COMMISSIONER ON INTERNAL REVENUE vs.

FORTUNE TOBACCO CORPORATION

Doctrine: The higher tax rule only applies during the transition period. To implement the higher tax rule on Jan. 1, 2000
would violate the rule of uniformity since brands belonging to the same category would be imposed with different taxes.

Background facts:

 Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products.
o Prior to Jan. 1, 1997 – excise taxes on these products were in the form of ad valorem taxes pursuant
to the 1977 Tax Code.
o Beginning Jan. 1, 1997, RA 8240 took effect and a shift from ad valorem to specific taxes was made.
Sec 142(c) of the 1977 Tax Code, as amended by RA 8240 provides:
“The specific tax from any brand of cigarettes within the next three 3 years of
effectivity of this Act shall not be lower than the tax [which] is due from each brand
on October 1, 1996: Provided, however, That in cases where the specific tax rates
imposed in paragraphs (1)-(4) hereinabove will result in an increase in excise tax
of more than 70%, for a brand of cigarette, the increase shall take effect in two
tranches: 50% of the increase shall be effective in 1997 and 100% of the increase
shall be effective in 1998.
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The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and
(4) hereof, shall be increased by twelve percent (12%) on January 1, 2000.”
 To implement RA 8240, the CIR issued Revenue Regulation No. (RR) 1-97 whose Section 3(c) and (d)
echoed the above-quoted portion of Section 142.
 The 1977 Tax Code was later repealed by RA 8424 (1997 Tax Code), and Sec. 142 as amended by RA 8240
was renumbered as Sec. 145.
 This time, to implement the 12% increase in specific taxes mandated under Section 145 of the 1997 Tax
Code, the CIR issued RR 17-99:
“Sec. 1. New Rates of Specific Tax – The specific tax rates imposed under the ff.
sections are hereby increased by 12% and the new rates to be levied, assessed,
and collected are as follows… Provided, however, that the new specific tax rate
for any existing brand of cigars [and] cigarettes packed by machine, distilled
spirits, wines and fermented liquors shall not be lower than the excise tax
that is actually being paid prior to January 1, 2000.”

Facts:

 Pursuant to these laws, Fortune Tobacco Corporation paid in advance excise taxes for 2003 (P11.15B), and
for the period covering Jan. 1-May 31, 2004 (P4.90B).
 June 2004: Fortune Tobacco filed an administrative claim for tax refund with the CIR for erroneously and/or
illegally collected taxes. It also filed a judicial claim for tax refund w/ the CTA.
 CTA 1st Division ruled in favor of Fortune Tobacco and granted its claim for refund. CTA en banc affirmed the
CTA decision and denied CIR’s MR. CIR filed a petition for review on certiorari.
 The parties’ arguments:

Fortune Tobacco CIR

 Primary basis for the claim for refund: CIR’s
unauthorized administrative legislation.
 By including the Sec 1 of RR 17-99, CIR went
beyond the language of the law and usurped
Congress’ power.
 Said proviso requires the payment of the excise
tax actually being paid prior to Jan. 1, 2000 if
this amount is higher than the new specific tax
rate, i.e., rates of specific taxes imposed in
1997 for each category of cigarette, plus 12%.
 Section 145(c) of the 1997 Tax Code, as
written, imposes a 12% increase on the excise
tax rates provided under sub-paragraphs (1)-
(4) only; it does not say that the tax due during
 The inclusion of the proviso was made to carry
out the law’s intent and is well within the scope
of his delegated legislative authority.
 CTA’s strict interpretation of the law ignored
Congress’ intent to increase the collection of
excise taxes (as shown by the adoption of the
“higher tax rule” during the transition period) by
increasing specific tax rates on sin products.
 Sec 145(c) categorically declares that the
excise tax from any brand of cigarettes w/in the
3-year transition period shall not be lower than
 the transition period shall continue to be
collected if the amount is higher than the new
specific tax rates.
 The “higher tax rule” applies only to the 3-year
transition period to offset the burden caused by
the shift from ad valorem to specific taxes.
the tax which is due from each brand on Oct. 1,
1996.
 No plausible reason why the new specific tax
rates due beginning Jan. 1, 2000 should not be
subject to the same rule as those due during the
transition period.

Issue:

WON the rule of uniformity of taxation was violated by the proviso in Sec 1, RR 17-99 – YES

Held:

 Following stare decisis, the ruling in CIR v. Fortune Tobacco (2008) applies in this case. The SC upheld
Fortune Tobacco’s tax refund claims after finding invalid the proviso in Sec 1 of RR17-99.
o By adding the qualification in Sec 145 stating that the tax due after the 12% increase becomes
effective shall not be lower than the tax actually paid prior to Jan. 1, 2000, RR 17-99 effectively
imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the
3-year transition period and the specific tax under par. C, sub-paragraph (1)-(4), as increased by
12% – a situation not supported by the plain wording of Section 145 of the Tax Code.
o The qualification is conspicuously absent as regards the 12% increase to be applied on cigars and
cigarettes packed by machine, among others, effective on Jan. 1, 2000.
o The proviso in Sec 1 of RR 17-99 clearly went beyond the terms of the law it was supposed to
implement.
 Raising government revenue is not RA8240’s sole objective. The shift from ad valorem (based on the value
of the goods) to specific taxes (based on the volume of the goods produced) was intended to curb the
corruption in the imposition of the former. Imposing specific taxes would prevent price manipulation and also
cure the unequal tax treatment created by the skewed valuation of similar goods.
 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.
 Illustration of the violation of the rule of uniformity of taxation by the proviso in Sec 1, RR 17-99:
o Consider 3 brands of cigarettes, all classified as lower-priced cigarettes (P5/pack net retail price)
under the 1997 Tax Code. Though the brands all belong to the same category, the said proviso
authorized the imposition of different and grossly disproportionate tax rates. It effectively extended
the qualification stated in the the 1997 Tax Code that was supposed to apply only during the transition
period:
“The excise tax from any brand of cigarettes w/in the next 3 years from the
effectivity of RA 8240 shall not be lower than the tax, which is due from each brand
on Oct. 1, 1996.”
o 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 1997 Tax Code’s provisions on excise taxes have omitted the adoption of certain tax measures. These
omissions reveal the legislative intent not to adopt the higher tax rule; they are not simply unintended lapses
in the law’s wording.