MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, CIR vs. CA, CTA and FORTUNE TOBACCO CORP.

INC. v. DEPARTMENT OF FINANCE SECRETARY,

G.R. No. 119761; August 29, 1996
COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE
(BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS
ORIENTAL, G.R. No. 108524. November 10, 1994
Facts: Fortune Tobacco Corporation ("Fortune
FACTS: Tobacco"), engaged in the manufacture of different
brands of cigarettes, registered "Champion," "Hope,"
Petitioner is engaged in the buying and selling of copra in
and "More" cigarettes. BIR classified them as foreign
Misamis Oriental. The petitioner questions Revenue
brands since they were listed in the World Tobacco
Memorandum Circular 47-91 issued by the respondent,
Directory as belonging to foreign companies. However,
in which copra was classified as agricultural non-food
Fortun changed the names of 'Hope' to 'Hope Luxury' and
product effectively removing copra as one of the
'More' to 'Premium More,' thereby removing the said
exemptions under Section 103 of the NIRC.
brands from the foreign brand category.
Section 103a of the NIRC states that the sale of
A 45% Ad Valorem taxes were imposed on these brands.
agricultural non-food products in their original state is
Then Republic Act ("RA") No. 7654 was enacted – 55% for
exempt from VAT only if the sale is made by the primary
locally manufactured foreign brand while 45% for locally
producer or owner of the land from which the same are
manufactured brands. 2 days before the effectivity of RA
produced and not by any other person or entity. Section
7654, Revenue Memorandum Circular No. 37-93 ("RMC
103b states the sale of agricultural food products in their
37-93"), was issued by the BIR saying since there is no
original state is exempt from VAT at all stages of
showing who the real owner/s are of Champion, Hope
production or distribution regardless of who the seller is
and More, it follows that the same shall be considered
- which the petitioner enjoys. The reclassification had the
locally manufactured foreign brand for purposes of
effect of denying to the petitioner this exemption when
determining the ad valorem tax - 55%. BIR sent via
copra was classified as an agricultural food product.
telefax a copy of RMC 37-93 to Fortune Tobacco
Petitioner filed a motion for prohibition. addressed to no one in particular. Then Fortune Tobacco
received, by ordinary mail, a certified xerox copy of RMC
ISSUE: Whether the Circular is valid.
37-93. CIR assessed Fortune Tobacco for ad valorem tax
deficiency amounting to P9,598,334.00.

RULING:
Yes. The Court first stated that the CIR gave the circular
a strict construction consistent with the rule that tax
exemptions must be strictly construed against the
taxpayer and liberally in favor of the state.
Fortune Tobacco filed a petition for review with the CTA.
8 CTA upheld the position of Fortune. CA affirmed.
Issue: WON it was necessary for BIR to follow the legal
requirements when it issued its RMC

The Court also stated that the Circular is not

discriminatory and in violation of the equal protection
clause. Petitioner likened copra farmers / producers,
who are exempted from VAT and copra traders, which
the Court disagreed.
Lastly, petitioners argued that the Circular was
counterproductive which the Court answers that it is a
question of wisdom or policy which should be addressed
to respondent officials and to Congress.
Ruling. YES. CIR may not disregard legal requirements in
the exercise of its quasi-legislative powers which
publication, filing, and prior hearing.
When an administrative rule is merely interpretative in
nature, its applicability needs nothing further than its
bare issuance for it gives no real consequence more than
what the law itself has already prescribed. BUT when,
upon the other hand, the administrative rule goes
beyond merely providing for the means that can
facilitate or render least cumbersome the
implementation of the law but substantially increases
the burden of those governed, the agency must accord,
at least to those directly affected, a chance to be heard,
before that new issuance is given the force and effect of
law.

RMC 37-93 cannot be viewed simply as construing

Section 142(c)(1) of the NIRC, as amended, but has, in
fact and most importantly, been made in order to place
"Hope Luxury," "Premium More" and "Champion" within
the classification of locally manufactured cigarettes
bearing foreign brands and to thereby have them
covered by RA 7654 which subjects mentioned brands to
55% 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.