COMMISSIONLR OI IN1LRNAL RLVLNUL v.

IOR1UNL 1OBACCO CORPORA1ION

G.R. Nos. J67274-7S, 2J July 2008, SLCOND DIVISION, (1inga, J.)
ectiov 11: of tbe 1a Coae iv.ofar roriae. a 12 ivcrea.e effectire ov 1 ]avvar, 2000 ba.ea ov tbe tae.
ivaicatea vvaer aragrab C, .vbaragrab ;1);1). orerer, Rerevve Regvtatiov ^o. 1 revt fvrtber ava aaaea
tbat 1be ver .ecific ta rate for av, ei.tivg brava of cigar., cigarette. ac/ea b, vacbive, ai.tittea .irit., rive. ava
fervevtea tiqvor .batt vot be torer tbav tbe eci.e ta tbat i. actvatt, beivg aia rior to ]avvar, 1, 2000. , aaaivg tbe
qvatificatiov tbat tbe ta ave after tbe 12 ivcrea.e becove. effectire .batt vot be torer tbav tbe ta actvatt, aia rior to
1 ]avvar, 2000, Rerevve Regvtatiov ^o. 1 effectiret, ivo.e. a ta rbicb i. tbe bigber avovvt betreev tbe aa
ratorev ta beivg aia at tbe eva of tbe tbree ;),ear trav.itiov erioa ava tbe .ecific ta vvaer aragrab C, .vb
aragrab ;1);1), a. ivcrea.ea b, 12-a .itvatiov vot .vortea b, tbe taiv roraivg of ectiov 11: of tbe 1a Coae.
.. re bare reriov.t, aectarea, rvteva/ivg orer vv.t be covfivea to aetait. for regvtativg tbe voae or roceeaivg. iv
oraer to carr, ivto effect tbe tar a. it ba. beev evactea, ava it cavvot be etevaea to aveva or eava tbe .tatvtor,
reqvirevevt. or to evbrace vatter. vot corerea b, tbe .tatvte. .avivi.tratire regvtatiov. vv.t atra,. be iv barvov, ritb
tbe rori.iov. of tbe tar becav.e av, re.vttivg ai.creavc, betreev tbe tro ritt atra,. be re.otrea iv faror of tbe ba.ic tar.
1be foregoivg teaa. v. to covctvae tbat Rerevve Regvtatiov ^o. 1 i. ivaeea ivaefev.ibt, ftarea.

Respondent lortune 1obacco Corporation ,lortune 1obacco, is the manuacturer,producer o
cigarette brands, with tax rate classiication based on net retail price prescribed by R.A. No. 4280.

Immediately prior to January 1, 199, the cigarette brands o respondent lortune 1obacco were
subject to aa ratorev tax pursuant to then Section 142 o the 1ax Code o 19, as amended. loweer,
on January 1, 199, R.A. 8240 took eect whereby a shit rom the aa ratorev tax system to the speciic
tax system was made and subjecting the respondent lortune`s cigarette brands to speciic tax under
Section 142 thereo, now renumbered as Sec. 145 o the 1ax Code o 199.
Reenue Regulation No. 1-99 likewise proides in the last paragraph o Section 1 thereo, that
the new speciic tax rate or any existing brand o cigars, cigarettes packed by machine, distilled spirits,
wines and ermented liquor shall not be lower than the excise tax that is actually being paid prior to
January 1, 2000.`
lor the period coering January 1-31, 2000, respondent lortune 1obacco allegedly paid speciic
taxes on all brands manuactured and remoed in the total amounts o P585,05,250.00. Respondent
lortune 1obacco iled with petitioner`s Appellate Diision a claim or reund or tax credit o its
purportedly oerpaid excise tax or the month o January 2000 in the amount o P35,651,410.00
On June 21, 2001, lortune 1obacco iled with petitioner Commissioner`s Legal Serice a letter
dated June 20, 2001 reiterating all the claims or reund,tax credit o its oerpaid excise taxes iled on
arious dates, including the present claim or the month o January 2000 in the amount o
P35,651,410.00.
As there was no action on the part o the petitioner, respondent lortune 1obacco iled the
instant petition or reiew with the Court o 1ax Appeals ,C1A, on December 11, 2001, in order to
comply with the two-year period or iling a claim or reund. C1A ound in aor o the respondent
lortune 1obacco.
Petitioner Commissioner o Internal Reenue sought reconsideration in an apparent change o
heart, C1A granted the petitioner`s reconsideration, thereby denying the respondent`s claim or reund.
On another motion or reconsideration iled by respondent lortune 1obacco, the C1A ruled this time
in their aor and ordered the reund. On appeal, the Court o Appeals denied the petition o petitioner
Commissioner o Internal Reenue. lence, this petition.
ISSUL:
\hether or not the reenue regulation has exceeded the allowable limits o legislatie delegation
HLLD:
Petition DISMISSLD.
Section 145 o the 1ax Code insoar proides a 12 increase eectie on 1 January 2000 based
on the taxes indicated under paragraph C, sub-paragraph ,1,-,4,. loweer, Reenue Regulation No. 1-
99 went urther and added that 1he new speciic tax rate or any existing brand o cigars, cigarettes
packed by machine, distilled spirits, wines and ermented liquor .batt vot be torer tbav tbe eci.e ta tbat i.
actvatt, beivg aia rior to ]avvar, 1, 2000.`
Parenthetically, Section 145 states that during the transition period, i.e., within the next three ,3,
years rom the eectiity o the 1ax Code, the excise tax rom any brand o cigarettes shall not be lower
than the tax due rom each brand on 01 October 1996. 1his qualiication, howeer, is conspicuously
absent as regards the 12 increase which is to be applied on cigars and cigarettes packed by machine,
among others, eectie on 01 January 2000. Clearly and unmistakably, Section 145 mandates a new rate
o excise tax or cigarettes packed by machine due to the 12 increase eectie on 01 January 2000
without regard to whether the reenue collection starting rom this period may turn out to be lower than
that collected prior to this date.
By adding the qualiication that the tax due ater the 12 increase becomes eectie shall not be
lower than the tax actually paid prior to 01 January 2000, Reenue Regulation No. 1-99 eectiely
imposes a tax which is the higher amount between the aa ratorev tax being paid at the end o the three
,3,-year transition period and the speciic tax under paragraph C, sub-paragraph ,1,-,4,, as increased by
12-a situation not supported by the plain wording o Section 145 o the 1ax Code.
1his is not the irst time that national reenue oicials had entured in the area o unauthorized
administratie legislation.
As the Court has preiously declared, rule-making power must be conined to details or
regulating the mode or proceedings in order to carry into eect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory requirements or to embrace matters not coered
by the statute. Administratie regulations must always be in harmony with the proisions o the law
because any resulting discrepancy between the two will always be resoled in aor o the basic law.

In the case at bar, the OSG`s argument that by 01 January 2000, the excise tax on cigarettes
should be the higher tax imposed under the speciic tax system and the tax imposed under the aa ratorev
tax system plus the 12 increase imposed by paragraph 5, Section 145 o the 1ax Code, is an
unsuccessul attempt to justiy what is clearly an impermissible incursion into the limits o administratie
legislation. Such an interpretation is not supported by the clear language o the law and is obiously only
meant to alidate the OSG`s thesis that Section 145 o the 1ax Code is ambiguous and admits o seeral
interpretations.
1he contention that the increase o 12 starting on 01 January 2000 does not apply to the
brands o cigarettes listed under Annex D` is likewise unmeritorious, absurd een. Paragraph 8,
Section 145 o the 1ax Code simply states that, |1|he classiication o each brand o cigarettes based on
its aerage net retail price as o October 1, 1996, as set orth in Annex D`, shall remain in orce until
reised by Congress.` 1his declaration certainly does not lend itsel to the interpretation gien to it by
the OSG. As plainly worded, the aerage net retail prices o the listed brands under Annex D,` which
classiy cigarettes according to their net retail price into low, medium or high, obiously remain the bases
or the application o the increase in excise tax rates eectie on 01 January 2000.
1he oregoing leads the Court to conclude that Reenue Regulation No. 1-99 is indeed
indeensibly lawed. 1he Commissioner cannot seek reuge in his claim that the purpose behind the
passage o the 1ax Code is to generate additional reenues or the goernment. Reenue generation has
undoubtedly been a major consideration in the passage o the 1ax Code. loweer, as borne by the
legislatie record, the shit rom the aa ratorev system to the speciic tax system is likewise meant to
promote air competition among the players in the industries concerned, to ensure an equitable
distribution o the tax burden and to simpliy tax administration by classiying cigarettes, among others,
into high, medium and low-priced based on their net retail price and accordingly graduating tax rates.
At any rate, this adertence to the legislatie record is merely gratuitous because, as we hae
held, the meaning o the law is clear on its ace and ree rom the ambiguities that the Commissioner
imputes. \e simply cannot disregard the letter o the law on the pretext o pursuing its spirit.

linally, the Commissioner`s contention that a tax reund partakes the nature o a tax exemption
does not apply to the tax reund to which lortune 1obacco is entitled. 1here is parity between tax
reund and tax exemption only when the ormer is based either on a tax exemption statute or a tax
reund statute. Obiously, that is not the situation here. Quite the contrary, lortune 1obaccos claim or
reund is premised on its erroneous payment o the tax, or better still the goernment`s exaction in the
absence o a law.

1ax exemption is a result o legislatie grace. And he who claims an exemption rom the burden
o taxation must justiy his claim by showing that the legislature intended to exempt him by words too
plain to be mistaken. 1he rule is that tax exemptions must be strictly construed such that the exemption
will not be held to be conerred unless the terms under which it is granted clearly and distinctly show
that such was the intention.

A claim or tax reund may be based on statutes granting tax exemption or tax reund. In such
case, the rule o strict interpretation against the taxpayer is applicable as the claim or reund partakes o
the nature o an exemption, a legislatie grace, which cannot be allowed unless granted in the most
explicit and categorical language. 1he taxpayer must show that the legislature intended to exempt him
rom the tax by words too plain to be mistaken.

1ax reunds ,or tax credits,, on the other hand, are not ounded principally on legislatie grace
but on the legal principle which underlies all quasi-contracts abhorring a person`s unjust enrichment at
the expense o another. 1he dynamic o erroneous payment o tax its to a tee the prototypic quasi-
contract, .otvtio ivaebiti, which coers not only mistake in act but also mistake in law.

1he Goernment is not exempt rom the application o .otvtio ivaebiti. Indeed, the taxpayer
expects air dealing rom the Goernment, and the latter has the duty to reund without any
unreasonable delay what it has erroneously collected. I the State expects its taxpayers to obsere airness
and honesty in paying their taxes, it must hold itsel against the same standard in reunding excess ,or
erroneous, payments o such taxes. It should not unjustly enrich itsel at the expense o taxpayers. And
so, gien its essence, a claim or tax reund necessitates only preponderance o eidence or its
approbation like in any other ordinary ciil case.

Under the 1ax Code itsel, apparently in recognition o the perasie quasi-contract principle, a
claim or tax reund may be based on the ollowing: ,a, erroneously or illegally assessed or collected
internal reenue taxes, ,b, penalties imposed without authority, and ,c, any sum alleged to hae been
excessie or in any manner wrongully collected.

\hat is controlling in this case is the well-settled doctrine o strict interpretation in the
imposition o taxes, not the similar doctrine as applied to tax exemptions. 1he rule in the interpretation
o 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 or that purpose.
Accordingly, the general rule o requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the proisions o a taxing act are not to be extended by implication. In
answering the question o who is subject to tax statutes, it is basic that in case o doubt, such statutes are
to be construed most strongly against the goernment and in aor o 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 o the
tax laws.