax bracket with a higher excise tax rate of P13.44 per pack. This unequal tax
treatment between Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other, is the crux of petitioner’s
contention that the legislative classification freeze violates the equal protection and uniformity of taxation clauses of the
Constitution.
It is apparent that, contrary to its assertions, petitioner is not only questioning the undue favoritism accorded to brands under
Annex "D," but the entire mechanism and philosophy of the law which freezes the tax classification of a cigarette brand based
on its current net retail price. Stated differently, the alleged discrimination arising from the legislative classification freeze
between the brands under Annex "D" and petitioner’s newly introduced brands arose only because the former were classified
based on their "current" net retail price as of October 1, 1996 and petitioner’s newly introduced brands were classified based
on their "current" net retail price as of 2003. Without this corresponding freezing of the classification of petitioner’s newly
introduced brands based on their current net retail price, it would be impossible to establish that a disparate tax treatment
occurred between the Annex "D" brands and petitioner’s newly introduced brands.
This clarification is significant because, under these circumstances, a declaration of unconstitutionality would necessarily
entail nullifying the whole mechanism of the law and not just Annex "D." Consequently, if the assailed law is declared
unconstitutional on equal protection grounds, the entire method by which a brand of cigarette is classified would have to be
invalidated. As a result, no method to classify brands under Annex "D" as well as new brands would be left behind and the
whole Section 145 of the NIRC, as amended, would become inoperative.43
To simplify the succeeding discussions, we shall refer to the whole mechanism and philosophy of the assailed law which
freezes the tax classification of a cigarette brand based on its current net retail price and which, thus, produced different
classes of brands based on the time of their introduction in the market (starting with the brands in Annex "D" since they were
the first brands so classified as of October 1, 1996) as the classification freeze provision.44
As thus formulated, the central issue is whether or not the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.
In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando, explained the applicable standard in deciding equal
protection and uniformity of taxation challenges:
Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional
mandate whether the assailed act is in the exercise of the police power or the power of eminent domain is to
demonstrate "that the governmental act assailed, far from being inspired by the attainment of the common weal was
prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then
that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumstances, which if not identical are analogous. If law be looks upon in
terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions
cast on some in the group equally binding on the rest." That same formulation applies as well to taxation measures.
The equal protection clause is, of course, inspired by the noble concept of approximating the ideal of the laws's
benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is
of the very essence of the idea of law. There is, however, wisdom, as well as realism, in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy arising out of specific difficulties, addressed to the attainment
of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." Hence the constant reiteration of the view that
classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz v. Araneta, this
Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state
be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shall
be uniform and equitable." This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco,
decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be
found." He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this
is hardly attainable." The problem of classification did not present itself in that case. It did not arise until nine years
later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation, . . . As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within
the meaning of this clause and is therefore uniform." There is quite a similarity then to the standard of equal
protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar
situation."46 (Emphasis supplied)
In consonance thereto, we have held that "in our jurisdiction, the standard and analysis of equal protection challenges in the
main have followed the ‘rational basis’ test, coupled with a deferential attitude to legislative classifications and a reluctance to
invalidate a law unless there is a showing of a clear and unequivocal breach of the Constitution."47 Within the present context
of tax legislation on sin products which neither contains a suspect classification nor impinges on a fundamental right, the
rational-basis test thus finds application. Under this test, a legislative classification, to survive an equal protection challenge,
must be shown to rationally further a legitimate state interest.48 The classifications must be reasonable and rest upon some
ground of difference having a fair and substantial relation to the object of the legislation.49 Since every law has in its favor the
presumption of constitutionality, the burden of proof is on the one attacking the constitutionality of the law to prove beyond
reasonable doubt that the legislative classification is without rational basis.50 The presumption of constitutionality can be
overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against
particular persons and classes, and that there is no conceivable basis which might support it.51
A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws.
The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to
the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to
all those belonging to the same class.52
The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of
practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of RA 8240, then
Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was
used to classify the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice. Further, with the
amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex "D" brands
but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced
in the future.53 (However, as will be discussed later, the intent to apply the freezing mechanism to newer brands was already
in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain, however, why the
classification is "frozen" after its determination based on current net retail price and how this is germane to the purpose of the
assailed law. An examination of the legislative history of RA 8240 provides interesting answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform Package then being pushed by the Ramos
Administration. It was enacted with the following objectives stated in the Sponsorship Speech of Senator Juan Ponce Enrile
(Senator Enrile), viz:
First, to evolve a tax structure which will promote fair competition among the players in the industries concerned and
generate buoyant and stable revenue for the government.
Second, to ensure that the tax burden is equitably distributed not only amongst the industries affected but equally
amongst the various levels of our society that are involved in various markets that are going to be affected by the
excise tax on distilled spirits, fermented liquor, cigars and cigarettes.
In the case of firms engaged in the industries producing the products that we are about to tax, this means relating the
tax burden to their market share, not only in terms of quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multi-tiered rate structure so that low-priced products are subject to
lower tax rates and higher-priced products are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax laws that are about to unfold in order to
minimize losses arising from inefficiencies and tax avoidance scheme, if not outright tax evasion.54
In the initial stages of the crafting of the assailed law, the Department of Finance (DOF) recommended to Congress a shift
from the then existing ad valorem taxation system to a specific taxation system with respect to sin products, including
cigarettes. The DOF noted that the ad valorem taxation system was a source of massive tax leakages because the taxpayer
was able to evade paying the correct amount of taxes through the undervaluation of the price of cigarettes using various
marketing arms and dummy corporations. In order to address this problem, the DOF proposed a specific taxation system
where the cigarettes would be taxed based on volume or on a per pack basis which was believed to be less susceptible to
price manipulation. The reason was that the BIR would only need to monitor the sales volume of cigarettes, from which it
could easily compute the corresponding tax liability of cigarette manufacturers. Thus, the DOF suggested the use of a three-
tiered system which operates in substantially the same manner as the four-tiered system under RA 8240 as earlier discussed.
The proposal of the DOF was embodied in House Bill (H.B.) No. 6060, the pertinent portions of which states—
SEC. 142. Cigars and cigarettes.—
(c) Cigarettes packed by machine.— There shall be levied, assessed and collected on cigarettes packed by machine
(1) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per pack exceeds four
pesos and twenty centavos (P4.20), the tax shall be seven pesos and fifty centavos (P7.50);
(2) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per pack exceeds
three pesos and ninety centavos (P3.90) but does not exceed four pesos and twenty centavos (P4.20), the tax shall
be five pesos and fifty centavos (P5.50): provided, that after two (2) years from the effectivity of this Act, cigarettes
otherwise subject to tax under this subparagraph shall be taxed under subparagraph (1) above.
(3) If the manufacturer’s or importer’s wholesale price (net of excise tax and value-added tax) per pack does not
exceeds three pesos and ninety centavos (P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by machine to be introduced in the domestic market
after the effectivity of this Act, shall be taxed under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes under paragraphs (a), (b), and (c) hereof, including the
price levels for purposes of classifying cigarettes packed by machine, shall be revised upward two (2) years
after the effectivity of this Act and every two years thereafter by the Commissioner of Internal Revenue,
subject to the approval of the Secretary of Finance, taking into account the movement of the consumer price
index for cigars and cigarettes as established by the National Statistics Office: provided, that the increase in
taxes and/or price levels shall be equal to the present change in such consumer price index for the two-year
period:provided, further, that the President, upon the recommendation of the Secretary of Finance, may
suspend or defer the adjustment in price levels and tax rates when the interest of the national economy and
general welfare so require, such as the need to obviate unemployment, and economic and social
dislocation:provided, finally, that the revised price levels and tax rates authorized herein shall in all cases be
rounded off to the nearest centavo and shall be in force and effect on the date of publication thereof in a
newspaper of general circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is that it contained a provision for the periodic adjustment
of the excise tax rates and tax brackets, and a corresponding periodic resurvey and reclassification of cigarette brands based
on the increase in the consumer price index as determined by the Commissioner of Internal Revenue subject to certain
guidelines. The evident intent was to prevent inflation from eroding the value of the excise taxes that would be collected from
cigarettes over time by adjusting the tax rate and tax brackets based on the increase in the consumer price index. Further,
under this proposal, old brands as well as new brands introduced thereafter would be subjected to a resurvey and
reclassification based on their respective values at the end of every two years in order to align them with the adjustment of the
excise tax rate and tax brackets due to the movement in the consumer price index.55
Of course, we now know that the DOF proposal, insofar as the periodic adjustment of tax rates and tax brackets, and the
periodic resurvey and reclassification of cigarette brands are concerned, did not gain approval from Congress. The House and
Senate pushed through with their own versions of the excise tax system on beers and cigarettes both denominated as H.B.
No. 7198. For convenience, we shall refer to the bill deliberated upon by the House as the House Version and that of the
Senate as the Senate Version.
The House’s Committee on Ways and Means, then chaired by Congressman Exequiel B. Javier (Congressman Javier),
roundly rejected the DOF proposal. Instead, in its Committee Report submitted to the plenary, it proposed a different excise
tax system which used a specific tax as a basic tax with an ad valorem comparator. Further, it deleted the proposal to have a
periodic adjustment of tax rates and the tax brackets as well as periodic resurvey and reclassification of cigarette brands, to
wit:
The rigidity of the specific tax system calls for the need for frequent congressional intervention to adjust the tax rates
to inflation and to keep pace with the expanding needs of government for more revenues. The DOF admits this flaw
inherent in the tax system it proposed. Hence, to obviate the need for remedial legislation, the DOF is asking
Congress to grant to the Commissioner the power to revise, one, the specific tax rates: and two, the price levels of
beer and cigarettes. What the DOF is asking, Mr. Speaker, is for Congress to delegate to the Commissioner of
Internal Revenue the power to fix the tax rates and classify the subjects of taxation based on their price levels for
purposes of fixing the tax rates. While we sympathize with the predicament of the DOF, it is not for Congress to
abdicate such power. The power sought to be delegated to be exercised by the Commissioner of Internal Revenue is
a legislative power vested by the Constitution in Congress pursuant to Section 1, Article VI of the Constitution.
Where the power is vested, there it must remain— in Congress, a body of representatives elected by the people.
Congress may not delegate such power, much less abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible, to the Commissioner of Internal Revenue is
fraught with ethical implications. The debates on how much revenue will be raised, how much money will be taken
from the pockets of taxpayers, will inexorably shift from the democratic Halls of Congress to the secret and non-
transparent corridors of unelected agencies of government, the Department of Finance and the Bureau of Internal
Revenue, which are not accountable to our people. We cannot countenance the shift for ethical reasons, lest we be
accused of betraying the trust reposed on this Chamber by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing power of the Commissioner of Internal
Revenue which will be triggered by inflation rates based on the consumer price index. Simply stated, Mr. Speaker,
the specific tax rates will be fixed by the Commissioner depending on the price levels of beers and cigarettes as
determined by the consumers’ price index. This is a novel idea, if not necessarily weird in the field of taxation. What if
the brewer or the cigarette manufacturer sells at a price below the consumers’ price index? Will it be taxed on the
basis of the consumer’s price index which is over and above its wholesale or retail price as the case may be? This is
a weird form of exaction where the tax is based not on what the brewer or manufacturer actually realized but on an
imaginary wholesale or retail price. This amounts to a taxation based on presumptive price levels and renders the
specific tax a presumptive tax. We hope, the DOF and the BIR will also honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumer’s price index as proposed by the DOF engenders
anti-trust concerns. The proposal if enacted into law will serve as a barrier to the entry of new players in the beer and
cigarette industries which are presently dominated by shared monopolies. A new player in these industries will be
denied business flexibility to fix its price levels to promote its product and penetrate the market as the price levels are
dictated by the consumer price index. The proposed tax regime, Mr. Speaker, will merely enhance the stranglehold
of the oligopolies in the beer and cigarette industries, thus, reversing the government’s policy of dismantling
monopolies and combinations in restraint of trade.56
For its part, the Senate’s Committee on Ways and Means, then chaired by Senator Juan Ponce Enrile (Senator Enrile),
developed its own version of the excise tax system on cigarettes. The Senate Version consisted of a four-tiered system and,
interestingly enough, contained a periodic excise tax rate and tax bracket adjustment as well as a periodic resurvey and
reclassification of brands provision ("periodic adjustment and reclassification provision," for brevity) to be conducted by the
DOF in coordination with the BIR and the National Statistics Office based on the increase in the consumer price index—
similar to the one proposed by the DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as amended, is hereby further amended to read as
follows:
"SEC. 142. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes packed by machine
the tax shall be Twelve pesos (P12.00) per pack;
(P6.50) per pack, the tax shall be Eight pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) up to Six pesos and
fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
tax shall be One peso (P1.00) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of this Act
shall be taxed under the highest classification of any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes under subparagraph (a), (b) and (c) hereof, including the
net retail prices for purposes of classification, shall be adjusted on the sixth of January three years after the
effectivity of this Act and every three years thereafter. The adjustment shall be in accordance with the
inflation rate measured by the average increase in the consumer price index over the three-year period. The
adjusted tax rates and net price levels shall be in force on the eighth of January.
Within the period hereinabove mentioned, the Secretary of Finance shall direct the conduct of a survey of
retail prices of each brand of cigarettes in coordination with the Bureau of Internal Revenue and the National
Statistics Office.
For purposes of this Section, net retail price shall mean the price at which the cigarette is sold on retail in 20 major
the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes in the initial year of implementation of this Act shall be based
on its average net retail price as of October 1, 1996. The said classification by brand shall remain in force
until January 7, 2000.
New brands shall be classified according to their current net retail price.57 (Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco (Senator Roco) expressed doubts as to the legality and
wisdom of putting a periodic adjustment and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed to be automatically adjusted upwards
based on a system of indexing tied up with the Consumers Price Index (CPI). Although I must add that we have
adopted a similar system in adjusting the personal tax exemption from income tax of our individual taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even then, we do note that this the first time we are
trying to put an automatic adjustment. My concern is, why do we propose now this automatic adjustment? What is
the reason that impels the committee? Maybe we can be enlightened and maybe we shall embrace it forthwith. But
what is the reason?
Senator Enrile: Mr. President, we will recall that in the House of Representatives, it has adopted a tax proposal on
these products based on a specific tax as a basic tax with an ad valorem comparator. The Committee on Ways and
Means of the Senate has not seen it fit to adopt this system, but it recognized the possibility that there may be an
occasion where the price movement in the country might unwarrantedly move upwards, in which case, if we peg the
government to a specific tax rate of P6.30, P9.30 and P12.30 for beer, since we are talking of beer, 58 the
government might lose in the process.
In order to consider the interest of the government in this, Mr. President, and in order to obviate the possibility that
some of these products categorized under the different tiers with different specific tax rates from moving upwards
and piercing their own tiers and thereby expose themselves to an incremental tax of higher magnitude, it was felt that
we should adopt a system where, in spite of any escalation in the price of these products in the future, the tax rates
could be adjusted upwards so that none of these products would leave their own tier. That was the basic principle
under which we crafted this portion of the tax proposal.
Senator Roco: Mr. President, we certainly share the judgment of the distinguished gentleman as regards the
comparator provision in the House of Representatives and we appreciate the reasons given. But we are under the
impression that the House also, aside from the comparator, has an adjustment clause that is fixed. It has fixed rates
for the adjustment. So that one of the basic differences between the Senate proposed version now and the House
version is that, the House of Representatives has manifested its will and judgment as regards the tax to which we will
adjust, whereas the Senate version relegates fundamentally that judgment to the Department of Finance.
Senator Enrile: That is correct, Mr. President, because we felt that in imposing a fixed adjustment, we might be fixing
an amount that is either too high or too low. We cannot foresee the economic trends in this country over a period of
two years, three years, let alone ten years. So we felt that a mechanism ought to be adopted in order to serve the
interest of the government, the interest of the producers, and the interest of the consuming public.
Senator Roco: This is where, Mr. President, my policy difficulties start. Under the Constitution— I think it is Article VI,
Section 24, and it was the distinguished chairman of the Committee on Ways and Means who made this Chamber
very conscious of this provision— revenue measures and tariff measures shall originate exclusively from the House
of Representatives.
The reason for this, Mr. President, is, there is a long history why the House of Representatives must originate
judgments on tax. The House members represent specific districts. They represent specific constituencies, and the
whole history of parliamentarism, the whole history of Congress as an institution is founded on the proposition that
the direct representatives of the people must speak about taxes.
Mr. President, while the Senate can concur and can introduce amendments, the proposed change here is radical.
This is the policy difficulty that I wish to clarify with the gentleman because the judgment call now on the amount of
tax to be imposed is not coming from Congress. It is shifted to the Department of Finance. True, the Secretary of
Finance may have been the best finance officer two years ago and now the best finance officer in Asia, but that does
not make him qualified to replace the judgment call of the House of Representatives. That is my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this rate beforehand. The computation of the
rate is the only thing that was left to the Department of Finance as a tax implementor of Congress. This is not
unusual because we have already, as I said, adopted a system similar to this. If we adjust the personal exemption of
an individual taxpayer, we are in effect adjusting the applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President, is that we depart precisely from the mandate
of the Constitution that judgment on revenue must emanate from Congress. Here, it is shifted to the Department of
Finance for no visible or patent reason insofar as I could understand. The only difference is, who will make the
judgment? Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I should. My understanding of the Constitution is
that all revenue measures must emanate from the House. That is all the Constitution says.
Now, it does not say that the judgment call must belong to the House. The judgment call can belong both to the
House and to the Senate. We can change whatever proposal the House did. Precisely, we are now crafting a
measure, and we are saying that this is the rate subject to an adjustment which we also provide. We are not giving
any unusual power to the Secretary of Finance because we tell him, "This is the formula that you must adopt in
arriving at the adjustment so that you do not have to come back to us."59
Apart from his doubts as to the legality of the delegation of taxing power to the DOF and BIR, Senator Roco also voiced out
his concern about the possible abuse and corruption that will arise from the periodic adjustment and reclassification provision.
Continuing—
Senator Roco: Mr. President, if that is the argument, that the distinguished gentleman has a different legal
interpretation, we will then now examine the choice. Because his legal interpretation is different from mine, then the
issues becomes: Is it more advantageous that this judgment be exercised by the House? Should we not
concur or modify in terms of the exercise by the House of its power or are we better off giving this judgment
call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more advantageous to fix the rate so that even if we
modify the rates identified by Congress, it is better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate to us how this will be done? On page 8, lines
5 to 9, there is a provision here as to when the Secretary of Finance shall direct the conduct of survey of retail prices
of each brand of fermented liquor in coordination with the Bureau of Internal Revenue and the National Statistics
Office.
These offices are not exactly noted, Mr. President, for having been sanctified by the Holy Spirit in their noble
intentions. x x x60 (Emphasis supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-year period, the Secretary of Finance shall
direct the conduct of the survey. How? When? Which retail prices and what brand shall he consider? When he
coordinates with the Bureau of Internal Revenue, what is the Bureau of Internal Revenue supposed to be doing?
What is the National Statistics Office supposed to be doing, and under what guides and standards?
May the gentleman wish to demonstrate how this will be done? My point, Mr. President, is, by giving the
Secretary of Finance, the BIR and the National Statistics Office discretion over a two-year period will invite
corruption and arbitrariness, which is more dangerous than letting the House of Representatives and this
Chamber set the adjustment rate. Why not set the adjustment rate? Why should Congress not exercise that
judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider choosing the judgment of this Chamber and
the House of Representatives over a delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has won awards, and I also trust the
undersecretary. But that is beside the point. Tomorrow, they may not be there.61 (Emphasis supplied)
This point was further dissected by the two senators. There was a genuine difference of opinion as to which system— one
with a fixed excise tax rate and classification or the other with a periodic adjustment of excise tax rate and reclassification—
was less susceptible to abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of these products from the viewpoint of exerted pressures
because of the understandable impact of this measure on the pockets of the major players producing these products,
the committee felt that perhaps to lessen such pressures, it is best that we now establish a norm where the tax will
be adjusted without incurring too much political controversy as has happened in the case of this proposal.
Senator Roco: But that is exactly the same reason we say we must rely upon Congress because Congress, if it is
subjected to pressure, at least balances off because of political factors.
When the Secretary of Finance is now subjected to pressure, are we saying that the Secretary of Finance and the
Department of Finance is better-suited to withstand the pressure? Or are we saying "Let the Finance Secretary
decide whom to yield"?
I am saying that the temptation and the pressure on the Secretary of Finance is more dangerous and more
corruption-friendly than ascertaining for ourselves now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree with this representation, but in my humble
opinion, this formulation is less susceptible to pressure because there is a definite point of reference which is the
consumer price index, and that consumer price index is not going to be used only for this purpose. The CPI is used
for a national purpose, and there is less possibility of tinkering with it.62
Further, Senator Roco, like Congressman Javier, expressed the view that the periodic adjustment and reclassification
provision would create an anti-competitive atmosphere. Again, Senators Roco and Enrile had genuine divergence of opinions
on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may, in fact, be disadvantageous to both
companies, whether it is the Lucio Tan companies or the San Miguel companies. If we have to adjust our marketing
position every two years based on the adjustment clause, the established company may survive, but the new ones
will have tremendous difficulty. Therefore, this provision tends to indicate an anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new companies— assuming there may be new
companies and we want to encourage them because of the old point of liberalization— will be at a disadvantage
under this situation. If this observation will find receptivity in the policy consideration of the distinguished Gentleman,
maybe we can also further, later on, seek amendments to this automatic adjustment clause in some manner.
Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of this provision with respect to a new
entrant, because a new entrant will not just come in without studying the market. He is a lousy businessman if he will
just come in without studying the market. If he comes in, he will determine at what retail price level he will market his
product, and he will be coming under any of the tiers depending upon his net retail price. Therefore, I do not see how
this particular provision will affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not resort to debate until this evening, and we will
have to look for other ways of resolving the policy options.
Let me just close that particular area of my interpellation, by summarizing the points we were hoping could be
clarified.
1. That the automatic adjustment clause is at best questionable in law.
2. It is corruption-friendly in the sense that it shifts the discretion from the House of Representatives and this
Chamber to the Secretary of Finance, no matter how saintly he may be.
3. There is,— although the judgment call of the gentleman disagrees— to our view, an anticompetitive
situation that is geared at…63
After these lengthy exchanges, it appears that the views of Senator Enrile were sustained by the Senate Body because the
Senate Version was passed on Third Reading without substantially altering the periodic adjustment and reclassification
provision.
It was actually at the Bicameral Conference Committee level where the Senate Version underwent major changes. The
Senate Panel prevailed upon the House Panel to abandon the basic excise tax rate and ad valorem comparator as the means
to determine the applicable excise tax rate. Thus, the Senate’s four-tiered system was retained with minor adjustments as to
the excise tax rate per tier. However, the House Panel prevailed upon the Senate Panel to delete the power of the DOF and
BIR to periodically adjust the excise tax rate and tax brackets, and periodically resurvey and reclassify the cigarette brands
based on the increase in the consumer price index.
In lieu thereof, the classification of existing brands based on their average net retail price as of October 1, 1996 was "frozen"
and a fixed across-the-board 12% increase in the excise tax rate of each tier after three years from the effectivity of the Act
was put in place. There is a dearth of discussion in the deliberations as to the applicability of the freezing mechanism to new
brands after their classification is determined based on their current net retail price. But a plain reading of the text of RA 8240,
even before its amendment by RA 9334, as well as the previously discussed deliberations would readily lead to the
conclusion that the intent of Congress was to likewise apply the freezing mechanism to new brands. Precisely, Congress
rejected the proposal to allow the DOF and BIR to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify cigarettes brands which would have encompassed old and new brands alike. Thus, it
would be absurd for us to conclude that Congress intended to allow the periodic reclassification of new brands by the BIR
after their classification is determined based on their current net retail price. We shall return to this point when we tackle the
second issue.
In explaining the changes made at the Bicameral Conference Committee level, Senator Enrile, in his report to the Senate
plenary, noted that the fixing of the excise tax rates was done to avoid confusion.64 Congressman Javier, for his part, reported
to the House plenary the reasons for fixing the excise tax rate and freezing the classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen classification, rejects the Senate version
which seeks to abdicate the power of Congress to tax by pegging the rates as well as the classification of sin
products to consumer price index which practically vests in the Secretary of Finance the power to fix the rates
and to classify the products for tax purposes.65 (Emphasis supplied)
Congressman Javier later added that the frozen classification was intended to give stability to the industry as the BIR would
be prevented from tinkering with the classification since it would remain unchanged despite the increase in the net retail prices
of the previously classified brands.66 This would also assure the industry players that there would be no new impositions as
long as the law is unchanged.67
From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary, or motivated
by a hostile or oppressive attitude to unduly favor older brands over newer brands. Congress was unequivocal in its
unwillingness to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically
resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR.
Congress doubted the constitutionality of such delegation of power, and likewise, considered the ethical implications thereof.
Curiously, the classification freeze provision was put in place of the periodic adjustment and reclassification provision because
of the belief that the latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is being
foisted by petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of Congress’s earnest efforts to improve the
efficiency and effectivity of the tax administration over sin products while trying to balance the same with other state interests.
In particular, the questioned provision addressed Congress’s administrative concerns regarding delegating too much authority
to the DOF and BIR as this will open the tax system to potential areas for abuse and corruption. Congress may have
reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers would
address the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the DOF proposal and the Senate Version, the
periodic reclassification of brands would tempt the cigarette manufacturers to manipulate their price levels or bribe the tax
implementers in order to allow their brands to be classified at a lower tax bracket even if their net retail prices have already
migrated to a higher tax bracket after the adjustment of the tax brackets to the increase in the consumer price index.
Presumably, this could be done when a resurvey and reclassification is forthcoming. As briefly touched upon in the
Congressional deliberations, the difference of the excise tax rate between the medium-priced and the high-priced tax brackets
under RA 8240, prior to its amendment, was P3.36. For a moderately popular brand which sells around 100 million packs per
year, this easily translates to P336,000,000.68 The incentive for tax avoidance, if not outright tax evasion, would clearly be
present. Then again, the tax implementers may use the power to periodically adjust the tax rate and reclassify the brands as a
tool to unduly oppress the taxpayer in order for the government to achieve its revenue targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin products to remove these potential areas of
abuse and corruption from both the side of the taxpayer and the government. Without doubt, the classification freeze
provision was an integral part of this overall plan. This is in line with one of the avowed objectives of the assailed law "to
simplify the tax administration and compliance with the tax laws that are about to unfold in order to minimize losses arising
from inefficiencies and tax avoidance scheme, if not outright tax evasion."69 RA 9334 did not alter this classification freeze
provision of RA 8240. On the contrary, Congress affirmed this freezing mechanism by clarifying the wording of the law. We
can thus reasonably conclude, as the deliberations on RA 9334 readily show, that the administrative concerns in tax
administration, which moved Congress to enact the classification freeze provision in RA 8240, were merely continued by RA
9334. Indeed, administrative concerns may provide a legitimate, rational basis for legislative classification.70 In the case at
bar, these administrative concerns in the measurement and collection of excise taxes on sin products are readily apparent as
afore-discussed.
Aside from the major concern regarding the elimination of potential areas for abuse and corruption from the tax administration
of sin products, the legislative deliberations also show that the classification freeze provision was intended to generate
buoyant and stable revenues for government. With the frozen tax classifications, the revenue inflow would remain stable and
the government would be able to predict with a greater degree of certainty the amount of taxes that a cigarette manufacturer
would pay given the trend in its sales volume over time. The reason for this is that the previously classified cigarette brands
would be prevented from moving either upward or downward their tax brackets despite the changes in their net retail prices in
the future and, as a result, the amount of taxes due from them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the government.71
All in all, the classification freeze provision addressed Congress’s administrative concerns in the simplification of tax
administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can be no denial of the equal protection of the
laws since the rational-basis test is amply satisfied.
Going now to the contention of petitioner that the classification freeze provision unduly favors older brands over newer
brands, we must first contextualize the basis of this claim. As previously discussed, the evidence presented by the petitioner
merely showed that in 2004, Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the other, would have been
taxed at the same rate had the classification freeze provision been not in place. But due to the operation of the classification
freeze provision, Lucky Strike was taxed higher. From here, petitioner generalizes that this differential tax treatment arising
from the classification freeze provision adversely impacts the fairness of the playing field in the industry, particularly, between
older and newer brands. Thus, it is virtually impossible for new brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact extent of such impact. It has not been shown that the net retail
prices of other older brands previously classified under this classification system have already pierced their tax brackets, and,
if so, how this has affected the overall competition in the market. Further, it does not necessarily follow that newer brands
cannot compete against older brands because price is not the only factor in the market as there are other factors like
consumer preference, brand loyalty, etc. In other words, even if the newer brands are priced higher due to the differential tax
treatment, it does not mean that they cannot compete in the market especially since cigarettes contain addictive ingredients
so that a consumer may be willing to pay a higher price for a particular brand solely due to its unique formulation. It may also
be noted that in 2003, the BIR surveyed 29 new brands72 that were introduced in the market after the effectivity of RA 8240 on
January 1, 1997, thus negating the sweeping generalization of petitioner that the classification freeze provision has become
an insurmountable barrier to the entry of new brands. Verily, where there is a claim of breach of the due process and equal
protection clauses, considering that they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.73
Be that as it may, petitioner’s evidence does suggest that, at least in 2004, Philip Morris and Marlboro, older brands, would
have been taxed at the same rate as Lucky Strike, a newer brand, due to certain conditions (i.e., the increase of the older
brands’ net retail prices beyond the tax bracket to which they were previously classified after the lapse of some time) were it
not for the classification freeze provision. It may be conceded that this has adversely affected, to a certain extent, the ability of
petitioner to competitively price its newer brands vis-à-vis the subject older brands. Thus, to a limited extent, the assailed law
seems to derogate one of its avowed objectives, i.e. promoting fair competition among the players in the industry. Yet, will this
occurrence, by itself, render the assailed law unconstitutional on equal protection grounds?
We answer in the negative.
Whether Congress acted improvidently in derogating, to a limited extent, the state’s interest in promoting fair competition
among the players in the industry, while pursuing other state interests regarding the simplification of tax administration of sin
products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue generation, and
ease of projection of revenues through the classification freeze provision, and whether the questioned provision is the best
means to achieve these state interests, necessarily go into the wisdom of the assailed law which we cannot inquire into, much
less overrule. The classification freeze provision has not been shown to be precipitated by a veiled attempt, or hostile attitude
on the part of Congress to unduly favor older brands over newer brands. On the contrary, we must reasonably assume, owing
to the respect due a co-equal branch of government and as revealed by the Congressional deliberations, that the enactment
of the questioned provision was impelled by an earnest desire to improve the efficiency and effectivity of the tax administration
of sin products. For as long as the legislative classification is rationally related to furthering some legitimate state interest, as
here, the rational-basis test is satisfied and the constitutional challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress, which state interest is superior
over another, or which method is better suited to achieve one, some or all of the state’s interests, or what these interests
should be in the first place. This policy-determining power, by constitutional fiat, belongs to Congress as it is its function to
determine and balance these interests or choose which ones to pursue. Time and again we have ruled that the judiciary does
not settle policy issues. The Court can only declare what the law is and not what the law should be. Under our system of
government, policy issues are within the domain of the political branches of government and of the people themselves as the
repository of all state power.74 Thus, the legislative classification under the classification freeze provision, after having been
shown to be rationally related to achieve certain legitimate state interests and done in good faith, must, perforce, end our
inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives (i.e.
promoting fair competition among the players in the industry) would suggest that, by Congress’s own standards, the current
excise tax system on sin products is imperfect. But, certainly, we cannot declare a statute unconstitutional merely because it
can be improved or that it does not tend to achieve all of its stated objectives.75 This is especially true for tax legislation which
simultaneously addresses and impacts multiple state interests.76 Absent a clear showing of breach of constitutional limitations,
Congress, owing to its vast experience and expertise in the field of taxation, must be given sufficient leeway to formulate and
experiment with different tax systems to address the complex issues and problems related to tax administration. Whatever
imperfections that may occur, the same should be addressed to the democratic process to refine and evolve a taxation
system which ideally will achieve most, if not all, of the state’s objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of Congress and the method by which the latter
sought to achieve the same. But its remedy is with Congress and not this Court. As succinctly articulated in Vance v.
Bradley:77
The Constitution presumes that, absent some reason to infer antipathy, even improvident decisions will eventually be
rectified by the democratic process, and that judicial intervention is generally unwarranted no matter how unwisely
we may think a political branch has acted. Thus, we will not overturn such a statute unless the varying treatment of
different groups or persons is so unrelated to the achievement of any combination of legitimate purposes that we can
only conclude that the legislature's actions were irrational.78
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue Regulations No. 9-2003, Revenue
Regulations No. 22-2003 and Revenue Memorandum Order No. 6-2003, are invalid insofar as they empower the BIR to
reclassify or update the classification of new brands of cigarettes based on their current net retail prices every two years or
earlier. It claims that RA 8240, even prior to its amendment by RA 9334, did not authorize the BIR to conduct said periodic
resurvey and reclassification.
The questioned provisions are found in the following sections of the assailed issuances:
(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-
2003, viz:
For the purpose of establishing or updating the tax classification of new brands and variant(s) thereof, their current
net retail price shall be reviewed periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new brands shall remain in force until the same is
altered or changed through the issuance of an appropriate Revenue Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum Order No.
6-2003, insofar as pertinent to cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for purposes of determining the current retail prices of new brands of
cigarettes and alcohol products introduced in the market on or after January 1, 1997, shall be undertaken in the
following instances:
xxxx
b. For reclassification of new brands of said excisable products that were introduced in the market after January 1,
1997.
xxxx
4. The determination of the current retail prices of new brands of the aforesaid excisable products shall be initiated
as follows:
xxxx
b. After the lapse of the prescribed two-year period or as the Commissioner may otherwise direct, the appropriate tax
reclassification of these brands based on the current net retail prices thereof shall be determined by a survey to be
conducted upon a written directive by the Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner, Large Taxpayers Service, Heads, Excise
Tax Areas, and Regional Directors of all Revenue Regions, except Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall be
issued by the Commissioner for the submission of the list of major supermarkets/retail outlets where the above
excisable products are being sold, as well as the list of selected revenue officers who shall be designated to conduct
the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall be submitted directly to the Chief, LT
Assistance Division II (LTAD II), National Office for consolidation. On the other hand, the results of the survey
conducted in Revenue Regions other than Revenue Region Nos. 4 to 9, shall be submitted to the Office of the
Regional Director for regional consolidation. The consolidated regional survey, together with the accomplished
survey forms shall be transmitted to the Chief, LTAD II for national consolidation within three (3) days from date of
actual receipt from the survey teams. The LTAD II shall be responsible for the evaluation and analysis of the
submitted survey forms and the preparation of the recommendation for the updating/revision of the tax classification
of each brand of cigarettes and alcohol products. The said recommendation, duly validated by the ACIR, LTS, shall
be submitted to the Commissioner for final review within ten (10) days from the date of actual receipt of complete
reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised tax classification of the different new brands of cigarettes
and alcohol products, the appropriate revenue regulations shall be prepared and submitted for approval by the
Secretary of Finance.
xxxx
III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the identification of brands to be surveyed, supermarkets/retail
outlets where the survey shall be conducted, and the personnel selected to conduct the survey.
xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey pursuant to the provisions of Item II.2 of this Order
containing the complete description of each brand, existing net retail price and the corresponding tax rate thereof.
ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets within the territorial jurisdiction of the
concerned revenue regions where the survey will be conducted to be used as basis in the issuance of Mission
Orders. Ensure that the minimum number of establishments to be surveyed, as prescribed under existing revenue
laws and regulations, is complied with. In addition, the names and designations of revenue officers selected to
conduct the survey shall be clearly indicated opposite the names of the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1, 1997, the BIR issued Revenue Regulations No. 1-97,
dated December 13, 1996, which mandates a one-time classification only.79 Upon their launch, new brands shall be initially
taxed based on their suggested net retail price. Thereafter, a survey shall be conducted within three (3) months to determine
their current net retail prices and, thus, fix their official tax classifications. However, the BIR made a turnaround by issuing
Revenue Regulations No. 9-2003, dated February 17, 2003, which partly amended Revenue Regulations No. 1-97, by
authorizing the BIR to periodically reclassify new brands (i.e., every two years or earlier) based on their current net retail
prices. Thereafter, the BIR issued Revenue Memorandum Order No. 6-2003, dated March 11, 2003, prescribing the
guidelines on the implementation of Revenue Regulations No. 9-2003. This was patent error on the part of the BIR for being
contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations
9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC
because they authorize the Commissioner of Internal Revenue to update the tax classification of new brands every two years
or earlier subject only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is such authority
granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a prerogative of
the legislature which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent was for new brands to benefit from the same freezing
mechanism accorded to Annex "D" brands. To reiterate, in enacting RA 8240, Congress categorically rejected the DOF
proposal and Senate Version which would have empowered the DOF and BIR to periodically adjust the excise tax rate and
tax brackets, and to periodically resurvey and reclassify cigarette brands. (This resurvey and reclassification would have
naturally encompassed both old and new brands.) It would thus, be absurd for us to conclude that Congress intended to allow
the periodic reclassification of new brands by the BIR after their classification is determined based on their current net retail
price while limiting the freezing of the classification to Annex "D" brands. Incidentally, Senator Ralph G. Recto expressed the
following views during the deliberations on RA 9334, which later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a specific tax system [under R.A. 8240], when
Congress did not index the brackets, and Congress did not index the rates but only provided for a one rate increase
in the year 2000, we shifted from ad valorem which was based on value to a system of specific which is based on
volume. Congress then, in effect, determined the classification based on the prices at that particular period of time
and classified these products accordingly.
Of course, Congress then decided on what will happen to the new brands or variants of existing brands. To favor
government, a variant would be classified as the highest rate of tax for that particular brand. In case of a new brand,
Mr. President, then the BIR should classify them. But I do not think it was the intention of Congress then to give the
BIR the authority to reclassify them every so often. I do not think it was the intention of Congress to allow the BIR to
classify a new brand every two years, for example, because it will be arbitrary for the BIR to do so. x x x80 (Emphasis
supplied)
For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the freezing mechanism is concerned,
must be seen merely as underscoring the legislative intent already in place then, i.e. new brands as being covered by the
freezing mechanism after their classification based on their current net retail prices.
Unfortunately for petitioner, this result will not cause a downward reclassification of Lucky Strike. It will be recalled that
petitioner introduced Lucky Strike in June 2001. However, as admitted by petitioner itself, the BIR did not conduct the required
market survey within three months from product launch. As a result, Lucky Strike was never classified based on its actual
current net retail price. Petitioner failed to timely seek redress to compel the BIR to conduct the requisite market survey in
order to fix the tax classification of Lucky Strike. In the meantime, Lucky Strike was taxed based on its suggestednet retail
price of P9.90 per pack, which is within the high-priced tax bracket. It was only after the lapse of two years or in 2003 that the
BIR conducted a market survey which was the first time that Lucky Strike’s actual current net retail price was surveyed and
found to be from P10.34 to P11.53 per pack, which is within the premium-priced tax bracket. The case of petitioner falls under
a situation where there was no reclassification based on its current net retail price which would have been invalid as
previously explained. Thus, we cannot grant petitioner’s prayer for a downward reclassification of Lucky Strike because it was
never reclassified by the BIR based on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued Revenue Regulations No. 22-2003 which implemented the
revised tax classifications of new brands based on their current net retail prices through the market survey conducted
pursuant to Revenue Regulations No. 9-2003. Annex "A" of Revenue Regulations No. 22-2003 lists the result of the market
survey and the corresponding recommended tax classification of the new brands therein aside from Lucky Strike. However,
whether these other brands were illegally reclassified based on their actual current net retail prices by the BIR must be
determined on a case-to-case basis because it is possible that these brands were classified based on their actual current net
retail price for the first time in the year 2003 just like Lucky Strike. Thus, we shall not make any pronouncement as to the
validity of the tax classifications of the other brands listed therein.
Finally, it must be noted that RA 9334 introduced changes in the manner by which the current net retail price of a new brand
is determined and how its classification is permanently fixed, to wit:
New brands shall mean a brand registered after the date of effectivity of R.A. No. 8240 [on January 1, 1997].
manufactured or imported cigarettes are intended by the manufacture or importer to be sold on retail in major
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue
shall validate the suggested net retail price of the new brand against the net retail price as defined herein
and determine the correct tax bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a particular new brand of
cigarettes shall be classified; Provided however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 and December 31, 2003 shall remain in the classification under which the Bureau of
Internal Revenue has determined them to belong as of December 31, 2003. Such classification of new brands
and brands introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an
act of Congress. (Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-2003 should be deemed modified by the
above provisions from the date of effectivity of RA 9334 on January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue
Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, as pertinent to cigarettes packed by machine, are invalid insofar as they grant the BIR the
power to reclassify or update the classification of new brands every two years or earlier. Further, these provisions are deemed
modified upon the effectivity of RA 9334 on January 1, 2005 insofar as the manner of determining the permanent
classification of new brands is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its implementing rules and regulations violate the General
Agreement on Tariffs and Trade (GATT) of 1947, as amended, specifically, Paragraph 2, Article III, Part II:
2. The products of the territory of any contracting party imported into the territory of any other contracting party shall
not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied,
directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or
other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph
1.
It claims that it is the duty of this Court to correct, in favor of the GATT, whatever inconsistency exists between the assailed
law and the GATT in order to prevent triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.
We disagree.
The classification freeze provision uniformly applies to all newly introduced brands in the market, whether imported or locally
manufactured. It does not purport to single out imported cigarettes in order to unduly favor locally produced ones. Further,
petitioner’s evidence was anchored on the alleged unequal tax treatment between old and new brands which involves a
different frame of reference vis-à-vis local and imported products. Petitioner has, therefore, failed to clearly prove its case,
both factually and legally, within the parameters of the GATT.
At any rate, even assuming arguendo that petitioner was able to prove that the classification freeze provision violates the
GATT, the outcome would still be the same. The GATT is a treaty duly ratified by the Philippine Senate and under Article VII,
Section 2181 of the Constitution, it merely acquired the status of a statute.82 Applying the basic principles of statutory
construction in case of irreconcilable conflict between statutes, RA 8240, as amended by RA 9334, would prevail over the
GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin products. Thus, in Abbas v.
Commission on Elections,83 we had occasion to explain:
Petitioners premise their arguments on the assumption that the Tripoli Agreement is part of the law of the land, being
a binding international agreement. The Solicitor General asserts that the Tripoli Agreement is neither a binding
treaty, not having been entered into by the Republic of the Philippines with a sovereign state and ratified according to
the provisions of the 1973 or 1987 Constitutions, nor a binding international agreement.
We find it neither necessary nor determinative of the case to rule on the nature of the Tripoli Agreement and its
binding effect on the Philippine Government whether under public international or internal Philippine law. In the first
place, it is now the Constitution itself that provides for the creation of an autonomous region in Muslim Mindanao.
The standard for any inquiry into the validity of R.A. No. 6734 would therefore be what is so provided in the
Constitution. Thus, any conflict between the provisions of R.A. No. 6734 and the provisions of the Tripoli Agreement
will not have the effect of enjoining the implementation of the Organic Act. Assuming for the sake of argument that
the Tripoli Agreement is a binding treaty or international agreement, it would then constitute part of the law of the
land. But as internal law it would not be superior to R.A. No. 6734, an enactment of the Congress of the Philippines,
rather it would be in the same class as the latter [SALONGA, PUBLIC INTERNATIONAL LAW 320 (4th ed., 1974),
citing Head Money Cases, 112 U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, if at all, R.A. No.
6734 would be amendatory of the Tripoli Agreement, being a subsequent law. Only a determination by this Court that
R.A. No. 6734 contravenes the Constitution would result in the granting of the reliefs sought. (Emphasis supplied)
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial Court of Makati, Branch 61, in
Civil Case No. 03-1032, is AFFIRMED with MODIFICATION. As modified, this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-
2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum
Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are INVALID insofar as they grant the BIR the power
to reclassify or update the classification of new brands every two years or earlier.
SO ORDERED.
G.R. No. 180909 January 19, 2011
EXXONMOBIL PETROLEUM AND CHEMICAL HOLDINGS, INC. - PHILIPPINE BRANCH, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 filed by petitioner Exxonmobil Petroleum and Chemical Holdings, Inc. -
Philippine Branch (Exxon) to set aside the September 7, 2007 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc)
in CTA E.B. No. 204, and its November 27, 2007 Resolution2 denying petitioner’s motion for reconsideration.
THE FACTS
Petitioner Exxon is a foreign corporation duly organized and existing under the laws of the State of Delaware, United States of
America.3 It is authorized to do business in the Philippines through its Philippine Branch, with principal office address at the
17/F The Orient Square, Emerald Avenue, Ortigas Center, Pasig City.4
Exxon is engaged in the business of selling petroleum products to domestic and international carriers.5 In pursuit of its
business, Exxon purchased from Caltex Philippines, Inc. (Caltex) and Petron Corporation (Petron) Jet A-1 fuel and other
petroleum products, the excise taxes on which were paid for and remitted by both Caltex and Petron.6Said taxes, however,
were passed on to Exxon which ultimately shouldered the excise taxes on the fuel and petroleum products.7
From November 2001 to June 2002, Exxon sold a total of 28,635,841 liters of Jet A-1 fuel to international carriers, free of
excise taxes amounting to Php105,093,536.47.8 On various dates, it filed administrative claims for refund with the Bureau of
Internal Revenue (BIR) amounting to Php105,093,536.47.9
On October 30, 2003, Exxon filed a petition for review with the CTA10 claiming a refund or tax credit in the amount of
Php105,093,536.47, representing the amount of excise taxes paid on Jet A-1 fuel and other petroleum products it sold to
international carriers from November 2001 to June 2002.11
Exxon and the Commissioner of Internal Revenue (CIR) filed their Joint Stipulation of Facts and Issues on June 24, 2004,
presenting a total of fourteen (14) issues for resolution.12
During Exxon’s preparation of evidence, the CIR filed a motion dated January 28, 2005 to first resolve the issue of whether or
not Exxon was the proper party to ask for a refund.13 Exxon filed its opposition to the motion on March 15, 2005.
On July 27, 2005, the CTA First Division issued a resolution14 sustaining the CIR’s position and dismissing Exxon’s claim for
refund. Exxon filed a motion for reconsideration, but this was denied on July 27, 2006.15
Exxon filed a petition for review16 with the CTA En Banc assailing the July 27, 2005 Resolution of the CTA First Division which
dismissed the petition for review, and the July 27, 2006 Resolution17 which affirmed the said ruling.
RULING OF THE COURT OF TAX APPEALS EN BANC
In its Decision dated September 7, 2007, the CTA En Banc dismissed the petition for review and affirmed the two resolutions
of the First Division dated July 27, 2005 and July 27, 2006. Exxon filed a motion for reconsideration, but it was denied on
November 27, 2007.
Citing Sections 130 (A)(2)18 and 204 (C) in relation to Section 135 (a)19 of the National Internal Revenue Code of 1997 (NIRC),
the CTA ruled that in consonance with its ruling in several cases,20 only the taxpayer or the manufacturer of the petroleum
products sold has the legal personality to claim the refund of excise taxes paid on petroleum products sold to international
carriers.21
The CTA stated that Section 130(A)(2) makes the manufacturer or producer of the petroleum products directly liable for the
payment of excise taxes.22 Therefore, it follows that the manufacturer or producer is the taxpayer.23
This determination of the identity of the taxpayer designated by law is pivotal as the NIRC provides that it is only the taxpayer
who "has the legal personality to ask for a refund in case of erroneous payment of taxes."24
Further, the excise tax imposed on manufacturers upon the removal of petroleum products by oil companies is an indirect tax,
or a tax which is primarily paid by persons who can shift the burden upon someone else.25 The CTA cited the cases
of Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue,26 Contex Corporation v. Commissioner of Internal
Revenue,27 and Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,28 and explained that
with indirect taxes, "although the burden of an indirect tax can be shifted or passed on to the purchaser of the goods, the
liability for the indirect tax remains with the manufacturer."29 Moreover, "the manufacturer has the option whether or not to shift
the burden of the tax to the purchaser. When shifted, the amount added by the manufacturer becomes a part of the price,
therefore, the purchaser does not really pay the tax per sebut only the price of the commodity."30
Going by such logic, the CTA concluded that a refund of erroneously paid or illegally received tax can only be made in favor of
the taxpayer, pursuant to Section 204(C) of the NIRC.31 As categorically ruled in the Cebu Portland
Cement32 and Contex33 cases, in the case of indirect taxes, it is the manufacturer of the goods who is entitled to claim any
refund thereof.34 Therefore, it follows that the indirect taxes paid by the manufacturers or producers of the goods cannot be
refunded to the purchasers of the goods because the purchasers are not the taxpayers.35
The CTA also emphasized that tax refunds are in the nature of tax exemptions and are, thus, regarded as in derogation of
sovereign authority and construed strictissimi juris against the person or entity claiming the exemption.36
Finally, the CTA disregarded Exxon’s argument that "in effectively holding that only petroleum products purchased directly
from the manufacturers or producers are exempt from excise taxes, the First Division of [the CTA] sanctioned a universal
amendment of existing bilateral agreements which the Philippines have with other countries, in violation of the basic principle
of ‘pacta sunt servanda.’"37 The CTA explained that the findings of fact of the First Division (that when Exxon sold the Jet A-1
fuel to international carriers, it did so free of tax) negated any violation of the exemption from excise tax of the petroleum
products sold to international carriers. Second, the right of international carriers to invoke the exemption granted under
Section 135(a) of the NIRC was neither affected nor restricted in any way by the ruling of the First Division. At the point of
sale, the international carriers were free to invoke the exemption from excise taxes of the petroleum products sold to them.
Lastly, the lawmaking body was presumed to have enacted a later law with the knowledge of all other laws involving the same
subject matter.38
THE ISSUES
Petitioner now raises the following issues in its petition for review:
I.
WHETHER THE ASSAILED DECISION AND RESOLUTION ERRONEOUSLY PROHIBITED PETITIONER, AS THE
DISTRIBUTOR AND VENDOR OF PETROLEUM PRODUCTS TO INTERNATIONAL CARRIERS REGISTERED IN
FOREIGN COUNTRIES WHICH HAVE EXISTING BILATERAL AGREEMENTS WITH THE PHILIPPINES, FROM
CLAIMING A REFUND OF THE EXCISE TAXES PAID THEREON; AND
II.
WHETHER THE ASSAILED DECISIONS ERRED IN AFFIRMING THE DISMISSAL OF PETITIONER’S CLAIM FOR
REFUND BASED ON RESPONDENT’S "MOTION TO RESOLVE FIRST THE ISSUE OF WHETHER OR NOT THE
PETITIONER IS THE PROPER PARTY THAT MAY ASK FOR A REFUND," SINCE SAID MOTION IS ESSENTIALLY A
MOTION TO DISMISS, WHICH SHOULD HAVE BEEN DENIED OUTRIGHT BY THE COURT OF TAX APPEALS FOR
HAVING BEEN FILED OUT OF TIME.
RULING OF THE COURT
I. On respondent’s "motion to resolve first the issue of whether or not the petitioner is the proper party that may ask
for a refund."
For a logical resolution of the issues, the court will tackle first the issue of whether or not the CTA erred in granting
respondent’s Motion to Resolve First the Issue of Whether or Not the Petitioner is the Proper Party that may Ask for a
Refund.39 In said motion, the CIR prayed that the CTA First Division resolve ahead of the other stipulated issues the sole
issue of whether petitioner was the proper party to ask for a refund.40
Exxon opines that the CIR’s motion is essentially a motion to dismiss filed out of time,41 as it was filed afterpetitioner began
presenting evidence42 more than a year after the filing of the Answer.43 By praying that Exxon be declared as not the proper
party to ask for a refund, the CIR asked for the dismissal of the petition, as the grant of the Motion to Resolve would bring trial
to a close.44
Moreover, Exxon states that the motion should have also complied with the three-day notice and ten-day hearing rules
provided in Rule 15 of the Rules of Court.45 Since the CIR failed to set its motion for any hearing before the filing of the
Answer, the motion should have been considered a mere scrap of paper.46
Finally, citing Maruhom v. Commission on Elections and Dimaporo,47 Exxon argues that a defendant who desires a
preliminary hearing on special and affirmative defenses must file a motion to that effect at the time of filing of his answer.48
The CIR, on the other hand, counters that it did not file a motion to dismiss.49 Instead, the grounds for dismissal of the case
were pleaded as special and affirmative defenses in its Answer filed on December 15, 2003.50 Therefore, the issue of
"whether or not petitioner is the proper party to claim for a tax refund of the excise taxes allegedly passed on by Caltex and
Petron" was included as one of the issues in the Joint Stipulation of Facts and Issues dated June 24, 2004 signed by
petitioner and respondent.51
The CIR now argues that nothing in the Rules requires the preliminary hearing to be held before the filing of an
Answer.52 However, a preliminary hearing cannot be held before the filing of the Answer precisely because any ground raised
as an affirmative defense is pleaded in the Answer itself.53
Further, the CIR contends that the case cited by petitioner, Maruhom v. Comelec,54 does not apply here. In the said case, a
motion to dismiss was filed after the filing of the answer.55 And, the said motion to dismiss was found to be a frivolous motion
designed to prevent the early termination of the proceedings in the election case therein.56 Here, the Motion to Resolve was
filed not to delay the disposition of the case, but rather, to expedite proceedings.571avvphi1
Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides:
SEC. 6. Pleading grounds as affirmative defenses. - If no motion to dismiss has been filed, any of the grounds for
dismissal provided for in this Rule may be pleaded as an affirmative defense in the answer, and in the discretion of the court,
a preliminary hearing may be had thereon as if a motion to dismiss had been filed.
The dismissal of the complaint under this section shall be without prejudice to the prosecution in the same or separate action
of a counterclaim pleaded in the answer. (Underscoring supplied.)
This case is a clear cut application of the above provision. The CIR did not file a motion to dismiss. Thus, he pleaded the
grounds for dismissal as affirmative defenses in its Answer and thereafter prayed for the conduct of a preliminary hearing to
determine whether petitioner was the proper party to apply for the refund of excise taxes paid.
The determination of this question was the keystone on which the entire case was leaning. If Exxon was not the proper party
to apply for the refund of excise taxes paid, then it would be useless to proceed with the case. It would not make any sense to
proceed to try a case when petitioner had no standing to pursue it.
In the case of California and Hawaiian Sugar Company v. Pioneer Insurance and Surety Corporation,58 the Court held that:
Considering that there was only one question, which may even be deemed to be the very touchstone of the whole case, the
trial court had no cogent reason to deny the Motion for Preliminary Hearing. Indeed, it committed grave abuse of discretion
when it denied a preliminary hearing on a simple issue of fact that could have possibly settled the entire case. Verily, where a
preliminary hearing appears to suffice, there is no reason to go on to trial. One reason why dockets of trial courts are clogged
is the unreasonable refusal to use a process or procedure, like a motion to dismiss, which is designed to abbreviate the
resolution of a case.59 (Underscoring supplied.)
II. On whether petitioner, as the distributor and vendor of petroleum products to international carriers registered in
foreign countries which have existing bilateral agreements with the Philippines, can claim a refund of the excise
taxes paid thereon
This brings us now to the substantive issue of whether Exxon, as the distributor and vendor of petroleum products to
international carriers registered in foreign countries which have existing bilateral agreements with the Philippines, is the
proper party to claim a tax refund for the excise taxes paid by the manufacturers, Caltex and Petron, and passed on to it as
part of the purchase price.
Exxon argues that having paid the excise taxes on the petroleum products sold to international carriers, it is a real party in
interest consistent with the rules and jurisprudence.60
It reasons out that the subject of the exemption is neither the seller nor the buyer of the petroleum products, but the products
themselves, so long as they are sold to international carriers for use in international flight operations, or to exempt entities
covered by tax treaties, conventions and other international agreements for their use or consumption, among other
conditions.61
Thus, as the exemption granted under Section 135 attaches to the petroleum products and not to the seller, the exemption will
apply regardless of whether the same were sold by its manufacturer or its distributor for two reasons.62 First, Section 135 does
not require that to be exempt from excise tax, the products should be sold by the manufacturer or producer.63 Second, the
legislative intent was precisely to make Section 135 independent from Sections 129 and 130 of the NIRC,64 stemming from
the fact that unlike other products subject to excise tax, petroleum products of this nature have become subject to preferential
tax treatment by virtue of either specific international agreements or simply of international reciprocity.65
Respondent CIR, on the other hand, posits that Exxon is not the proper party to seek a refund of excise taxes paid on the
petroleum products.66 In so arguing, the CIR states that excise taxes are indirect taxes, the liability for payment of which falls
on one person, but the burden of payment may be shifted to another.67 Here, the sellers of the petroleum products or Jet A-1
fuel subject to excise tax are Petron and Caltex, while Exxon was the buyer to whom the burden of paying excise tax was
shifted.68 While the impact or burden of taxation falls on Exxon, as the tax is shifted to it as part of the purchase price, the
persons statutorily liable to pay the tax are Petron and Caltex.69As Exxon is not the taxpayer primarily liable to pay, and not
exempted from paying, excise tax, it is not the proper party to claim for the refund of excise taxes paid.70
The excise tax, when passed on to the purchaser, becomes part of the purchase price.
Excise taxes are imposed under Title VI of the NIRC. They apply to specific goods manufactured or produced in the
Philippines for domestic sale or consumption or for any other disposition, and to those that are imported.71 In effect, these
taxes are imposed when two conditions concur: first, that the articles subject to tax belong to any of the categories of goods
enumerated in Title VI of the NIRC; and second, that said articles are for domestic sale or consumption, excluding those that
are actually exported.72
There are, however, certain exemptions to the coverage of excise taxes, such as petroleum products sold to international
carriers and exempt entities or agencies. Section 135 of the NIRC provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. - Petroleum products
sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines:
Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank
and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use
of consumption: Provided, however, That the country of said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes. (Underscoring supplied.)
Thus, under Section 135, petroleum products sold to international carriers of foreign registry on their use or consumption
outside the Philippines are exempt from excise tax, provided that the petroleum products sold to such international carriers
shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner.73
The confusion here stems from the fact that excise taxes are of the nature of indirect taxes, the liability for payment of which
may fall on a person other than he who actually bears the burden of the tax.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,74 the Court discussed the nature of
indirect taxes as follows:
[I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by, one person to someone else. Stated
elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer
who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to
pay it, to the purchaser, as part of the goods sold or services rendered.
Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase price of the goods or services.
Although the manufacturer/seller is the one who is statutorily liable for the tax, it is the buyer who actually shoulders or bears
the burden of the tax, albeit not in the nature of a tax, but part of the purchase price or the cost of the goods or services sold.
As petitioner is not the statutory taxpayer, it is not entitled to claim a refund of excise taxes paid.
The question we are faced with now is, if the party statutorily liable for the tax is different from the party who bears the burden
of such tax, who is entitled to claim a refund of the tax paid?
Sections 129 and 130 of the NIRC provide:
SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition and to things imported. The excise tax imposed herein shall be in
addition to the value-added tax imposed under Title IV.
For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other physical unit of
measurement shall be referred to as 'specific tax' and an excise tax herein imposed and based on selling price or other
specified value of the good shall be referred to as 'ad valorem tax.'
SEC. 130. Filing of Return and Payment of Excise Tax on Domestic Products. -
(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax. -
(1) Persons Liable to File a Return. - Every person liable to pay excise tax imposed under this Title shall file a separate
return for each place of production setting forth, among others the description and quantity or volume of products to be
removed, the applicable tax base and the amount of tax due thereon: Provided, however, That in the case of indigenous
petroleum, natural gas or liquefied natural gas, the excise tax shall be paid by the first buyer, purchaser or transferee for local
sale, barter or transfer, while the excise tax on exported products shall be paid by the owner, lessee, concessionaire or
operator of the mining claim.
Should domestic products be removed from the place of production without the payment of the tax, the owner or person
having possession thereof shall be liable for the tax due thereon.
(2) Time for Filing of Return and Payment of the Tax. - Unless otherwise specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or producer before removal of domestic products from place of production: Provided,
That the tax excise on locally manufactured petroleum products and indigenous petroleum/levied under Sections 148 and
151(A)(4), respectively, of this Title shall be paid within ten (10) days from the date of removal of such products for the period
from January 1, 1998 to June 30, 1998; within five (5) days from the date of removal of such products for the period from July
1, 1998 to December 31, 1998; and, before removal from the place of production of such products from January 1, 1999 and
thereafter: Provided, further, That the excise tax on nonmetallic mineral or mineral products, or quarry resources shall be due
and payable upon removal of such products from the locality where mined or extracted, but with respect to the excise tax on
locally produced or extracted metallic mineral or mineral products, the person liable shall file a return and pay the tax within
fifteen (15) days after the end of the calendar quarter when such products were removed subject to such conditions as may
be prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner. For this purpose, the taxpayer shall file a bond in an amount which approximates the amount of excise tax due
on the removals for the said quarter. The foregoing rules notwithstanding, for imported mineral or mineral products, whether
metallic or nonmetallic, the excise tax due thereon shall be paid before their removal from customs custody.
xxx
(Italics and underscoring supplied.)
As early as the 1960’s, this Court has ruled that the proper party to question, or to seek a refund of, an indirect tax, is the
statutory taxpayer, or the person on whom the tax is imposed by law and who paid the same, even if he shifts the burden
thereof to another.75
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue,76 the Court held that the sales tax is imposed on the
manufacturer or producer and not on the purchaser, "except probably in a very remote and inconsequential
sense."77 Discussing the "passing on" of the sales tax to the purchaser, the Court therein cited Justice Oliver Wendell Holmes’
opinion in Lash’s Products v. United States78 wherein he said:
"The phrase ‘passed the tax on’ is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him alone.
The purchaser does not really pay the tax. He pays or may pay the seller more for the goods because of the seller’s
obligation, but that is all. x x x The price is the sum total paid for the goods. The amount added because of the tax is paid to
get the goods and for nothing else. Therefore it is part of the price x x x."79
Proceeding from this discussion, the Court went on to state:
It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the
price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. x x x The
effect is still the same, namely, that the purchaser does not pay the tax. He pays or may pay the seller more for the goods
because of the seller’s obligation, but that is all and the amount added because of the tax is paid to get the goods and for
nothing else.
But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a
matter of economics. Then it can no longer be contended that a sales tax is a tax on the purchaser.80
The above case was cited in the later case of Cebu Portland Cement Company v. Collector (now Commissioner) of Internal
Revenue,81 where the Court ruled that as the sales tax is imposed upon the manufacturer or producer and not on the
purchaser, "it is petitioner and not its customers, who may ask for a refund of whatever amount it is entitled for the percentage
or sales taxes it paid before the amendment of section 246 of the Tax Code."82
The Philippine Acetylene case was also cited in the first Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal
Revenue83 case, where the Court held that the proper party to question, or to seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to
another.84
In the Silkair cases,85 petitioner Silkair (Singapore) Pte, Ltd. (Silkair), filed with the BIR a written application for the refund of
excise taxes it claimed to have paid on its purchase of jet fuel from Petron. As the BIR did not act on the application, Silkair
filed a Petition for Review before the CTA.
In both cases, the CIR argued that the excise tax on petroleum products is the direct liability of the manufacturer/producer,
and when added to the cost of the goods sold to the buyer, it is no longer a tax but part of the price which the buyer has to
pay to obtain the article.
In the first Silkair case, the Court ruled:
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the
tax is imposed by law and who paid the same even if he shifts the burden thereof to another.Section 130 (A) (2) of the
NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the
manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not
Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet
fuel is not a tax but part of the price which Silkair had to pay as a purchaser. 86 (Emphasis and underscoring supplied.)
Citing the above case, the second Silkair case was promulgated a few months after the first, and stated:
The issue presented is not novel. In a similar case involving the same parties, this Court has categorically ruled that "the
proper party to question, or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed
by law and who paid the same even if he shifts the burden thereof to another." The Court added that "even if Petron
Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part
of the price which Silkair had to pay as a purchaser."87
The CTA En Banc, thus, held that:
The determination of who is the taxpayer plays a pivotal role in claims for refund because the same law provides that it is only
the taxpayer who has the legal personality to ask for a refund in case of erroneous payment of taxes. Section 204 (C) of the
1997 NIRC, [provides] in part, as follows:
SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. – The Commissioner may –
x x x x x x x x x
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change
unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of
taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return showing an overpayment
shall be considered as a written claim for credit or refund.
x x x x x x x x x
(Emphasis shown supplied by the CTA.)88
Therefore, as Exxon is not the party statutorily liable for payment of excise taxes under Section 130, in relation to Section 129
of the NIRC, it is not the proper party to claim a refund of any taxes erroneously paid.
There is no unilateral amendment of existing bilateral agreements of the Philippines with other countries.
Exxon also argues that in effectively holding that only petroleum products purchased directly from the manufacturers or
producers are exempt from excise taxes, the CTA En Banc sanctioned a unilateral amendment of existing bilateral
agreements which the Philippines has with other countries, in violation of the basic international law principle of pacta sunt
servanda.89 The Court does not agree.
As correctly held by the CTA En Banc:
One final point, petitioner’s argument "that in effectively holding that only petroleum products purchased directly from the
manufacturers or producers are exempt from excise taxes, the First Division of this Court sanctioned a unilateral amendment
of existing bilateral agreements which the Philippines have (sic) with other countries, in violation of the basic international
principle of "pacta sunt servanda" is misplaced. First, the findings of fact of the First Division of this Court that "when petitioner
sold the Jet A-1 fuel to international carriers, it did so free of tax"negates any violation of the exemption from excise tax of the
petroleum products sold to international carriers insofar as this case is concerned. Secondly, the right of international carriers
to invoke the exemption granted under Section 135 (a) of the 1997 NIRC has neither been affected nor restricted in any way
by the ruling of the First Division of this Court. At the point of sale, the international carriers are free to invoke the exemption
from excise taxes of the petroleum products sold to them. Lastly, the law-making body is presumed to have enacted a later
law with the knowledge of all other laws involving the same subject matter."90 (Underscoring supplied.) WHEREFORE, the
petition is DENIED.
G.R. No. 188497 April 25, 2012
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Petitioner Commissioner of Internal Revenue appeals the Decision1 dated March 25, 2009 and Resolution2 dated June 24,
2009 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 415. The CTA dismissed the petition for review filed by
petitioner assailing the CTA First Division’s Decision3 dated April 25, 2008 and Resolution4 dated July 10, 2008 which ordered
petitioner to refund the excise taxes paid by respondent Pilipinas Shell Petroleum Corporation on petroleum products it sold to
international carriers.
The facts are not disputed.
Respondent is engaged in the business of processing, treating and refining petroleum for the purpose of producing
marketable products and the subsequent sale thereof.5
On July 18, 2002, respondent filed with the Large Taxpayers Audit & Investigation Division II of the Bureau of Internal
Revenue (BIR) a formal claim for refund or tax credit in the total amount of ₱28,064,925.15, representing excise taxes it
allegedly paid on sales and deliveries of gas and fuel oils to various international carriers during the period October to
December 2001. Subsequently, on October 21, 2002, a similar claim for refund or tax credit was filed by respondent with the
BIR covering the period January to March 2002 in the amount of ₱41,614,827.99. Again, on July 3, 2003, respondent filed
another formal claim for refund or tax credit in the amount of ₱30,652,890.55 covering deliveries from April to June 2002.6
Since no action was taken by the petitioner on its claims, respondent filed petitions for review before the CTA on September
19, 2003 and December 23, 2003, docketed as CTA Case Nos. 6775 and 6839, respectively.
In its decision on the consolidated cases, the CTA’s First Division ruled that respondent is entitled to the refund of excise
taxes in the reduced amount of ₱95,014,283.00. The CTA First Division relied on a previous ruling rendered by the CTA En
Banc in the case of "Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue"7where the CTA also granted
respondent’s claim for refund on the basis of excise tax exemption for petroleum products sold to international carriers of
foreign registry for their use or consumption outside the Philippines. Petitioner’s motion for reconsideration was denied by the
CTA First Division.
Petitioner elevated the case to the CTA En Banc which upheld the ruling of the First Division. The CTA pointed out the
specific exemption mentioned under Section 135 of the National Internal Revenue Code of 1997 (NIRC) of petroleum
products sold to international carriers such as respondent’s clients. It said that this Court’s ruling in Maceda v. Macaraig, Jr.8 is
inapplicable because said case only put to rest the issue of whether or not the National Power Corporation (NPC) is subject to
tax considering that NPC is a tax-exempt entity mentioned in Sec. 135 (c) of the NIRC (1997), whereas the present case
involves the tax exemption of the sale of petroleum under Sec. 135 (a) of the same Code. Further, the CTA said that the ruling
in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue9 likewise finds no application because the party asking
for the refund in said case was the seller-producer based on the exemption granted under the law to the tax-exempt buyers,
NPC and Voice of America (VOA), whereas in this case it is the article or product which is exempt from tax and not the
international carrier.
Petitioner filed a motion for reconsideration which the CTA likewise denied.
Hence, this petition anchored on the following grounds:
SECTION 148 OF THE NATIONAL INTERNAL REVENUE CODE EXPRESSLY SUBJECTS THE PETROLEUM PRODUCTS
TO AN EXCISE TAX BEFORE THEY ARE REMOVED FROM THE PLACE OF PRODUCTION.
II
THE ONLY SPECIFIC PROVISION OF THE LAW WHICH GRANTS TAX CREDIT OR TAX REFUND OF THE EXCISE
TAXES PAID REFERS TO THOSE CASES WHERE GOODS LOCALLY PRODUCED OR MANUFACTURED ARE
ACTUALLY EXPORTED WHICH IS NOT SO IN THIS CASE.
III
THE PRINCIPLES LAID DOWN IN MACEDA VS. MACARAIG, JR. AND PHILIPPINE ACETYLENE CO. VS. CIR ARE
APPLICABLE TO THIS CASE.10
The Solicitor General argues that the obvious intent of the law is to grant excise tax exemption to international carriers and
exempt entities as buyers of petroleum products and not to the manufacturers or producers of said goods. Since the excise
taxes are collected from manufacturers or producers before removal of the domestic products from the place of production,
respondent paid the subject excise taxes as manufacturer or producer of the petroleum products pursuant to Sec. 148 of the
NIRC. Thus, regardless of who the buyer/purchaser is, the excise tax on petroleum products attached to the said goods
before their sale or delivery to international carriers, as in fact respondent averred that it paid the excise tax on its petroleum
products when it "withdrew petroleum products from its place of production for eventual sale and delivery to various
international carriers as well as to other customers."11 Sec. 135 (a) and (c) granting exemption from the payment of excise tax
on petroleum products can only be interpreted to mean that the respondent cannot pass on to international carriers and
exempt agencies the excise taxes it paid as a manufacturer or producer.
As to whether respondent has the right to file a claim for refund or tax credit for the excise taxes it paid for the petroleum
products sold to international carriers, the Solicitor General contends that Sec. 130 (D) is explicit on the circumstances under
which a taxpayer may claim for a refund of excise taxes paid on manufactured products, which express enumeration did not
include those excise taxes paid on petroleum products which were eventually sold to international carriers (expressio unius
est exclusio alterius). Further, the Solicitor General asserts that contrary to the conclusion made by the CTA, the principles
laid down by this Court in Maceda v. Macaraig, Jr.12 and Philippine Acetylene Co. v. Commissioner of Internal Revenue13 are
applicable to this case. Respondent must shoulder the excise taxes it previously paid on petroleum products which it later sold
to international carriers because it cannot pass on the tax burden to the said international carriers which have been granted
exemption under Sec. 135 (a) of the NIRC. Considering that respondent failed to prove an express grant of a right to a tax
refund, such claim cannot be implied; hence, it must be denied.
On the other hand, respondent maintains that since petroleum products sold to qualified international carriers are exempt from
excise tax, no taxes should be imposed on the article, to which goods the tax attaches, whether in the hands of the said
international carriers or the petroleum manufacturer or producer. As these excise taxes have been erroneously paid taxes,
they can be recovered under Sec. 229 of the NIRC. Respondent contends that contrary to petitioner’s assertion, Sections 204
and 229 authorizes respondent to maintain a suit or proceeding to recover such erroneously paid taxes on the petroleum
products sold to tax-exempt international carriers.
As to the jurisprudence cited by the petitioner, respondent argues that they are not applicable to the case at bar. It points out
that Maceda v. Macaraig, Jr. is an adjudication on the issue of tax exemption of NPC from direct and indirect taxes given the
passage of various laws relating thereto. What was put in issue in said case was NPC’s right to claim for refund of indirect
taxes. Here, respondent’s claim for refund is not anchored on the exemption of the buyer from direct and indirect taxes but on
the tax exemption of the goods themselves under Sec. 135. Respondent further stressed that in Maceda v. Macaraig, Jr., this
Court recognized that if NPC purchases oil from oil companies, NPC is entitled to claim reimbursement from the BIR for that
part of the purchase price that represents excise taxes paid by the oil company to the BIR. Philippine Acetylene Co. v. CIR, on
the other hand, involved sales tax, which is a tax on the transaction, which this Court held as due from the seller even if such
tax cannot be passed on to the buyers who are tax-exempt entities. In this case, the excise tax is a tax on the goods
themselves. While indeed it is the manufacturer who has the duty to pay the said tax, by specific provision of law, Sec. 135,
the goods are stripped of such tax under the circumstances provided therein. Philippine Acetylene Co., Inc. v. CIR was thus
not anchored on an exempting provision of law but merely on the argument that the tax burden cannot be passed on to
someone.
Respondent further contends that requiring it to shoulder the burden of excise taxes on petroleum products sold to
international carriers would effectively defeat the principle of international comity upon which the grant of tax exemption on
aviation fuel used in international flights was founded. If the excise taxes paid by respondent are not allowed to be refunded or
credited based on the exemption provided in Sec. 135 (a), respondent avers that the manufacturers or oil companies would
then be constrained to shift the tax burden to international carriers in the form of addition to the selling price.
Respondent cites as an analogous case Commissioner of International Revenue v. Tours Specialists, Inc.14 which involved the
inclusion of hotel room charges remitted by partner foreign tour agents in respondent TSI’s gross receipts for purposes of
computing the 3% contractor’s tax. TSI opposed the deficiency assessment invoking, among others, Presidential Decree No.
31, which exempts foreign tourists from paying hotel room tax. This Court upheld the CTA in ruling that while CIR may claim
that the 3% contractor’s tax is imposed upon a different incidence, i.e., the gross receipts of the tourist agency which he
asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it
nonetheless imposes a tax actually on room charges. One way or the other, said the CTA, it would not have the effect of
promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the
overall expenses of said tourists.
The instant petition squarely raised the issue of whether respondent as manufacturer or producer of petroleum products is
exempt from the payment of excise tax on such petroleum products it sold to international carriers.
In the previous cases15 decided by this Court involving excise taxes on petroleum products sold to international carriers, what
was only resolved is the question of who is the proper party to claim the refund of excise taxes paid on petroleum products if
such tax was either paid by the international carriers themselves or incorporated into the selling price of the petroleum
products sold to them. We have ruled in the said cases that the statutory taxpayer, the local manufacturer of the petroleum
products who is directly liable for the payment of excise tax on the said goods, is the proper party to seek a tax refund. Thus,
a foreign airline company who purchased locally manufactured petroleum products for use in its international flights, as well
as a foreign oil company who likewise bought petroleum products from local manufacturers and later sold these to
international carriers, have no legal personality to file a claim for tax refund or credit of excise taxes previously paid by the
local manufacturers even if the latter passed on to the said buyers the tax burden in the form of additional amount in the price.
Excise taxes, as the term is used in the NIRC, refer to taxes applicable to certain specified goods or articles manufactured or
produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported into the
Philippines. These taxes are imposed in addition to the value-added tax (VAT).16
As to petroleum products, Sec. 148 provides that excise taxes attach to the following refined and manufactured mineral oils
and motor fuels as soon as they are in existence as such:
(a) Lubricating oils and greases;
(b) Processed gas;
(c) Waxes and petrolatum;
(d) Denatured alcohol to be used for motive power;
(e) Naphtha, regular gasoline and other similar products of distillation;
(f) Leaded premium gasoline;
(g) Aviation turbo jet fuel;
(h) Kerosene;
(i) Diesel fuel oil, and similar fuel oils having more or less the same generating power;
(j) Liquefied petroleum gas;
(k) Asphalts; and
(l) Bunker fuel oil and similar fuel oils having more or less the same generating capacity.
Beginning January 1, 1999, excise taxes levied on locally manufactured petroleum products and indigenous petroleum are
required to be paid before their removal from the place of production.17 However, Sec. 135 provides:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to
the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines:
Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank
and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use
or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes.
Respondent claims it is entitled to a tax refund because those petroleum products it sold to international carriers are not
subject to excise tax, hence the excise taxes it paid upon withdrawal of those products were erroneously or illegally collected
and should not have been paid in the first place. Since the excise tax exemption attached to the petroleum products
themselves, the manufacturer or producer is under no duty to pay the excise tax thereon.
We disagree.
Under Chapter II "Exemption or Conditional Tax-Free Removal of Certain Goods" of Title VI, Sections 133, 137, 138, 139 and
140 cover conditional tax-free removal of specified goods or articles, whereas Sections 134 and 135 provide for tax
exemptions. While the exemption found in Sec. 134 makes reference to the nature and quality of the goods manufactured
(domestic denatured alcohol) without regard to the tax status of the buyer of the said goods, Sec. 135 deals with the tax
treatment of a specified article (petroleum products) in relation to its buyer or consumer. Respondent’s failure to make this
important distinction apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) "attaches to the goods
themselves" such that the excise tax should not have been paid in the first place.
On July 26, 1996, petitioner Commissioner issued Revenue Regulations 8-9618 ("Excise Taxation of Petroleum Products")
which provides:
SEC. 4. Time and Manner of Payment of Excise Tax on Petroleum Products, Non-Metallic Minerals and Indigenous
Petroleum –
I. Petroleum Products
xxxx
a) On locally manufactured petroleum products
The specific tax on petroleum products locally manufactured or produced in the Philippines shall be paid by the manufacturer,
producer, owner or person having possession of the same, and such tax shall be paid within fifteen (15) days from date of
removal from the place of production. (Underscoring supplied.)
Thus, if an airline company purchased jet fuel from an unregistered supplier who could not present proof of payment of
specific tax, the company is liable to pay the specific tax on the date of purchase.19 Since the excise tax must be paid upon
withdrawal from the place of production, respondent cannot anchor its claim for refund on the theory that the excise taxes due
thereon should not have been collected or paid in the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously or illegally collected. An "erroneous or illegal tax" is defined as
one levied without statutory authority, or upon property not subject to taxation or by some officer having no authority to levy
the tax, or one which is some other similar respect is illegal.20
Respondent’s locally manufactured petroleum products are clearly subject to excise tax under Sec. 148. Hence, its claim for
tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of erroneous or excess payment of tax.
Respondent’s claim is premised on what it determined as a tax exemption "attaching to the goods themselves," which must
be based on a statute granting tax exemption, or "the result of legislative grace." Such a claim is to be construed strictissimi
juris against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant
must show that he clearly falls under the exempting statute.21
The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on international carriers who
purchased the same for their use or consumption outside the Philippines. The only condition set by law is for these petroleum
products to be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
On January 22, 2008, or five years after the sale by respondent of the subject petroleum products, then Secretary of Finance
Margarito B. Teves issued Revenue Regulations No. 3-2008 "Amending Certain Provisions of Existing Revenue Regulations
on the Granting of Outright Excise Tax Exemption on Removal of Excisable Articles Intended for Export or Sale/Delivery to
International Carriers or to Tax-Exempt Entities/Agencies and Prescribing the Provisions for Availing Claims for Product
Replenishment." Said issuance recognized the "tax relief to which the taxpayers are entitled" by availing of the following
remedies: (a) a claim for excise tax exemption pursuant to Sections 204 and 229 of the NIRC; or (2) a product replenishment.
SEC. 2. IMPOSITION OF EXCISE TAX ON REMOVAL OF EXCISABLE ARTICLES FOR EXPORT OR SALE/DELIVERY TO
INTERNATIONAL CARRIERS AND OTHER TAX-EXEMPT ENTITIES/AGENCIES. – Subject to the subsequent filing of a
claim for excise tax credit/refund or product replenishment, all manufacturers of articles subject to excise tax under Title VI of
the NIRC of 1997, as amended, shall pay the excise tax that is otherwise due on every removal thereof from the place of
production that is intended for exportation or sale/delivery to international carriers or to tax-exempt entities/agencies:
Provided, That in case the said articles are likewise being sold in the domestic market, the applicable excise tax rate shall be
the same as the excise tax rate imposed on the domestically sold articles.
In the absence of a similar article that is being sold in the domestic market, the applicable excise tax shall be computed based
on the value appearing in the manufacturer’s sworn statement converted to Philippine currency, as may be applicable.
x x x x (Emphasis supplied.)
In this case, however, the Solicitor General has adopted a position contrary to existing BIR regulations and rulings recognizing
the right of oil companies to seek a refund of excise taxes paid on petroleum products they sold to international carriers. It is
argued that there is nothing in Sec. 135 (a) which explicitly grants exemption from the payment of excise tax in favor of oil
companies selling their petroleum products to international carriers and that the only claim for refund of excise taxes
authorized by the NIRC is the payment of excise tax on exported goods, as explicitly provided in Sec. 130 (D), Chapter I
under the same Title VI:
(D) Credit for Excise Tax on Goods Actually Exported. -- When goods locally produced or manufactured are removed and
actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of
any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof
of actual exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the excise tax on
mineral products, except coal and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral
products are actually exported.
According to the Solicitor General, Sec. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect
taxation, may only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to
international carriers by incorporating previously paid excise taxes into the selling price. In other words, respondent cannot
shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the
added cost of the excise tax.
We agree with the Solicitor General.
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue22 this Court held that petitioner manufacturer who sold
its oxygen and acetylene gases to NPC, a tax-exempt entity, cannot claim exemption from the payment of sales tax simply
because its buyer NPC is exempt from taxation. The Court explained that the percentage tax on sales of merchandise
imposed by the Tax Code is due from the manufacturer and not from the buyer.
Respondent attempts to distinguish this case from Philippine Acetylene Co., Inc. on grounds that what was involved in the
latter is a tax on the transaction (sales) and not excise tax which is a tax on the goods themselves, and that the exemption
sought therein was anchored merely on the tax-exempt status of the buyer and not a specific provision of law exempting the
goods sold from the excise tax. But as already stated, the language of Sec. 135 indicates that the tax exemption mentioned
therein is conferred on specified buyers or consumers of the excisable articles or goods (petroleum products). Unlike Sec. 134
which explicitly exempted the article or goods itself (domestic denatured alcohol) without due regard to the tax status of the
buyer or purchaser, Sec. 135 exempts from excise tax petroleum products which were sold to international carriers and other
tax-exempt agencies and entities.
Considering that the excise taxes attaches to petroleum products "as soon as they are in existence as such,"23 there can be
no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then
of respondent’s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135
(a) for their purchases of locally manufactured petroleum products. Pursuant to our ruling in Philippine Acetylene, a tax
exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Sec. 148 is the
direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international
carriers.
In Maceda v. Macaraig, Jr.,24 the Court specifically mentioned excise tax as an example of an indirect tax where the tax
burden can be shifted to the buyer:
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else". For
example, the excise and ad valorem taxes that the oil companies pay to the Bureau of Internal Revenue upon removal of
petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the "cash" and/or "selling
price."
An excise tax is basically an indirect tax. Indirect taxes are those that are demanded, in the first instance, from, or are paid by,
one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are
taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When
the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part
of the price of goods sold or services rendered.25
Further, in Maceda v. Macaraig, Jr., the Court ruled that because of the tax exemptions privileges being enjoyed by NPC
under existing laws, the tax burden may not be shifted to it by the oil companies who shall pay for fuel oil taxes on oil they
supplied to NPC. Thus:
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to
pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of
such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold.
Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from
absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to
NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did
not enjoy exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay that part of the
"normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR.
If NPC nonetheless purchases such oil from the oil companies – because to do so may be more convenient and ultimately
less costly for NPC than NPC itself importing and hauling and storing the oil from overseas – NPC is entitled to be reimbursed
by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor
to the BIR.26 (Emphasis supplied.)
In the case of international air carriers, the tax exemption granted under Sec. 135 (a) is based on "a long-standing
international consensus that fuel used for international air services should be tax-exempt." The provisions of the 1944
Convention of International Civil Aviation or the "Chicago Convention", which form binding international law, requires the
contracting parties not to charge duty on aviation fuel already on board any aircraft that has arrived in their territory from
another contracting state. Between individual countries, the exemption of airlines from national taxes and customs duties on a
range of aviation-related goods, including parts, stores and fuel is a standard element of the network of bilateral "Air Service
Agreements."27 Later, a Resolution issued by the International Civil Aviation Organization (ICAO) expanded the provision as to
similarly exempt from taxes all kinds of fuel taken on board for consumption by an aircraft from a contracting state in the
territory of another contracting State departing for the territory of any other State.28 Though initially aimed at establishing
uniformity of taxation among parties to the treaty to prevent double taxation, the tax exemption now generally applies to fuel
used in international travel by both domestic and foreign carriers.
On April 21, 1978, then President Ferdinand E. Marcos issued Presidential Decree (P.D.) No. 1359:
PRESIDENTIAL DECREE No. 1359
AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977.
WHEREAS, under the present law oil products sold to international carriers are subject to the specific tax;
WHEREAS, some countries allow the sale of petroleum products to Philippine Carriers without payment of taxes thereon;
WHEREAS, to foster goodwill and better relationship with foreign countries, there is a need to grant similar tax exemption in
favor of foreign international carriers;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the
Constitution, do hereby order and decree the following:
Section 1. Section 134 of the National Internal Revenue Code of 1977 is hereby amended to read as follows:
"Sec. 134. Articles subject to specific tax. Specific internal revenue taxes apply to things manufactured or produced in the
Philippines for domestic sale or consumption and to things imported, but not to anything produced or manufactured here
which shall be removed for exportation and is actually exported without returning to the Philippines, whether so exported in its
original state or as an ingredient or part of any manufactured article or product.
"HOWEVER, PETROLEUM PRODUCTS SOLD TO AN INTERNATIONAL CARRIER FOR ITS USE OR CONSUMPTION
OUTSIDE OF THE PHILIPPINES SHALL NOT BE SUBJECT TO SPECIFIC TAX, PROVIDED, THAT THE COUNTRY OF
SAID CARRIER EXEMPTS FROM TAX PETROLEUM PRODUCTS SOLD TO PHILIPPINE CARRIERS.
"In case of importations the internal revenue tax shall be in addition to the customs duties, if any."
Section 2. This Decree shall take effect immediately.
Contrary to respondent’s assertion that the above amendment to the former provision of the 1977 Tax Codesupports its
position that it was not liable for excise tax on the petroleum products sold to international carriers, we find that no such
inference can be drawn from the words used in the amended provision or its introductory part. Founded on the principles of
international comity and reciprocity, P.D. No. 1359 granted exemption from payment of excise tax but only to foreign
international carriers who are allowed to purchase petroleum products free of specific tax provided the country of said carrier
also grants tax exemption to Philippine carriers. Both the earlier amendment in the 1977 Tax Code and the present Sec. 135
of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and
sold by them to international carriers.
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the
NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and
absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135
(a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys
petroleum products from the local manufacturers. Said provision thus merely allows the international carriers to purchase
petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil companies which sold such petroleum products to international carriers are not
entitled to a refund of excise taxes previously paid on the goods.1âwphi1
Time and again, we have held that tax refunds are in the nature of tax exemptions which result to loss of revenue for the
government. Upon the person claiming an exemption from tax payments rests the burden of justifying the exemption by words
too plain to be mistaken and too categorical to be misinterpreted,29 it is never presumed30 nor be allowed solely on the ground
of equity.31 These exemptions, therefore, must not rest on vague, uncertain or indefinite inference, but should be granted only
by a clear and unequivocal provision of law on the basis of language too plain to be mistaken. Such exemptions must be
strictly construed against the taxpayer, as taxes are the lifeblood of the government.32
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009 and Resolution dated
June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE. The claims
for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 188497 February 19, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
RESOLUTION
VILLARAMA, JR., J.:
For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for Reconsideration dated
December 12, 2012 filed by Pilipinas Shell Petroleum Corporation (respondent). As directed, the Solicitor General on behalf of
petitioner Commissioner of Internal Revenue filed their Comment, to which respondent filed its Reply.
In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred in granting respondent's
claim for tax refund because the latter failed to establish a tax exemption in its favor under Section 135(a) of the National
Internal Revenue Code of 1997 (NIRC).
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009 and Resolution dated
June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE. The claims
for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.1
Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum products sold to
international carriers which are exempt from excise tax for which reason no excise taxes are deemed to have been due in the
first place. It points out that excise tax being an indirect tax, Section 135 in relation to Section 148 should be interpreted as
referring to a tax exemption from the point of production and removal from the place of production considering that it is only at
that point that an excise tax is imposed. The situation is unlike the value-added tax (VAT) which is imposed at every point of
turnover – from production to wholesale, to retail and to end-consumer. Respondent thus concludes that exemption could only
refer to the imposition of the tax on the statutory seller, in this case the respondent. This is because when a tax paid by the
statutory seller is passed on to the buyer it is no longer in the nature of a tax but an added cost to the purchase price of the
product sold.
Respondent also contends that our ruling that Section 135 only prohibits local petroleum manufacturers like respondent from
shifting the burden of excise tax to international carriers has adverse economic impact as it severely curtails the domestic oil
industry. Requiring local petroleum manufacturers to absorb the tax burden in the sale of its products to international carriers
is contrary to the State’s policy of "protecting gasoline dealers and distributors from unfair and onerous trade conditions," and
places them at a competitive disadvantage since foreign oil producers, particularly those whose governments with which we
have entered into bilateral service agreements, are not subject to excise tax for the same transaction. Respondent fears this
could lead to cessation of supply of petroleum products to international carriers, retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet A-1 fuel and aviation gas
due to unprofitability of sustaining operations. Under this scenario, participation of Filipino capital, management and labor in
the domestic oil industry is effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on petroleum products sold to
international carriers is in violation of the Chicago Convention on International Aviation ("Chicago Convention") to which it is a
signatory, as well as other international agreements (the Republic of the Philippines’ air transport agreements with the United
States of America, Netherlands, Belgium and Japan).
In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the exemption under Section
135 does not attach to the products. Citing Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,2 which held that the excise tax, when passed on to the purchaser, becomes part of the
purchase price, the Solicitor General claims this refutes respondent’s theory that the exemption attaches to the petroleum
product itself and not to the purchaser for it would have been erroneous for the seller to pay the excise tax and inequitable to
pass it on to the purchaser if the excise tax exemption attaches to the product.
As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue3 and
Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,4 the Solicitor
General points out that there was no pronouncement in these cases that petroleum manufacturers selling petroleum products
to international carriers are exempt from paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene
Co, Inc. v. Commissioner of Internal Revenue.5 Further, the ruling in Maceda v. Macaraig, Jr.6 which confirms that Section 135
does not intend to exempt manufacturers or producers of petroleum products from the payment of excise tax.
The Court will now address the principal arguments proffered by respondent: (1) Section 135 intended the tax exemption to
apply to petroleum products at the point of production; (2) Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue
and Maceda v. Macaraig, Jr. are inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR) and the
CTA that the excise tax on petroleum products sold to international carriers for use or consumption outside the Philippines
attaches to the article when sold to said international carriers, as it is the article which is exempt from the tax, not the
international carrier; and (3) the Decision of this Court will not only have adverse impact on the domestic oil industry but is
also in violation of international agreements on aviation.
Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition and to things imported. Excise taxes as used in our Tax Code fall
under two types – (1) specific tax which is based on weight or volume capacity and other physical unit of measurement, and
(2) ad valorem tax which is based on selling price or other specified value of the goods. Aviation fuel is subject to specific tax
under Section 148 (g) which attaches to said product "as soon as they are in existence as such."
On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P. Bersamin regarding the traditional
meaning of excise tax adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its traditional concept up to its current definition in our Tax Code
was explained in the case of Petron Corporation v. Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or exercise of some right,
privilege, activity, calling or occupation" derives from the compendium American Jurisprudence, popularly referred to as Am
Jur and has been cited in previous decisions of this Court, including those cited by Petron itself. Such a definition would not
have been inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature used in those prior laws in
referring to taxes imposed on specific articles was "specific tax." Yet beginning with the National Internal Revenue Code of
1986, as amended, the term "excise taxes" was used and defined as applicable "to goods manufactured or produced in the
Philippines… and to things imported." This definition was carried over into the present NIRC of 1997. Further, these two latest
codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based on weight or volume capacity
or any other physical unit of measurement; and "ad valorem tax" which is imposed and based on the selling price or other
specified value of the goods. In other words, the meaning of "excise tax" has undergone a transformation, morphing from the
Am Jur definition to its current signification which is a tax on certain specified goods or articles.
The change in perspective brought forth by the use of the term "excise tax" in a different connotation was not lost on the
departed author Jose Nolledo as he accorded divergent treatments in his 1973 and 1994 commentaries on our tax laws.
Writing in 1973, and essentially alluding to the Am Jur definition of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property taxes, a ruling which seems
to be erroneous. Specific taxes are truly excise taxes for the fact that the value of the property taxed is taken into account will
not change the nature of the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture and
remove from storage certain articles specified by law.
In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes, Nolledo, in his 1994
commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods or articles
manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to
things imported into the Philippines. They are either specific or ad valorem.
2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra) They are, therefore, taxes
on property. (see Medina vs. City of Baguio, 91 Phil. 854.)
A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an incident to, or in
connection with, the business to be taxed.
In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and observe that the term is
"synonymous with ‘privilege tax’ and [both terms] are often used interchangeably." At the same time, they offer a caveat that
"[e]xcise tax, as [defined by Am Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles
manufactured or produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other disposition.’"
It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a specific article, rather than one
"upon the performance, carrying on, or the exercise of an activity."
This current definition was already in place when the Code was enacted in 1991, and we can only presume that it was what
the Congress had intended as it specified that local government units could not impose "excise taxes on articles enumerated
under the [NIRC]." This prohibition must pertain to the same kind of excise taxes as imposed by the NIRC, and not those
previously defined "excise taxes" which were not integrated or denominated as such in our present tax law.8 (Emphasis
supplied.)
That excise tax as presently understood is a tax on property has no bearing at all on the issue of respondent’s entitlement to
refund. Nor does the nature of excise tax as an indirect tax supports respondent’s postulation that the tax exemption provided
in Sec. 135 attaches to the petroleum products themselves and consequently the domestic petroleum manufacturer is not
liable for the payment of excise tax at the point of production. As already discussed in our Decision, to which Justice Bersamin
concurs, "the accrual and payment of the excise tax on the goods enumerated under Title VI of the NIRC prior to their removal
at the place of production are absolute and admit of no exception." This also underscores the fact that the exemption from
payment of excise tax is conferred on international carriers who purchased the petroleum products of respondent.
On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim
for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax
imposed on petroleum products under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise
tax exemption granted to its buyers who are international carriers. And following our pronouncement in Maceda v. Macarig, Jr.
we further ruled that Section 135(a) should be construed as prohibiting the shifting of the burden of the excise tax to the
international carriers who buy petroleum products from the local manufacturers. Said international carriers are thus allowed to
purchase the petroleum products without the excise tax component which otherwise would have been added to the cost or
price fixed by the local manufacturers or distributors/sellers.
Excise tax on aviation fuel used for international flights is practically nil as most countries are signatories to the 1944 Chicago
Convention on International Aviation (Chicago Convention). Article 249 of the Convention has been interpreted to prohibit
taxation of aircraft fuel consumed for international transport. Taxation of international air travel is presently at such low level
that there has been an intensified debate on whether these should be increased to "finance development rather than simply to
augment national tax revenue" considering the "cross-border environmental damage" caused by aircraft emissions that
contribute to global warming, not to mention noise pollution and congestion at airports).10 Mutual exemptions given under
bilateral air service agreements are seen as main legal obstacles to the imposition of indirect taxes on aviation fuel. In
response to present realities, the International Civil Aviation Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our Governments’ compliance with the
Chicago Convention, its subsequent resolutions/annexes, and the air transport agreements entered into by the Philippine
Government with various countries. The rationale for exemption of fuel from national and local taxes was expressed by ICAO
as follows:
...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a Resolution on the taxation of
income and of aircraft, and a Resolution on taxes related to the sale or use of international air transport (cf. Doc 7145) which
were further amended and amplified by the policy statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the uniqueness of civil aviation and the need to accord tax exempt
status to certain aspects of the operations of international air transport and were adopted because multiple taxation on the
aircraft, fuel, technical supplies and the income of international air transport, as well as taxes on its sale and use, were
considered as major obstacles to the further development of international air transport. Non-observance of the principle of
reciprocal exemption envisaged in these policies was also seen as risking retaliatory action with adverse repercussions on
international air transport which plays a major role in the development and expansion of international trade and travel.12
In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22, 2013 at Montreal, among
matters agreed upon was that "the proliferation of various taxes and duties on air transport could have negative impact on the
sustainable development of air transport and on consumers." Confirming that ICAO’s policies on taxation remain valid, the
Conference recommended that "ICAO promote more vigorously its policies and with industry stakeholders to develop analysis
and guidance to States on the impact of taxes and other levies on air transport."13 Even as said conference was being held,
on March 7, 2013, President Benigno Aquino III has signed into law Republic Act (R.A.) No. 1037814 granting tax incentives to
foreign carriers which include exemption from the 12% value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT).
GPBT is a form of income tax applied to international airlines or shipping companies. The law, based on reciprocal grant of
similar tax exemptions to Philippine carriers, is expected to increase foreign tourist arrivals in the country.
Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which the law-making body
considers sufficient to offset the monetary loss entailed in the grant of the exemption."15 The exemption from excise tax of
aviation fuel purchased by international carriers for consumption outside the Philippines fulfills a treaty obligation pursuant to
which our Government supports the promotion and expansion of international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air travel. In recent years, developing economies such as ours focused
more serious attention to significant gains for business and tourism sectors as well. Even without such recent incidental
benefit, States had long accepted the need for international cooperation in maintaining a capital intensive, labor intensive and
fuel intensive airline industry, and recognized the major role of international air transport in the development of international
trade and travel.
Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our treaty obligations in good
faith. This entails harmonization of national legislation with treaty provisions. In this case, Sec. 135(a) of the NIRC embodies
our compliance with our undertakings under the Chicago Convention and various bilateral air service agreements not to
impose excise tax on aviation fuel purchased by international carriers from domestic manufacturers or suppliers. In our
Decision in this case, we interpreted Section 135 (a) as prohibiting domestic manufacturer or producer to pass on to
international carriers the excise tax it had paid on petroleum products upon their removal from the place of production,
pursuant to Article 148 and pertinent BIR regulations. Ruling on respondent’s claim for tax refund of such paid excise taxes on
petroleum products sold to tax-exempt international carriers, we found no basis in the Tax Code and jurisprudence to grant
the refund of an "erroneously or illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business prerogative resulting
from the collective impact of market forces," and that it is "erroneous to construe Section 135(a) only as a prohibition against
the shifting by the manufacturers-sellers of petroleum products of the tax burden to international carriers, for such construction
will deprive the manufacturers-sellers of their business prerogative to determine the prices at which they can sell their
products."
We maintain that Section 135 (a), in fulfillment of international agreement and practice to exempt aviation fuel from excise tax
and other impositions, prohibits the passing of the excise tax to international carriers who buys petroleum products from local
manufacturers/sellers such as respondent. However, we agree that there is a need to reexamine the effect of denying the
domestic manufacturers/sellers’ claim for refund of the excise taxes they already paid on petroleum products sold to
international carriers, and its serious implications on our Government’s commitment to the goals and objectives of the
Chicago Convention.
The Chicago Convention, which established the legal framework for international civil aviation, did not deal comprehensively
with tax matters. Article 24 (a) of the Convention simply provides that fuel and lubricating oils on board an aircraft of a
Contracting State, on arrival in the territory of another Contracting State and retained on board on leaving the territory of that
State, shall be exempt from customs duty, inspection fees or similar national or local duties and charges. Subsequently, the
exemption of airlines from national taxes and customs duties on spare parts and fuel has become a standard element of
bilateral air service agreements (ASAs) between individual countries.
The importance of exemption from aviation fuel tax was underscored in the following observation made by a British author16 in
a paper assessing the debate on using tax to control aviation emissions and the obstacles to introducing excise duty on
aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on international flights, either
at a domestic or European level, would encourage 'tankering': carriers filling their aircraft as full as possible whenever they
landed outside the EU to avoid paying tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft would be
travelling further than necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when carrying
the extra weight of a full fuel tank.
With the prospect of declining sales of aviation jet fuel sales to international carriers on account of major domestic oil
companies' unwillingness to shoulder the burden of excise tax, or of petroleum products being sold to said carriers by local
manufacturers or sellers at still high prices , the practice of "tankering" would not be discouraged. This scenario does not
augur well for the Philippines' growing economy and the booming tourism industry. Worse, our Government would be risking
retaliatory action under several bilateral agreements with various countries. Evidently, construction of the tax exemption
provision in question should give primary consideration to its broad implications on our commitment under international
agreements.
In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We therefore hold that respondent,
as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit
of the excise taxes it paid for petroleum products sold to international carriers, the latter having been granted exemption from
the payment of said excise tax under Sec. 135 (a) of the NIRC.
WHEREFORE, the Court hereby resolves to:
(1) GRANT the original and supplemental motions for reconsideration filed by respondent Pilipinas Shell Petroleum
Corporation; and
(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En
Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of Internal Revenue to refund or to issue a tax
credit certificate to Pilipinas Shell Petroleum Corporation in the amount of J195,014,283.00 representing the excise
taxes it paid on petroleum products sold to international carriers from October 2001 to June 2002.
SO ORDERED.

Tax Excise

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G.R. No.

163583 August 20, 2008

BRITISH AMERICAN TOBACCO, petitioner,

Paragraph (c) of Section 145, 1 states –

SEC. 145. Cigars and cigarettes. –

New brands shall be classified according to their current net retail price.

SECTION 2. Definition of Terms.

Pertinent portions, of RA 9334, provides:

SEC. 145. Cigars and Cigarettes. –

Effective on January 1, 2005, Two pesos (P2.00) per pack;

Effective on January 1, 2011, Twelve pesos (P12.00) per pack.

Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;

Sec. 7. Jurisdiction. — The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

In Drilon v. Lim,27 it was held:

Sec. 2. Conclusive presumptions. — The following are instances of conclusive presumptions:

Now to the substantive issues.

SEC. 145. Cigars and Cigarettes. –

Effective on January 1, 2005, Two pesos (P2.00) per pack;

Effective on January 1, 2011, Twelve pesos (P12.00) per pack.

Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;

SEC. 142. Cigars and cigarettes.—

"SEC. 142. Cigars and cigarettes. –

Pressing this point, Senator Roco continued his query:

1. That the automatic adjustment clause is at best questionable in law.

We answer in the negative.

We now tackle the second issue.

Large Taxpayers Assistance Division II

b. On the tax reclassification of new brands

There is merit to the contention.

We now tackle the last issue.

EXXONMOBIL PETROLEUM AND CHEMICAL HOLDINGS, INC. - PHILIPPINE BRANCH, Petitioner,

RULING OF THE COURT OF TAX APPEALS EN BANC

RULING OF THE COURT

Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides:

Sections 129 and 130 of the NIRC provide:

(Italics and underscoring supplied.)

Proceeding from this discussion, the Court went on to state:

In the first Silkair case, the Court ruled:

The CTA En Banc, thus, held that:

(Emphasis shown supplied by the CTA.)88

As correctly held by the CTA En Banc:

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

The facts are not disputed.

Hence, this petition anchored on the following grounds:

(a) Lubricating oils and greases;

(b) Processed gas;

(c) Waxes and petrolatum;

(d) Denatured alcohol to be used for motive power;

(e) Naphtha, regular gasoline and other similar products of distillation;

(f) Leaded premium gasoline;

(g) Aviation turbo jet fuel;

(j) Liquefied petroleum gas;

(k) Asphalts; and

a) On locally manufactured petroleum products

We agree with the Solicitor General.

PRESIDENTIAL DECREE No. 1359

AMENDING SECTION 134 OF THE NATIONAL INTERNAL REVENUE CODE OF 1977.

Section 2. This Decree shall take effect immediately.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

Are specific taxes, taxes on property or excise taxes –

WHEREFORE, the Court hereby resolves to:

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