CIR v.

CA
GR. No. 119761, Aug. 29, 1996

Doctrine: The case did not mention tax evasion at all. However, I think the doctrine would be that, for
tax evasion to take place, the scheme used must be outside of lawful means. In the present case, the
actions of the company (changing the name of the brands) did not involve unlawful means.
Facts:
Fortune Tobacco is engaged in the business of different brands of cigarettes. The Philippine Patent Office
issued the trademark registration certificates to the corporation over “Champion”, “Hope”, and “More”
cigarettes. The CIR then classified the said cigarettes as foreign brands as they were listed in the World
Tobacco Directory. However, Fortune Tobacco changed the names, to remove the said brands from the
foreign brand category. Proof was submitted to the BIR that Champion was an original Fortune Tobacco
register, and therefore, local brand.
Ad valorem taxes were imposed on the brands. The National Internal Revenue Code was then amended
by RA 7654. It prescribed new rates for cigars and cigarettes: locally-manufactured cigarettes currently
classified and taxed at 55% would be taxed at 55 given that the minimum tax would not be less than
Php5/pack; and for others, it would be at 45%, given that the minimum tax would not be less than
Php3/pack.
Revenue Memorandum Circular No. 37-93 was then issued by the BIR. It assessed that Hope would be
imposed with 55% tax using the following test: it would consider as locally-manufactured cigarettes
bearing a foreign brand, whether the right to use or title to the foreign brand was sold or transferred by its
owner to the local manufacturer. The brand must be originally-owned by a foreign
manufacturer/producer. If not determinable, it would be based on the current World Tobacco Directory.
Given that all three were listed, they would be now subject to 55% tax.
Fortune Tobacco requested for a review, but it was denied. The following day, it was assessed for ad
valorem tax deficiency amounting to Php9M. Fortune Tobacco filed a petition for review with the CTA.
CTA upheld the position of Fortune Tobacco. CA affirmed.
Issue: W/N the said memorandum may be enforced? NO.
Held:
There are two kinds of administrative issuances: a legislative rule and an interpretative rule. In MOACTI
v. SOF, the Court ruled that “legislative rule is in the nature of subordinate legislation, designed to
implement a primary legislation by providing the details thereof. In the same way that laws must have the
benefit of public hearing, it is generally required that before a legislative rule is adopted there must be
hearing. xxx On the other hand, interpretative rules are designed to provide guidelines to the law which
the administrative agency is in-charge of enforcing.”
It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than what
the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render least cumbersome the implementation of the
law but substantially adds to or increases the burden of those governed, it behooves the agency to accord
at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new
issuance is given the force and effect of law.
A reading of the memorandum shows that the circular cannot be viewed as a corrective measure, but
rather it was made to place the said brands within the classification of locally-manufactured cigarettes
bearing foreign brands, for them to be covered by the new law. Hence, without the said circular, the law
would have no new tax rate consequence on the said products. In doing so, it legislated under its quasi-
legislative authority. However, the requirements of due process should not have been ignored. The
circular might have even infringed on uniformity of taxation.
The Constitution mandates taxation to be uniform and equitable. Uniformity requires that all subjects or
objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and
liabilities. All taxable articles or kinds of property of the same class must be taxed at the same rate and the
tax must operate with the same force and effect in every place where the subject may be found.