CIR vs Fortune Tabacco

G.R. No. 180006 

September 28, 2011

Facts:
What is assailed in this case is Section 1 of RR 17-99.

Starting on Jan 1, 1997, RA 8240 took effect and a shift from ad valorem to specific taxes was
made. Section 142 ( c ) provides that “there shall be levied, assessed and collected, on cigarettes
packed by machine a tax at the rates prescribed bellow:
1. Net Retail Price P10/pack, tax is P12/pack
2. Net Retail Price P6.50/pack but does not exceed P10/ pack, tax is P8/pack
3. Net Retail Price is P5/pack but does not exceed P6.50/pack, tax is P5/pack
4. Net Retail is below P5/pack, tax is P1/pack
The rates of specific tax under par 1-4 shall be increased by 12% on Jan 1, 2000.

To implement RA 8240, CIR issued RR1-97 which echoed Section 142 of 1977 Tax Code.

The 1977 Tax Code was repealed by RA 8424 and Section 142 was renumbered as Section 145.

To implement the 12% increase in specific tax, CIR issued RR 17-99. Section 1 of the RR
provides for the new tax rates in 1-4 above as follow;
Prior Jan 1, 2000 Effective Jan 1, 2000
1. P12/pack P13.44/pack
2. P8/pack P8.96/pack
3. P5/pack P5.60/pack
4. P1/pack P1.20/pack

Pursuant to these laws, Fortune paid in advance excise tax for 2003 in the amount of
P11.15billion, and for the period covering Jan-May 31, 2004 in the amount of P4.90
billion.Fortune then filed its administrative claim for refund with the CIR for erroneously and/or
illegally collected taxes in the amount of P491 million. Without waiting for CIR’s action,
Fortune filed a judicial claim with the CTA. CTA 1 st Division ruled in favor of Fortune.
Fortune’s claim for refund of overpaid excise tax is based on what it considers as an
“Unauthorized administrative legislation” particularly Section 1 of RR 17-99.

Issue:
1. W/N the rule of uniformity of taxation is violated by Section 1 of RR 17-99.
2. W/N Section 1 of RR 17-99 is an “unauthorized administrative legislation” when the
proviso went beyond the language of the law and usurped Congress’ power.

Held:
1. Yes.

The rule of uniformity of taxation is violated by the proviso in Section 1, RR 17-99.

The Constitution requires that taxation should be uniform and equitable. Uniformity in taxation
requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities. This requirement, however, is unwittingly violated when the proviso in
Section 1 of RR 17-99 is applied in certain cases. To illustrate, the Court consider 3 brands of
cigarettes all classified as lower-priced cigarettes under Section 145 (c ) (4 ) of the 1997 Tax
code since their retail price is lower than P5/pack. Although the brands all belong to the same
category, the proviso in Section 1, RR 17-99 authorized the imposition of different (and grossly
disproportionate) tax rates. It effectively extended the qualification stated in the third
paragraph of Section 145(c) of the 1997 Tax Code that was supposed to apply only during the
transition period:

2. Yes. Section 1 of RR 17-99 is an “unauthorized administrative legislation” as the law in

implements contained no similar proviso.

When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products
are read, however, there is nothing similar to the third paragraph of Section 145(c) that can be
found in the provisions imposing excise taxes on distilled spirits (Section 141) and wines
(Section 142). In fact, the rule will also not apply to cigars as these products fall under Section
145(a).

The 1997 Tax Code’s provisions on excise taxes have omitted the adoption of certain tax
measures. These omissions are telling indications of the intent of Congress not to adopt the
omitted tax measures; they are not simply unintended lapses in the law’s wording that, as the
CIR claims, are nevertheless covered by the spirit of the law. Had the intention of Congress
been solely to increase revenue collection, a provision similar to the third paragraph of Section
145(c) would have been incorporated in Sections 141 and 142 of the 1997 Tax Code .

The law contained no provision similar to the proviso of Section 1 of RR 17-99.