Factory v. Court Of Appeals

LEONEN, J.:

These cases involve the taxability of stemmed leaf tobacco imported and locally purchased by cigarette manufacturers for use as raw material in the manufacture of their cigarettes. Under the National Internal Revenue Code of 1997 (1997 NIRC), before it was amended on December 19, 2012 through Republic Act No. 103511 (Sin Tax Law), stemmed leaf tobacco is subject to an excise tax of P0.75 for each kilogram thereof.2 The 1997 NIRC further provides that stemmed leaf tobacco - "leaf tobacco which has had the stem or midrib removed"3 - "may be sold in bulk as raw material by one manufacturer directly to another without payment of the tax, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance."4 This is a consolidation of six petitions for review of several decisions of the Court of Appeals, involving three cigarette manufacturers and the Commissioner of Internal Revenue.

G.R. No. 125346 is anal5 from the Court of Appeals (Sixth Division) that rever LEONEN, LEONEN, sed6 the Court of Tax Appeals' decision7 and held petitioner La Suerte Cigar & Cigarette Factory (La Suerte) liable for deficiency specific tax on its purchase of imported and locally produced stemmed leaf tobacco and sale of stemmed leaf tobacco to Associated Anglo-American Tobacco Corporation (AATC) during the period from January 1, 1986 to June 30, 1989. GR. Nos. 136328-29 is an appeal8 by the Commissioner of Internal Revenue (Commissioner) from the decision9 of the Court of Appeals that affirmed the Court of Tax Appeals' rulings10 that Fortune Tobacco Corporation (Fortune) was not obliged to pay the excise tax on its importations of stemmed leaf tobacco for the periods from January 1, 1986 to June 30, 1989 and July 1, 1989 to November 30, 1990.

In G.R. No. 148605, Sterling Tobacco Corporation (Sterling) appeals11 the decision12 of the Court of Appeals that reversed the Court of Tax Appeals' decision13 and held it liable to pay deficiency excise taxes on its importation and local purchases of stemmed leaf tobacco from November 1986 to June 24, 1989. G.R. No. 144942is an appeal14 from the Court of Appeals' decision15 that affirmed the Court of Tax Appeals' decision16 and ordered the refund of specific taxes paid by La Suerte on its importation of stemmed leaf tobacco in April 1995. In G.R. No. 158197, La Suerte sought to appeal17 the decision18 of the Court of Appeals holding it liable for deficiency specific tax on its local and imported purchases of stemmed leaf tobacco and those it sold for the period from June 21, 1989 to November 20, 1990.

Finally, in G.R. No. 165499, La Suerte again sought to appeal by certiorari19 the decision20 of the Court of Appeals reversing the Court of Tax Appeals and holding it liable for deficiency specific tax on its importation of stemmed leaf tobacco in March 1995.

Factual background Overview of cigarette manufacturing The primary component of cigarettes is tobacco, a processed product derived from the leaves of the plants in the genus Nicotiana.21 Most cigarettes contain a mixture or blend of several types of tobacco from a variety of sources. The tobacco types grown in the Philippines are: Virginia (or 'fluecured'),22 which accounts for 59.35% of tobacco production, Burley (or 'bright air-cured'),23 which makes up 22.21%, and the Native (or 'dark air-cured),24 which makes up the remaining 18.44%.25 "[T]he 'native' type is normally categorized into three: cigar filler type, wrapper type and chewing type, or . .

. 'Batek' tobacco."26 Virginia and Burley, considered as the aromatic type, are intended for cigarette manufacturing. Growing and harvesting "Tobacco seeds undergo a process of germination, which takes about 7 to 10 days, depending on the tobacco varieties.

. . .

The tobacco seedlings are then sown in cold frames or hotbedsto prevent attacks from insects, and then transplanted into the fields"27 after 45 to 65 days.28 Harvesting begins 55 to 60 days after transplanting.29 A farmer carries out either priming(leaf by leaf) or stalk harvesting (by the whole plant).30 Curing "After harvest, tobacco is stored for curing, which allows for the slow oxidation and degradation of carotenoids. This allows for the leaves to take on properties that are usually attributed to the 'smoothness' of the smoke."31 "Curing methods vary with the type of tobacco grown. The tobacco barn design varies accordingly."32 There are two main ways of curing tobacco in the Philippine setting: 1) Air-curing (for Burley and Native tobacco) "is carried out by hanging the tobacco in well-ventilated barns, where the tobacco is allowed to dry over a period of 4 to 8 weeks.

Air-cured tobacco is generally low in sugar content, which gives the tobacco smoke a light, smooth, semi-sweet flavor. These tobacco leaves usually have a high nicotine content[;]"33 and 2) Flue-curing (for Virginia tobacco) process "starts by the sticking of tobacco leaves, which are then hung from tier-poles in curing barns. The procedure will generally take about a week.

Fluecured tobacco generally produces cigarette tobacco, which usually has a high content of sugar, with medium to high levels of nicotine."34 Once cured, the leaves are sorted into grades based on size, color, and quality, and packed in standard bales.35 The bales are then moved to accredited trading centers where they are purchased by leaf buyers such as wholesale tobacco dealers and exporters or cigarette manufacturing companies.36 Redrying and aging After purchase, leaf tobacco is re-dried and then added with moisture to make the tobacco pliable enough to remove its large stems.37 The leaves are stripped or de-stemmed, eitherby hand or machine, cleaned and compressed into boxes or porous wooden vats called hogsheads, and aged.38 Thereafter, the leaves are either exported or used for the manufacture of cigarettes, cigars, and other tobacco products. Primary processing39 In the cigarette factory, the tobacco leaves undergo a conditioning process where "high temperatures and humidity restore moisture to suitable levels for cutting and blending tobacco and completing the cigarette-making process."40 "[T]obaccos are precisely cut and blended according to .

. . formulas, or recipes, to produce tobaccos for various brands of cigarettes.

These brand recipes include ingredients and flavors that are added to the tobacco to give each brand its unique characteristics."41 Cigarette making and packing42 "The blended tobacco - often referred to as "filler" or "cut-filler" - .

. . is delivered by a pneumatic feed system to cigarette making machines .

. . within the factory."43 The machine disperses the shredded tobacco over a continuous roll of cigarette paper and cuts the paper to the desired length.

The completed cigarettes are subsequently packed, sealed, and placed in cartons.

Cigarette manufacturers La Suerte Cigar & Cigarette Factory (La Suerte),44 Fortune Tobacco Corporation (Fortune),45 and Sterling Tobacco Corporation (Sterling)46 are domestic corporations engaged in the production and manufacture of cigars and cigarettes. These companies import leaf tobacco from foreign sources and purchase locally produced leaf tobacco to be used in the manufacture of cigars and cigarettes.47 The transactions of these cigarette manufacturers pertinent to these consolidated cases are the following: 1. La Suerte's local purchases, importations, and sale of stemmed leaf tobacco from January 1, 1986 to June 30, 1989 (G.R. No. 125346), and from June 1989 to November 1990 (G.R. No. 158197), and importations in March 1995 (G.R. No. 165499) and April 1995 (G.R. No. 144942); 2.

Fortune's importation of tobacco strips from January 1, 1986 to June 30, 1989, and from July 1, 1989 to November 30, 1990 (G.R. Nos. 136328-29); and 3. Sterling's importations and local purchases of stemmed leaf tobacco from November 1986 to June 24, 1989 (G.R. No. 148605). History of applicable tax provisions The first tax code came into existence in 1939 with the enactment of Commonwealth Act No. 46648 (1939 Code).

Section 136 of the 1939 Code imposed specific (excise) taxes on manufactured products of tobacco, but excluded cigars and cigarettes, which were subject to tax under a different section.49 Section 136 provided thus: SECTION 136. Specific Tax on Products of Tobacco. - On manufactured products of tobacco, except cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for consumption in any other manner, but including all other tobacco twisted by hand or reduced into a condition to be consumed in any manner other than by the ordinary mode of drying and curing; and on all tobacco prepared or partially prepared for sale or consumption, even if prepared without the use of any machine or instrument and without being pressed or sweetened; and on all fine-cut shorts and refuse, scraps, clippings, cuttings, and sweepings of tobacco, there shall be collected on each kilogram, sixty centavos.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, forty-eight centavos. (Emphasis supplied) Section 132 of the 1939 Code, however, by way of exception, provided that "stemmed leaf tobacco . .

. may be sold in bulk as raw material by one manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax." Section 132 stated: SECTION 132.

Removal of Tobacco Products Without Prepayment of Tax. - Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditionsas may be prescribed in the regulations of the Department of Finance; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings and sweepings of tobacco may be sold in bulk as raw material byone manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax. "Stemmed leaf tobacco,"

as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco. (Emphasis supplied) On September 29, 1954, upon the recommendation of then Acting Collector of Internal Revenue J. Antonio Araneta, the Department of Finance promulgated Revenue Regulations No. V-39 (RR No. V-39), or "The Tobacco Products Regulations,"

relative to "the enforcement of the provisions of Title IV of the [1939 Tax Code] in so far as they affect the manufacture or importation of, and the collection and payment of the specific tax on, manufactured tobacco or products of tobacco."50 Section 20(a) of RR No. V-39, which lays the rules for tax exemption on tobacco products, states: SECTION 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes. - (a) Sale of stemmed leaf tobacco, etc., by one factory to another.

- Subject to the limitations herein established, products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use;and stemmed leaf tobacco, finecut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of specific tax. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or partially manufactured tobacco or other refuse of tobacco may be transferred from one factory to another under an official L-7 in voice on which shall be entered the exact weight of the tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the page of removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under heading "Refuse, etc., received from other factory,"

showing the date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, and the weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another. (Emphasis supplied) Sections 10 and 11 of RR No. V-39 enumerate and describe the record books to be kept and used by manufacturers of tobacco products, viz: SECTION 10.

(a) Register, auxiliary, and stamps requisition books for manufacturers. - The Collector of Internal Revenue shall from time to time supply provincial revenue agents or the Chief of the Tobacco Tax Section with the necessary number of manufacturers official register books and official auxiliary register booksas may be required in each locality by manufacturers of tobacco products. Whenever any manufacturer shall have qualified himself as such by executing a proper bond, registering his factory, and paying the privilege tax and shall have complied with all the requirements ofengaging in such business contained in the National Internal Revenue Code and in these regulations, the internal revenue agent within whose district the factory is located shall deliver to said manufacturer the necessary official register books and auxiliary register books.

These books consist of the following: B.I.R. No. 31.09-Official RegisterBook, A-3 for manufacturers of chewing and smoking tobacco. B.I.R. No. 31.10-Manufactured tobacco (Transcript sheet of above). B.I.R. No. 31.18-Official Register Book, A-4, for manufacturers of cigar.

B.I.R. No. 31.19-(Transcriptsheet of the above). B.I.R. No. 31.27-Official Register Book, A-5, for Manufacturers of cigarettes. B.I.R. No. 31.28-(Transcript sheet of above).

B.I.R. No. 31.01-Official Register Book, L-7, record of raw materials for manufacturers of any class of tobacco products. B.I.R. No. 31.02-(Transcript sheet of above)[.] B.I.R. No. 31.46-Auxiliary Register Book, L-7-1/2, bale book, for manufacturers of any class of tobacco products. B.I.R. No. 31.47-(Transcript sheet of above).

B.I.R. No. 31.12-Stamp requisition book, for manufacturers of manufactured tobacco. B.I.R. No. 31.21-Stamp requisition book, for manufacturers of cigars. B.I.R. No. 31.30-Stamp requisition book, for manufacturers of cigarettes.

B.I.R. No. 31.05-L-7 Official Invoice Book for, use in connection with L-7 register book. B.I.R. No. 31.05-L-7-1/2 OfficialInvoice Book, for use in connection with L-7-1/2 bale book.

(b) General nature of official register and auxiliary register books.- The L-7 official register book isthe record of all raw materials used in the manufacture of tobacco products of all description in the factory.It is the primary record of the internal operations of the factory. It shows the raw materials used in the manufacture and the articles actually manufactured or produced. The Schedule A register books are the record of the articles actually manufactured or produced, and transferred from the credit side of the official register book, L-7.

They show the amount of taxes paid and the name of the person to whom the finished products is consigned or sold when leaving the factory. The bale book[,] L-7-1/2, is an auxiliary to the L-7 official register book. All official register books and other official records herein required of manufacturers shall be kept in the factory premises, or in the factory warehouse, in the case of bale books, and open to inspection by any internal revenue officer at all times of the day or night.

. . .

. SECTION 11. Entries to be made in the official register and auxiliary register books; monthly transcripts.- (a) Official bale book (L-7-1/2).

All leaf tobacco received in any factory or factory warehouse shall be debited, and any removal of tobacco from the factory shall be credited in the official bale book; except cuttings, clippings, sweepings, and other partially manufactured tobacco, which shall be credited in the L-7 register book. The Collector of Internal Revenue may in his discretion waive the requirements of keeping an official bale book by small factories. (b) The Official Register Book (L-7).- One L-7 books shall suffice for each manufacturer of tobacco products, regardless of the classes of tobacco manufactured by him.All loose leaf tobacco received in the factory proper and all bales of leaf tobacco which are opened in the factory for use in the manufacture of tobacco products shall be entered in the L-7 official register book under the heading "Received from Dealers"

at the net weights. In the column headed "Name["] and "Address" shall be shown the words "Transferred from tobacco factory warehouse".

All leaf tobacco received into a factory must be entered in the official bale book pertaining to the factory and bales of leaf tobacco shall not be taken up in the L-7 register book until said bales are transferred for use and credited in the official bale book. While leaf tobacco must be taken in the official bale book, this is done for statistical purposes only. As soon asit enters the factory for use in manufacture it should be taken up in the L-7 register book and credited in the official bale book.

All removals of waste of tobacco, whether transferred to other factories, removed for agricultural orindustrial purposes, or destroyed on the premises or elsewhere, shall be entered in the official register book, L-7, under the heading "Raw Materials Removed", showing all information required therein. (Emphasis supplied) Section 2 of RR No. V-39 broadly defined "manufactured products of tobacco" and "manufacturer of tobacco products"

as follows: Section 2. Definition of terms. - When used in there [sic] regulations, the following terms shall begiven the interpretations indicated in their respective definitions given below, except where the context indicates otherwise: (a) "Manufactured products of tobacco"

shall include cigars, cigarettes, smoking tobacco, chewing, snuff, and all other forms of manufactured and partially manufactured tobacco, as defined in section 194 (M)51 of the National Internal Revenue Code. (b) "Manufacturer of tobacco products" shall include all persons engaged in the manufacture of any of the forms of tobacco mentioned in the next preceding paragraph.

In 1967, the Secretary of Finance promulgated Revenue Regulations No. 17-67 (RR No.

17-67), as amended,52 or the "Tobacco Revenue Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and Other Tobacco Products; Grading, Classification, Inspection, Shipments, Exportation, Importation and the Manufacturers thereof under the provisions of Act No. 2613, as amended." Section 2(i) of RR No. 17-67 defined a "manufacturer of tobacco" and included in the definition one who prepares partially manufactured tobacco.

Section 2(m) defined "partially manufactured tobacco" as including stemmed leaf tobacco. Thus, Sections 2(i) and (m) read: (i) "Manufacturer of tobacco"

- Includes every person whose business it is to manufacture tobacco o[r] snuff or who employs others to manufacture tobacco or snuff, whether such manufacture be by cutting, pressing (not baling), grinding, or rubbing (grating) any raw or leaf tobacco, or otherwise preparing raw or leaf tobacco, or manufactured or partially manufactured tobacco and snuff, or putting up for consumption scraps, refuse, or stems of tobacco resulting from any process of handling tobacco stems, scraps, clippings, or waste by sifting, twisting, screening or by any other process. . .

. . (m) "Partially manufactured tobacco"

- Includes: (1) "Stemmed leaf" - handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust. (2) "Long-filler"

- handstripped tobacco of good, long pieces of broken leaf usableas filler for cigars without further preparation, and free from mold, dust stems and cigar cuttings. (3) "Short-filler" - handstripped or machine-stripped tobacco, clean, good, short pieces of broken leaf, which will not pass through a screen of two inches (2") mesh.

(4) "Cigar-cuttings" - clean cuttings or clippings from cigars, unsized with any other form of tobacco. (5) "Machine-scrap tobacco"- machine-threshed, clean, good tobacco, not included in any of the above terms, usable in the manufacture of tobacco products.

(6) "Stems" - midribs of leaftobacco removed from the whole leaf or broken leaf either by hand or machine. (7) "Waste tobacco"

- denatured tobacco; powder or dust, refuse, unfit for human consumption; discarded materials in the manufacture of tobacco products, which may include stems. Section 3 of RR No. 17-67 classifiedentities that dealt with tobacco according to the type of permit that the Bureau of Internal Revenue issued to each entity. Under this classification, wholesale leaf tobacco dealers were considered L-3 permittees.

Those (referring to wholesale leaf tobacco dealers) that reprocess partially manufactured tobacco for export, for themselves, and/or for other L-6 or L-7 permittees were considered L-6 permittees. Manufacturers of tobacco products such as cigarette manufacturers were considered L-7 permittees. Section 3 of RR No. 17-67 reads: (a) L-3 - Wholesale leaf tobacco dealer.

(b) L-3F - Wholesale leaf tobacco dealer. Issued only in favor of Farmer's Cooperative Marketing Association (FaCoMas) duly organized in accordance with law. [This function relative to tobacco trading was transferred to the Philippine Virginia Tobacco Administration (PVTA) under Section 15 of Republic Act No. 2265].

(c) L-3R - Wholesale leaf tobacco dealers. Issued only in favor of persons or entities having fully equipped Redrying Plants. (d) L-3-1/4 - Buyers for wholesale leaf tobacco dealers.

(e) L-4 - Wholesale leaf tobacco dealers. Issued only in favor of persons or entities having flue-curing barns, who may purchase or receive green Virginia leaf tobacco from bona fide tobacco planters only, or handle green leaf of their own production, which tobacco shall be sold or transferred only to holders of L-3 and L-3R permits after flue-curing the tobacco. (f) L-5 - Tobacco planters selling to consumers part or the whole of their tobacco production.

(g) L-6 - Wholesale leaf tobacco dealers who, exclusively for export, except as otherwise provided for in these regulations, perform the following functions: (1) Handstripped and/or threshwhole leaf tobacco for themselves or for other L-6 or L-7 permittees; (2) Re-process partially manufactured tobacco for themselves, or for other L-6 or L-7 permittees; (3) Sell their partially manufactured tobacco to other L-6 permittees. (h) L-7 - Manufacturers of tobacco products. [L-7 1/2 designates an auxiliary registered book (bale books), for manufacturers of tobacco products.] (i) B-14 - Wholesale leaf tobaccodealers (Privilege tax receipt) (j) B-14 (a) - Retail leaf tobacco dealers (Privilege tax receipt) La Suerte contends that on December 12, 1972, then Internal Revenue Commissioner Misael P. Vera issued a ruling which declared that: .

. . .

The subsequent sale or transfer by the L-6/L-3R permittee for export or to an L-7-1/2 for use in the manufacture of cigars or cigarettes may also be allowed without the prepayment of the specific tax.53 Almost 40 years from the enactment of the 1939 Tax Code, Presidential Decree No. 1158-A, otherwise known as the "National Internal Revenue Code of 1977," was promulgated on June 3, 1977, to consolidate and integrate the various tax laws which have so far amended or repealed the provisions found in the 1939 Tax Code. Section 132 was renumbered as Section 144, and Section 136 as Section 148.

Sections 144 and 148, read: SEC. 144. Removal of tobacco products without prepayment of tax.-Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Department of Finance, and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cuts chewing tobacco, re-refuse, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another, under such conditions as may be prescribed in the regulations of the Department of Finance, without the prepayment of the tax.

"Stemmed leaf tobacco", as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco. .

. . .

SEC. 148. Specific tax on products of tobacco.-On manufactured products of tobacco, except cigars, cigarettes, and tobacco specially prepared for chewing so as to be unsuitable for consumption in any other manner, but including all other tobacco twisted by hand or reduced into a condition to be consumed in any manner other than by the ordinary mode of drying and curing; and on all tobacco prepared orpartially prepared for sale or consumption, even if prepared without the use of any machine or instrument and without being pressed or sweetened; and on all fine-cut shorts and refuse, scraps, clippings,cuttings, stems, and sweepings of tobacco, there shall be collected on each kilogram, seventy-five centavos: Provided, however, That fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling, or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment ofthe specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner if the same are to be exported or to be used in the manufacture of other tobacco products on which the specific tax will eventually be paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos. Sections 144 and 148 were subsequently renumbered as Sections 120 and 125 respectively under Presidential Decree No. 1994,54 which took effect on January 1, 1986 (1986 Tax Code); then as Sections 137 and 141 under Executive Order No. 273;55 and finally as Sections 140 and 144 under Republic Act No. 8424 or the "Tax Reform Act of 1997." However, the provisions remained basically unchanged.

The business transactions of La Suerte, Fortune, and Sterling that the Commissioner found to be taxable for specific tax took place during the effectivity of the 1986 Tax Code, as amended by Executive Order No. 273. The pertinent provisions are Sections 137 and 141, thus: SEC. 137.

Removal of tobacco products without prepayment of tax. - Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Ministry of Finance. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be soldin bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Ministry of Finance.

'Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco. .

. . .

SEC. 141. Tobacco Products.

- There shall be collected a tax of seventy-five centavos on each kilogram of the following products of tobacco: (a) tobacco twisted by hand or reduced into a condition to be consumed in any manner other than the ordinary mode of drying and curing; (b) tobacco prepared or partially prepared with or without the use of any machine or instruments or without being pressed or sweetened; and (c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of the specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Ministry of Finance upon recommendation of the Commissioner, if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventuallybe paid on the finished product.

On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos. Parenthetically, the present provisionsexplicitly state the following: Stemmed leaf tobacco, tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened, fine-cut shorts and refuse, scraps, clippings, cuttings, stems, midribs, and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco shall be transferred, disposed of, or otherwise sold, without any prepayment of the excisetax . .

. if the same are to be exported or to be used in the manufacture of cigars, cigarettes, or other tobacco products on which the excise tax will eventually be paid on the finished product, under such conditions as may be prescribed in the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.56 BIR assessments G.R. No. 125346 Sometime in June, 1989, a team of examiners from the Bureau of Internal Revenue, led by Crisanto G. Luna, Revenue Officer III of the Field Operation Division of the Excise Tax Service, conducted an examination of the books of La Suerte by virtue of a letter of authority issued by then Commissioner Jose U. Ong. On January 3, 1990, La Suerte received a letter from then Commissioner Jose U. Ong demanding the payment of 34,934,827.67 as deficiency excise tax on La Suerte's entire importation and local purchase of stemmed leaf tobacco for the period covering January 1, 1986 to June 30, 1989.

On January 12, 1990, La Suerte . . .

protest[ed] the excise tax deficiency assessment . . .

stressing that the BIR assessment was based solely on Section 141(b) of the Tax Code without, however, applying Section 137 thereof, the more specific provision, which expressly allows the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without payment of the excise tax. However, in a letter, dated August 31, 1990, Commissioner Jose U. Ong denied La Suerte's protest, insisting that stemmed leaf tobacco is subject to excise tax "unless there is an express grant of exemption from [the] payment of tax." In a letter dated October 17, 1990, Commissioner Ong reiterated his demand for the payment of the alleged deficiency excise taxes due from La Suerte, to wit: "Please be informed that in an investigation conducted by this Office, it was ascertainedthat you incurred a deficiency specific tax on your importation and local purchase of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989 in the total amount of 34,904,247.00 computed as follows: STEMMED-LEAF TOBACCO Imported 13,918,465 kls.

x 0.75 ₱10,438,848.00 Local 32,620,532 kls. x 0.75 24,465,399.00