Commissioner of Internal Revenue vs.

CA and Fortune Tobacco Corporation

Facts:

Fortune Tobacco Corporation is engaged in the manufacture of different brands of

cigarettes. On various dates, certificates of trademark registration were issued to the
corporation for its "Champion," "Hope," and "More" cigarettes. 

The CIR initially classified these brands as foreign brands since they were listed in the World
Tobacco Directory as belonging to foreign companies. However, Fortune changed the names
of 'Hope' to Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands
from the foreign brand category. Fortune also submitted proof to the BIR that 'Champion'
was an original register and therefore a local brand. Ad Valorem taxes were then imposed
on these brands (ranging from 15% to 45%). 

Later on, RA 7654 was passed, amending Section 142(c)(1) of the National Internal
Revenue Code (NIRC). The said law provided that 55% ad valorem tax will be imposed on
locally manufactured cigarettes which are currently classified and taxed at 55%.

Two days before the effectivity of RA 7654, the BIR issued Revenue Memorandum Circular
No. 37-93, in which Fortune’s brands in question were classified as local brands carrying a
foreign name subject to a 55% ad valorem tax.

Thereafter, CIR assessed Fortune Tobacco for ad valorem tax deficiency. Fortune filed a
petition for review with the CTA. CTA found RMC as defective, on the ground that when RA
7654 took effect, the cigarette brands were not currently classified and taxed at 55%
pursuant to the NIRC. The CIR filed a motion for reconsideration with the CTA, but was
denied. CA affirmed the CTA’s decision.

CIR opined that RMC 37-93 is merely an interpretative ruling of the BIR which can thus
become effective without any prior need for notice and hearing, nor publication, and that its
issuance is not discriminatory since it would apply under similar circumstances all locally
manufactured cigarettes.

Issue: WON the issuance of RMC 37-93 was valid.

Ruling: NO.

Like any other government agency, the CIR shall not disregard legal requirements or
applicable principles in the exercise of its quasi-legislative powers.

When an administrative rule is merely interpretative in nature, its applicability needs

nothing further than its bare issuance. However, when the administrative rule goes beyond
merely providing for the means that can facilitate implementation of the law, but
substantially adds to or increases the burden of those governed, the agency should 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.

The SC held that RMC 37-93 cannot be viewed simply as a corrective measure or merely as
construing the NIRC, as amended, but has, in fact, been made in order to place the brands
in question within the classification of locally manufactured cigarettes bearing foreign
brands and to thereby have them covered by RA 7654.
Prior to the issuance of the questioned circular, the brands were in the category of locally
manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence,
without RMC 37-93, the enactment of RA 7654, would have had no new tax rate
consequence on Fortune’s products.

Evidently, in order to place the brands within the scope of the amendatory law and subject
them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing,
the BIR not simply interpreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements of notice, of hearing, and of
publication should not have been then ignored.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Apparently, RMC 37-93 would only apply to the brands in question and, unless petitioner
would be willing to concede to the submission of private respondent that the circular should
be considered adjudicatory in nature and thus violative of due process, the measure suffers
from lack of uniformity of taxation.