Commissioner and Internal Revenue, Petitioner. Fortune Tobacco Corporation, Respondent

TAXREV Topic
GR No. 167274-75
Date: July 21, 2008
Ponente: Tinga, J.
Commissioner and Internal Revenue, petitioner. Fortune Tobacco Corporation , respondent
SUMMARY
After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation
(Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its
tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this
petition. Accordingly, strict implementation and interpretation of taxes is as well discussed in this case.
Prior to the effectivity of January 1, 1997 wherein there was a shift from the ad valorem tax (VAT) system subjecting
cigarette brands to specific tax under Sec. 142, now Sec. 145 of the Tax Code of 1997, hence involving Fortune
Tobacco’s some cigarette products such that the rates of excise tax on cigars and cigarettes shall be increased by twelve
percent (12%). The Commissioner of Internal Revenue accordingly issued a Regulation No. 17-99 which entails the
increase on the applicable tax rates on cigars and cigarettes whereby it as well provides under Sec. 1 of the regulation
that "that the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits,
wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000."
Hence, for the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured
and removed in the total amounts of ₱585,705,250.00. On February 7, 2000, petitioner filed with respondent’s
Appellate Division a claim for refund or tax credit of its purportedly overpaid excise tax for the month of January 2000
in the amount of ₱35,651,410.00.
The court granted the tax refund and emphasized that although tax refund partakes the nature of a tax exemption, the
parity between tax refund and tax exemption exists only when the former is based either on a tax exemption statute or
a tax refund statute. In the present case, Fortune Tobacco’s claim for refund is premised on its erroneous payment of
the tax, or the government’s exaction in the absence of a law. Tax exemption is granted by the legislature thus, the one
who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to
exempt him by words too plain to be mistaken. In the same manner, a claim for tax refund may also be based on
statutes granting tax exemption or tax refund. Hence, in this case, the rule of strict interpretation against the taxpayer
is applicable as the claim for refund partakes of the nature of an exemption.
DOCTRINE :
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without
clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended
by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes
are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are
not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.
Nature of the case:

FACTS
Fortune Tobacco is a manufacturer and producer of some cigarette brands with tax rate classification based on net
retail price prescribed. Prior to January 1, 1997, its cigarette brands were subject to ad valorem tax but on January 1,
1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax system was
made and subjecting its cigarette brands to specific tax under Sec. 142 thereof, now renumbered as Sec. 145 of the Tax
Code of 1997 which provides pertinent provision that the rates of excise tax on cigars and cigarettes shall be increased
by twelve percent (12%) on January 1, 2000. To implement the provisions for a twelve percent (12%) increase of excise
tax on, among others, cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon
recommendation of the respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, likewise
provides in the last paragraph of Section 1, "that the new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually
being paid prior to January 1, 2000."
Accordingly, for the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands
manufactured and removed in the total amounts of ₱585,705,250.00. On February 7, 2000, petitioner filed with
respondent’s Appellate Division a claim for refund or tax credit of its purportedly overpaid excise tax for the month of
January 2000 in the amount of ₱35,651,410.00. Petitioner filed the instant petition for review with this Court in order
to comply with the two-year period for filing a claim for refund.
The Court of Tax Appeals (CTA) and the Court of Appeals, granted the tax refund or tax credit representing specific
taxes erroneously collected from its tobacco products. However, the Commissioner of Internal Revenue reclaims the
grant of tax refund. Hence, this petition.
ISSUE/S
I. Whether or not Section 1 of RR 17-99 is an unauthorized administrative legislation on the part of the CIR.
II. Whether or not Fortune Tobacco is entitled to tax refund.
RATIO
I. The proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it was supposed to implement, and
therefore entitles Fortune Tobacco to claim a refund of the overpaid excise taxes collected pursuant to this provision.
The rule on uniformity of taxation is violated by the proviso in Section 1, RR 17-99. Uniformity in taxation requires that
all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. 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. In the process, the CIR also
perpetuated the unequal tax treatment of similar goods that was supposed to be cured by the shift from ad valorem to
specific taxes.
The Court further said that the omission in the law in fact reveals the legislative intent not to adopt the higher tax rule.
It appears that despite its awareness of the need to protect the increase of excise taxes to increase government
revenue, Congress ultimately decided against adopting the higher tax rule.
II. Although tax refund partakes the nature of a tax exemption, this rule does not apply to Fortune Tobacco’s claim.
The parity between tax refund and tax exemption exists only when the former is based either on a tax exemption
statute or a tax refund statute. In the present case, Fortune Tobacco’s claim for refund is premised on its erroneous
payment of the tax, or the government’s exaction in the absence of a law.
Tax exemption is granted by the legislature thus, the one who claims an exemption from the burden of taxation must
justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. In the same
manner, a claim for tax refund may also be based on statutes granting tax exemption or tax refund. In this case, the
rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption.
Tax refunds (or tax credits) are not founded principally on legislative grace but on the legal principle which underlies all
quasi-contracts abhorring a person’s unjust enrichment at the expense of another. The dynamic of erroneous payment
of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but also mistake
in law.
The Government is not exempt from the application of solutio indebiti. Indeed, the taxpayer expects fair dealing from
the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously
collected. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself
against the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich
itself at the expense of taxpayers.
Hence, following the legal principle of solutio indebiti, the government cannot unjustly enrich itself at the expense of
the taxpayers. Under the Tax Code, in recognition of the pervasive quasi-contract principle, a claim for tax refund may
be based on the following:
(a) erroneously or illegally assessed or collected internal revenue taxes;
(b) penalties imposed without authority; and
(c) any sum alleged to have been excessive or in any manner wrongfully collected.
RULING
WHEREFORE the petition is DENIED.
(Surname/Alias/Nickname)

Commissioner and Internal Revenue, Petitioner. Fortune Tobacco Corporation, Respondent

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TAXREV Topic

Nature of the case:

II. Whether or not Fortune Tobacco is entitled to tax refund.

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