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CIR vs.

Fortune Tobacco Corporation

G.R. Nos. 167274-75
Manufacturers of cigarettes are subject to pay excise taxes on their
products. Prior to January 1, 1997, the excises taxes on these products were in the
form of ad valorem taxes. The cigarette brands tax classification
rates were based on their net retail price. Beginning January 1,
1997, Republic Act No. (RA) 8240 took effect and a shift from ad valorem to
specific taxes was made. Pursuant to these laws, respondent Fortune Tobacco
Corporation (Fortune Tobacco) paid in advance excise taxes for the year 2003 in
the amount of P11.15 billion, and for the period covering January 1 to May 31,
2004 in the amount of P4.90 billion.

Sec. 145 thereof now subjects the cigarette brands to

specific tax and also provides that:
(1) the excise tax from any brand of cigarettes within the
next three years from the effectivity of R.A. No. 8240 shall
not be lower than the tax, which is due from each brand on
October 1, 1996;
(2) the rates of excise tax on cigarettes enumerated
therein shall increase by 12% on January 1, 2000; and
(3) the classification of each brand of cigarettes based on
its average retail price as of October 1, 1996, as set forth
in Annex D shall remain in force until revised by
The Secretary of Finance issued RR No. 17-99 to
implement the provision for the 12% excise tax increase
with the additional qualification that the new specific tax
rate xxx shall not be lower than the excise tax that is

actually being paid prior to January 1, 2000. In effect, it

provided that the 12% tax increase must be based on the
excise tax actually being paid prior to January 1, 2000 and
not on their actual net retail price.

In June 2004, Fortune Tobacco filed an administrative claim for tax refund
with the CIR for erroneously and/or illegally collected taxes in the amount ofP491

FTC filed 2 separate claims for refund or tax credit of its

purportedly overpaid excise taxes for the month of
January 2000 and for the period January 1-December 31,
2002. It assailed the validity of RR No. 17-99 in that it
enlarges Section 145 by providing the aforesaid
qualification. In this petition, petitioner CIR alleges that the
literal interpretation given by the CTA and the CA of
Section 145 would lead to a lower tax imposable on 1
January 2000 than that imposable during the transition
period, which is contrary to the legislative intent to raise
revenue. Section 145(c) of the 1997 Tax Code read and interpreted as it is
written; it imposes a 12% increase on the rates of excise taxes provided under subparagraphs (1), (2), (3), and (4) only; it does not say that the tax due during the
transition period shall continue to be collected if the amount is higher than the new
specific tax rates. It contends that the higher tax rule applies only to the threeyear transition period to offset the burden caused by the shift from ad valorem to
specific taxes.

Issue: Should the 12% tax increase be based on the net

retail price of the cigarettes in the market as outlined in
Section 145 of the 1997 Tax Code?
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.

YES. Section 145 is clear and unequivocal. It states that

during the transition period, i.e., within the next 3 years
from the effectivity of the 1997 Tax Code, the excise tax
from any brand of cigarettes shall not be lower than the
tax due from each brand on 1 October 1996. This
qualification, however, is conspicuously absent as regards
the 12% increase which is to be applied on cigars and
cigarettes packed by machine, among others, effective on
1 January 2000.
Clearly, Section 145 mandates a new rate of excise tax for
cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the
revenue collection starting from this period may turn out to
be lower than that collected prior to this date.

The qualification added by RR No. 17-99 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 Section 145, as increased by 12%
a situation not supported by the plain wording of Section
145 of the 1997 Tax Code. Administrative issuances must
not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out.
Revenue generation is not the sole purpose of the
passage of the 1997 Tax Code. The shift from the ad
valorem system to the specific tax system in the Code is
likewise meant to promote fair competition among the
players in the industries concerned and to ensure an
equitable distribution of the tax burden.