CIR VS FORTUNE G.R. No.

180006

Respondent FTC is a domestic corporation that manufactures cigarettes packed by machine

under several brands. Prior to January 1, 1997, Section 142 of the 1977 Tax Codesubjected
said cigarette brands to ad valorem tax. Annex D of R.A. No. 4280 prescribed
the cigarette brands tax classification rates based on their net retail price. On January 1, 1997,
R.A. No. 8240 took effect. 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 (3) 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 oncigarettes enumerated therein shall be
increased by 12% on January 1, 2000; and (3) the classification of each brand ofcigarettes based
on its average retail price as of October 1, 1996, as set forth in Annex D shall remain in force
until revised by Congress.
The Secretary of Finance issued RR No. 17-99 to implement the provision for the 12% excise tax
increase. RR No. 17-99 added the 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.
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.
ISSUE: WON Section 1 of RR 17-99 violated the constitutional limitation rule on uniformity?

Positive. 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. This requirement, however, is
unwittingly violated when the proviso in Section 1 of RR 17-99 is applied in certain cases. To
illustrate this point, we consider three brands of cigarettes, all classified as lower-priced
cigarettes under Section 145(c)(4) of the 1997 Tax Code, since their net retail price is
below P5.00 per pack:

Brand[22]

Net

(A)

(B)

(C)

(D)

(E)

Retail
Price
per
pack

Camel KS
Champion
M 100
Union
American
Blend

Ad
ValoremTax
Due prior to
Jan 1997

Specific
Tax under
Section
145(C)(4)

Specific
New Specific
Tax Due
Tax imposing
Jan 1997 to 12% increase
Dec 1999
by Jan 2000

4.71
4.56

5.50
3.30

1.00/pack
1.00/pack

5.50
3.30

1.12/pack
1.12/pack

New
Specific
Tax Due
by Jan
2000
perRR 1799
5.50
3.30

4.64

1.09

1.00/pack

1.09

1.12/pack

1.12

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 (see column
[D]). 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:
The excise tax from any brand of cigarettes within the next three (3) 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[.]

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.

NOTES:
REFUND: Following the principle of stare decisis, our ruling in the present case should no
longer come as a surprise. 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.
LEGISLATIVE INTENT: That RA 8240 (incorporated as Section 145 of the 1997 Tax Code)
was enacted to raise government revenues is a given fact, but this is not the sole and only
objective of the law. Congressional deliberations show that the shift from ad valorem to specific
taxes introduced by the law was also intended to curb the corruption that became endemic to the
imposition of ad valorem taxes. Since ad valorem taxes were based on the value of the goods,
the prices of the goods were often manipulated to yield lesser taxes. The imposition of specific
taxes, which are based on the volume of goods produced, would prevent price manipulation and
also cure the unequal tax treatment created by the skewed valuation of similar goods.