EN BANC
Puno, C.J.,
Quisumbing,
Ynares-Santiago,
Carpio,
- versus - Austria-Martinez,
Corona,
Carpio Morales,
Azcuna,
Tinga,
Chico-Nazario,
Velasco, Jr.,
Nachura,
Reyes,
Leonardo-De Castro, and
Brion, JJ.
JOSE ISIDRO N. CAMACHO,
in his
capacity as Secretary of
the
Department of Finance and
GUILLERMO L.
PARAYNO, JR.,
in his
capacity as Commissioner of
the Bureau
of Internal Revenue,
Respondents.
Philip
Morris
Manufacturing,
Inc.,
fortune
tobacco, corp., Promulgated:
MIGHTY
CORPORATION, and
JT
InTERNATIONAL,
Respondents-in-Intervention. August 20, 2008
x
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x
YNARES-SANTIAGO, J.:
This petition for review assails the
validity of: (1) Section 145 of the National Internal Revenue Code (NIRC), as
recodified by Republic Act (RA) 8424; (2) RA 9334, which further amended
Section 145 of the NIRC on
RA 8240, entitled “An Act Amending
Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other
Purposes,” took effect on
Paragraph (c) of Section 145 provides for four tiers of tax rates based
on the net retail price per pack of
cigarettes. To determine the applicable tax
rates of existing cigarette brands, a survey of the net retail prices per pack
of cigarettes was conducted as of
Paragraph (c) of Section 145, [1]
states –
SEC.
145. Cigars and cigarettes. –
x x x x
(c) Cigarettes
packed by machine. – There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the
excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the
tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the
excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight
pesos and ninety-six centavos (P8.96) per pack;
(3) If the
net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per
pack, the tax shall be Five pesos and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One
peso and twelve centavos (P1.12) per pack.
Variants of existing brands of
cigarettes which are introduced in the domestic market after the effectivity of
this Act shall be taxed under the highest classification of any variant of that
brand.
x x x x
New brands
shall be classified according to their current
net retail price.
For the above
purpose, net retail price shall mean
the price at which the cigarette is sold on retail in 20 major supermarkets in
Metro Manila (for brands of cigarettes marketed nationally), excluding the
amount intended to cover the applicable excise tax and the value-added
tax. For brands which are marketed only
outside Metro Manila, the net retail price shall mean the price at which the
cigarette is sold in five major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net
retail price as of
As such, new brands of cigarettes
shall be taxed according to their current
net retail price while existing or “old” brands shall be taxed based on
their net retail price as of
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue
Regulations No. 1-97,[2] which
classified the existing brands of cigarettes as those duly registered or active
brands prior to
SECTION
2. Definition
of Terms.
x x x x
3. Duly registered or
existing brand of cigarettes – shall include duly registered, existing
or active brands of cigarettes, prior to
x x x x
6. New
Brands – shall mean brands duly registered after
Section 4. Classification and Manner of Taxation of Existing Brands, New Brands
and Variant of Existing Brands.
x x x x
B. New
Brand
New
brands shall be classified according to their current net retail price. In the meantime that the current net retail
price has not yet been established, the suggested net retail price shall be
used to determine the specific tax classification. Thereafter, a survey shall be conducted in 20
major supermarkets or retail outlets in Metro Manila (for brands of cigarette
marketed nationally) or in five (5) major supermarkets or retail outlets in the
region (for brands which are marketed only outside Metro Manila) at which the
cigarette is sold on retail in reams/cartons, three (3) months after the
initial removal of the new brand to determine the actual net retail price
excluding the excise tax and value added
tax which shall then be the basis in determining the specific tax
classification. In case the current net
retail price is higher than the suggested net retail price, the former shall
prevail. Any difference in specific tax
due shall be assessed and collected inclusive of increments as provided for by
the National Internal Revenue Code, as amended.
In June 2001, petitioner British
American Tobacco introduced into the market Lucky Strike Filter, Lucky Strike
Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail
price of P9.90 per pack.[3] Pursuant to Sec. 145 (c) quoted above, the
Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.
On
For
the purpose of establishing or updating the tax classification of new brands
and variant(s) thereof, their current net retail price shall be reviewed
periodically through the conduct of survey or any other appropriate activity,
as mentioned above, every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding
any increase in the current net retail price, the tax classification of such
new brands shall remain in force until the same is altered or changed through
the issuance of an appropriate Revenue Regulations.
Pursuant thereto, Revenue
Memorandum Order No. 6-2003[5] was
issued on March 11, 2003, prescribing the guidelines and procedures in
establishing current net retail prices of new brands of cigarettes and alcohol
products.
Subsequently, Revenue Regulations No. 22-2003[6] was
issued on August 8, 2003 to implement the revised tax classification of certain
new brands introduced in the market after January 1, 1997, based on the survey
of their current net retail price. The
survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike
Menthol Lights, are sold at the current net retail price of P22.54, P22.61 and
P21.23, per pack, respectively.[7] Respondent Commissioner of the Bureau of
Internal Revenue thus recommended the applicable tax rate of P13.44 per pack
inasmuch as Lucky Strike’s average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner
filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition
for injunction with prayer for the issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction, docketed as Civil Case No.
03-1032. Said petition sought to enjoin
the implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97,
9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they
discriminate against new brands of cigarettes, in violation of the equal
protection and uniformity provisions of the Constitution.
Respondent Commissioner of Internal
Revenue filed an Opposition[8] to
the application for the issuance of a TRO.
On
In an Order dated
On
WHEREFORE,
premises considered, the instant Petition is hereby DISMISSED for lack of
merit. The Writ of Preliminary
Injunction previously issued is hereby lifted and dissolved.
SO
ORDERED.[16]
Petitioner brought the instant petition for review directly with this
Court on a pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax
Rates Imposed on Alcohol And Tobacco Products, Amending For The Purpose
Sections 131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took
effect on January 1, 2005. The statute, among
others,–
(1) increased the excise tax
rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of
cigarettes shall initially be classified according to their suggested net
retail price, until such time that their correct tax bracket is finally determined
under a specified period and, after which, their classification shall remain in force until revised by
Congress;
(3) retained Annex “D” as tax
base of those surveyed as of October 1, 1996 including the classification of brands for the same products which, although not
set forth in said Annex “D,” were registered on or before January 1, 1997 and
were being commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the effectivity
of this Act. Said classification shall
remain in force until revised by Congress; and
(4) provided
a legislative freeze on brands of cigarettes introduced between the period
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes.
–
x x x x
(C) Cigarettes Packed by Machine. – There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(2) If the net retail price (excluding the
excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed
Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(3) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(4) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
x x x x
New
brands, as defined in the immediately following paragraph, shall initially be
classified according to their suggested net retail price.
New brands shall mean a brand
registered after the date of effectivity of R.A. No. 8240.
Suggested net retail price shall mean
the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacturer or
importer to be sold on retail in major supermarkets or retail outlets in Metro
Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three
(3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail
price as defined herein and determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which
a particular new brand of cigarettes shall be classified; Provided however,
That brands of cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in the classification
under which the Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification
of new brands and brands introduced between
Net
retail price, as determined by the Bureau of Internal Revenue through a price
survey to be conducted by the Bureau of Internal Revenue itself, or the
National Statistics Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the cigarette is sold in retail
in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax.
For brands which are marketed only outside Metro Manila, the “net retail
price” shall mean the price at which the cigarette is sold in at least five (5)
major supermarkets in the region excluding the amount intended to cover the
applicable excise tax and value-added tax.
The classification of each brand of
cigarettes based on its average net retail price as of October 1, 1996, as set
forth in Annex “D”, including the classification of brands for the same
products which, although not set forth in said Annex “D”, were registered and
were being commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the effectivity
of this Act, shall remain in force until revised by Congress. (Emphasis added)
Under RA 9334, the excise tax due on petitioner’s products was increased
to P25.00 per pack. In the
implementation thereof, respondent Commissioner assessed petitioner’s
importation of 911,000 packs of Lucky Strike cigarettes at the increased tax
rate of P25.00 per pack, rendering it liable for taxes in the total sum of
P22,775,000.00.[18]
Hence, petitioner filed a Motion to Admit Attached Supplement[19]
and a Supplement[20] to the
petition for review, assailing the constitutionality of RA 9334 insofar as it retained
Annex “D” and praying for a downward classification of Lucky Strike products at
the bracket taxable at P8.96 per pack.
Petitioner contended that the continued use of Annex “D” as the tax base
of existing brands of cigarettes gives undue protection to said brands which are
still taxed based on their price as of October 1996 notwithstanding that they
are now sold at the same or even at a higher price than new brands like Lucky
Strike. Thus, old brands of cigarettes such
as Marlboro and Philip Morris which, like Lucky Strike, are sold at or more
than P22.00 per pack, are taxed at the rate of P10.88 per pack, while Lucky
Strike products are taxed at P26.06 per pack.
In its Comment to the supplemental petition, respondents, through the
Office of the Solicitor General (OSG), argued that the passage of RA 9334,
specifically the provision imposing a legislative freeze on the classification
of cigarettes introduced into the market between January 2, 1997 and December
31, 2003, rendered the instant petition academic. The OSG claims that the provision in Section
145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, “cured’ the perceived defect of Section 145
considering that, like the cigarettes under Annex “D,” petitioner’s brands and
other brands introduced between January 2, 1997 and December 31, 2003, shall
remain in the classification under which the BIR has placed them and only
Congress has the power to reclassify them.
On
According to the Intervenors, no inequality exists because cigarettes
classified by the BIR based on their net retail price as of
Intervenor Fortune Tobacco further contends that petitioner is estopped
from questioning the constitutionality of Section 145 and its implementing
rules and regulations because it entered into the cigarette industry fully
aware of the existing tax system and its consequences. Petitioner imported cigarettes into the
country knowing that its suggested retail price, which will be the initial
basis of its tax classification, will be confirmed and validated through a
survey by the BIR to determine the correct tax that would be levied on its
cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of
the BIR issuances should have been brought by petitioner before the Court of
Tax Appeals (CTA) and not the RTC because it is the CTA which has exclusive
appellate jurisdiction over decisions of the BIR in tax disputes.
On
Before going into the substantive issues of this case, we must first
address the matter of jurisdiction, in light of Fortune Tobacco’s contention
that petitioner should have brought its petition before the Court of Tax
Appeals rather than the regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act
No. 1125, as amended by Republic Act No. 9282.
Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. — The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relations thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial; xxx.[25]
While the above statute confers on the CTA jurisdiction to resolve tax
disputes in general, this does not include cases where the constitutionality of
a law or rule is challenged. Where what
is assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts have jurisdiction to pass upon
the same. The determination of whether a
specific rule or set of rules issued by an administrative agency contravenes the
law or the constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine in an appropriate
action the validity of the acts of the political departments. Judicial power includes the duty of the
courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the Government.[26]
In Drilon v. Lim,[27]
it was held:
We stress at the outset that
the lower court had jurisdiction to consider the constitutionality of Section
187, this authority being embraced in the general definition of the judicial
power to determine what are the valid and binding laws by the criterion of
their conformity to the fundamental law.
Specifically, B.P. 129 vests in the regional trial courts jurisdiction
over all civil cases in which the subject of the litigation is incapable of
pecuniary estimation, even as the accused in a criminal action has the right to
question in his defense the constitutionality of a law he is charged with
violating and of the proceedings taken against him, particularly as they
contravene the Bill of Rights. Moreover,
Article X, Section 5(2), of the Constitution vests in the Supreme Court
appellate jurisdiction over final judgments and orders of lower courts in all
cases in which the constitutionality or validity of any treaty, international
or executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question.
The petition for injunction filed by
petitioner before the RTC is a direct attack on the constitutionality of
Section 145(C) of the NIRC, as amended, and the validity of its implementing
rules and regulations. In fact, the RTC
limited the resolution of the subject case to the issue of the
constitutionality of the assailed provisions. The determination of whether the assailed law
and its implementing rules and regulations contravene the Constitution is
within the jurisdiction of regular courts.
The Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the
regional trial courts.[28] Petitioner,
therefore, properly filed the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from assailing
the authority of the Commissioner of Internal Revenue. Fortune Tobacco raises this objection by
pointing out that when petitioner requested the Commissioner for a ruling that
its Lucky Strike Soft Pack cigarettes was a “new brand” rather than a variant
of an existing brand, and thus subject to a lower specific tax rate, petitioner
executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of
the Commissioner of Internal Revenue, cannot later on turn around when the
ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents
persons from going back on their own acts and representations, to the prejudice
of others who have relied on them.[29] The principle is codified in Article 1431 of
the Civil Code, which provides:
Through estoppel, an admission
or representation is rendered conclusive upon the person making it and cannot
be denied or disproved as against the person relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of
Court, viz:
Sec.
2. Conclusive presumptions. — The
following are instances of conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing true,
and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission be permitted to falsify it.
The elements of estoppel are: first,
the actor who usually must have knowledge, notice or suspicion of the true
facts, communicates something to another in a misleading way, either by words,
conduct or silence; second,
the other in fact relies, and relies reasonably or justifiably, upon that
communication; third, the
other would be harmed materially if the actor is later permitted to assert any
claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees that the other
would act upon the information given or that a reasonable person in the actor's
position would expect or foresee such action.[30]
In the early case of Kalalo v. Luz,[31] the elements of estoppel, as related to the
party to be estopped, are: (1) conduct amounting to false representation or
concealment of material facts; or at
least calculated to convey the impression that the facts are other than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent,
or at least expectation that this
conduct shall be acted upon by, or at
least influence, the other party; and (3) knowledge,
actual or constructive, of the real
facts.
We find that petitioner was not
guilty of estoppel. When it made the
undertaking to comply with all issuances of the BIR, which at that time it
considered as valid, petitioner did not commit any false misrepresentation or
misleading act. Indeed, petitioner
cannot be faulted for initially undertaking to comply with, and subjecting
itself to the operation of Section 145(C), and only later on filing the subject
case praying for the declaration of its unconstitutionality when the
circumstances change and the law results in what it perceives to be unlawful
discrimination. The mere fact that a law
has been relied upon in the past and all that time has not been attacked as
unconstitutional is not a ground for considering petitioner estopped from
assailing its validity. For courts will
pass upon a constitutional question only when presented before it in bona
fide cases for determination, and the fact that the question has not been
raised before is not a valid reason for refusing to allow it to be raised
later.[32]
Now to the substantive issues.
To place this case in its proper
context, we deem it necessary to first discuss how the assailed law operates in
order to identify, with precision, the specific provisions which, according to
petitioner, have created a grossly discriminatory classification scheme between
old and new brands. The pertinent portions of RA 8240, as amended by RA 9334, are
reproduced below for ready reference:
SEC. 145. Cigars and
Cigarettes. –
x x x x
(C) Cigarettes Packed by Machine. – There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(2) If the net retail price (excluding the
excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed
Six pesos and fifty centavos (P6.50) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(3) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
(4) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on
Effective on
Effective on
Effective on
x x x x
New
brands, as defined in the immediately following paragraph, shall initially be
classified according to their suggested net retail price.
New
brands shall mean a brand registered after the date of effectivity of R.A. No.
8240.
Suggested
net retail price shall mean the net retail price at which new brands, as
defined above, of locally manufactured or imported cigarettes are intended by
the manufacturer or importer to be sold on retail in major supermarkets or
retail outlets in Metro Manila for those marketed nationwide, and in other
regions, for those with regional markets.
At the end of three (3) months from the product launch, the Bureau of
Internal Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against the net retail
price as of the time of revalidation in order to finally determine the correct
tax bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in the classification under which the
Bureau of Internal Revenue has determined them to belong as of December 31,
2003. Such classification of new brands
and brands introduced between
Net
retail price, as determined by the Bureau of Internal Revenue through a price
survey to be conducted by the Bureau of Internal Revenue itself, or the
National Statistics Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the cigarette is sold in retail
in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax.
For brands which are marketed only outside Metro Manila, the “net retail
price” shall mean the price at which the cigarette is sold in at least five (5)
major supermarkets in the region excluding the amount intended to cover the
applicable excise tax and value-added tax.
The
classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex “D”, including the classification
of brands for the same products which, although not set forth in said Annex
“D”, were registered and were being commercially produced and marketed on or
after October 1, 1996, and which continue to be commercially produced and
marketed after the effectivity of this Act, shall remain in force until revised
by Congress.
As can be seen, the law creates a
four-tiered system which we may refer to as the low-priced,[33]
medium-priced,[34]
high-priced,[35] and
premium-priced[36] tax
brackets. When a brand is introduced in
the market, the current net retail price is determined through the aforequoted specified
procedure. The current net retail price is then used to classify under which tax
bracket the brand belongs in order to finally determine the corresponding excise
tax rate on a per pack basis. The assailed
feature of this law pertains to the mechanism where, after a brand is
classified based on its current net retail price, the classification is frozen
and only Congress can thereafter reclassify the same. From a practical point of view, Annex “D” is
merely a by-product of the whole
mechanism and philosophy of the assailed law. That is, the brands under Annex
“D” were also classified based on their current net retail price, the only
difference being that they were the first ones so classified since they were
the only brands surveyed as of October 1, 1996, or prior to the effectivity of
RA 8240 on January 1, 1997.[37]
Due to this legislative
classification scheme, it is possible
that over time the net retail price of a previously classified brand, whether
it be a brand under Annex “D” or a new brand classified after the effectivity
of RA 8240 on January 1, 1997, would increase
(due to inflation, increase of production costs, manufacturer’s decision to
increase its prices, etc.) to a point
that its net retail price pierces the tax bracket to which it was previously
classified.[38] Consequently, even if its present day net
retail price would make it fall under a higher tax bracket, the previously
classified brand would continue to be subject to the excise tax rate under the
lower tax bracket by virtue of the legislative classification freeze.
Petitioner
claims that this is what happened in 2004 to the Marlboro and Philip Morris
brands, which were permanently classified under Annex “D.” As of October 1, 1996, Marlboro had net retail
prices ranging from P6.78 to P6.84 while Philip Morris had net retail prices
ranging from P7.39 to P7.48. Thus,
pursuant to RA 8240,[39] Marlboro
and Philip Morris were classified under the high-priced tax bracket and
subjected to an excise tax rate of P8.96 per pack. Petitioner then presented evidence showing
that after the lapse of about seven years or sometime in 2004, Marlboro’s and
Philip Morris’ net retail prices per pack both increased to about P15.59.[40] This meant that they would fall under the
premium-priced tax bracket, with a higher excise tax rate of P13.44 per pack,[41] had
they been classified based on their 2004 net retail prices. However, due to the legislative classification
freeze, they continued to be classified under the high-priced tax bracket with
a lower excise tax rate. Petitioner thereafter
deplores the fact that its Lucky Strike Filter, Lucky Strike Lights, and Lucky
Strike Menthol Lights cigarettes, introduced in the market sometime in 2001 and
validated by a BIR survey in 2003, were found to have net retail prices of P11.53,
P11.59 and P10.34,[42]
respectively, which are lower than those of Marlboro and Philip Morris. However, since petitioner’s cigarettes were newly
introduced brands in the market, they were taxed based on their current net
retail prices and, thus, fall under the premium-priced tax bracket with a higher
excise tax rate of P13.44 per pack. This
unequal tax treatment between Marlboro and Philip Morris, on the one hand, and
Lucky Strike, on the other, is the crux of petitioner’s contention that the
legislative classification freeze violates the equal protection and uniformity
of taxation clauses of the Constitution.
It is apparent that, contrary to its
assertions, petitioner is not only questioning the undue favoritism accorded to
brands under Annex “D,” but the entire mechanism and philosophy of the law
which freezes the tax classification of a cigarette brand based on its current
net retail price. Stated differently, the alleged discrimination arising from
the legislative classification freeze between the brands under Annex “D” and petitioner’s
newly introduced brands arose only because the former were classified based
on their “current” net retail price as of October 1, 1996 and petitioner’s newly introduced brands were classified based on
their “current” net retail price as of 2003. Without this corresponding
freezing of the classification of petitioner’s newly introduced brands based on
their current net retail price, it would be impossible to establish that a disparate
tax treatment occurred between the Annex “D” brands and petitioner’s newly
introduced brands.
This clarification is significant
because, under these circumstances, a declaration of unconstitutionality would
necessarily entail nullifying the whole mechanism of the law and not just Annex
“D.” Consequently, if the assailed law
is declared unconstitutional on equal protection grounds, the entire method by
which a brand of cigarette is classified would have to be invalidated. As a result, no method to classify brands
under Annex “D” as well as new brands would be left behind and the whole
Section 145 of the NIRC, as amended, would become inoperative.[43]
To simplify the succeeding
discussions, we shall refer to the whole mechanism and philosophy of the
assailed law which freezes the tax classification of a cigarette brand based on
its current net retail price and which, thus, produced different classes of
brands based on the time of their introduction in the market (starting with the
brands in Annex “D” since they were the first brands so classified as of
October 1, 1996) as the classification
freeze provision.[44]
As thus
formulated, the central issue is whether or not the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.
In Sison, Jr. v. Ancheta,[45]
this Court, through Chief Justice Fernando, explained the applicable standard
in deciding equal protection and uniformity of taxation challenges:
Now for equal protection. The
applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the
police power or the power of eminent domain is to demonstrate "that the
governmental act assailed, far from being inspired by the attainment of the
common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws
operate equally and uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the conditions not being
different, both in the privileges conferred and the liabilities imposed.
Favoritism and undue preference cannot be allowed. For the principle is that
equal protection and security shall be given to every person under
circumstances, which if not identical are analogous. If law be looks upon in
terms of burden or charges, those that fall within a class should be treated in
the same fashion, whatever restrictions cast on some in the group equally
binding on the rest." That same formulation applies as well to taxation
measures. The equal protection clause is, of course, inspired by the noble
concept of approximating the ideal of the laws's benefits being available to
all and the affairs of men being governed by that serene and impartial
uniformity, which is of the very essence of the idea of law. There is, however,
wisdom, as well as realism, in these words of Justice Frankfurter: "The
equality at which the 'equal protection' clause aims is not a disembodied
equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,'
and laws are not abstract propositions. They do not relate to abstract units A,
B and C, but are expressions of policy arising out of specific difficulties,
addressed to the attainment of specific ends by the use of specific remedies.
The Constitution does not require things which are different in fact or opinion
to be treated in law as though they were the same." Hence the constant reiteration of the view that classification if
rational in character is allowable. As a matter of fact, in a leading case
of Lutz v. Araneta, this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free
to select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation.'"
Petitioner likewise invoked
the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shall be uniform and equitable." This requirement is met
according to Justice Laurel in Philippine Trust Company v. Yatco, decided in
1940, when the tax "operates with the same force and effect in every place
where the subject may be found." He likewise added: "The rule of
uniformity does not call for perfect uniformity or perfect equality, because
this is hardly attainable." The problem of classification did not present
itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority
to make reasonable and natural classifications for purposes of taxation, .
. . As clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of justice and
equity" it "is not discriminatory within the meaning of this clause
and is therefore uniform." There is quite a similarity then to the
standard of equal protection for all that is required is that the tax
"applies equally to all persons, firms and corporations placed in similar
situation."[46] (Emphasis
supplied)
In consonance
thereto, we have held that “in our
jurisdiction, the standard and analysis of equal protection challenges in
the main have followed the ‘rational basis’ test, coupled with
a deferential attitude to legislative classifications and a reluctance to
invalidate a law unless there is a showing of a clear and unequivocal breach of
the Constitution.”[47] Within the present context of tax legislation on
sin products which neither contains a suspect classification nor impinges on a
fundamental right, the rational-basis test thus finds application. Under this test, a legislative classification,
to survive an equal protection challenge, must be shown to rationally further a legitimate state interest.[48]
The classifications must be
reasonable and rest upon some ground of difference having a fair and
substantial relation to the object of the legislation.[49] Since every law has in its favor the
presumption of constitutionality, the burden of proof is on the one attacking
the constitutionality of the law to prove beyond reasonable doubt that the
legislative classification is without rational basis.[50] The presumption of constitutionality can be
overcome only by the most explicit demonstration that a classification is a
hostile and oppressive discrimination against particular persons and classes,
and that there is no conceivable basis which might support it.[51]
A legislative classification that is
reasonable does not offend the constitutional guaranty of the equal protection
of the laws. The classification is
considered valid and reasonable provided that: (1) it rests on substantial
distinctions; (2) it is germane to the purpose of the law; (3) it applies, all
things being equal, to both present and future conditions; and (4) it applies
equally to all those belonging to the same class.[52]
The first, third and fourth requisites are satisfied. The classification
freeze provision was inserted in the law for reasons of practicality and
expediency. That is, since a new brand
was not yet in existence at the time of the passage of RA 8240, then Congress
needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what
was used to classify the brands under Annex “D” as of October 1, 1996, was thus
the logical and practical choice. Further,
with the amendments introduced by RA 9334, the freezing of the tax
classifications now expressly applies not just to Annex “D” brands but to newer
brands introduced after the effectivity of RA 8240 on January 1, 1997 and any
new brand that will be introduced in the future.[53] (However, as will be discussed later, the
intent to apply the freezing mechanism to newer brands was already in place
even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain, however, why the
classification is “frozen” after its determination based on current net retail
price and how this is germane to the purpose of the assailed law. An examination of the legislative history of
RA 8240 provides interesting answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform
Package then being pushed by the Ramos Administration. It was enacted with the following objectives
stated in the Sponsorship Speech of Senator Juan Ponce Enrile (Senator Enrile),
viz:
First, to
evolve a tax structure which will promote fair competition among the players in
the industries concerned and generate buoyant and stable revenue for the
government.
Second, to
ensure that the tax burden is equitably distributed not only amongst the
industries affected but equally amongst the various levels of our society that
are involved in various markets that are going to be affected by the excise tax
on distilled spirits, fermented liquor, cigars and cigarettes.
In the case of firms engaged
in the industries producing the products that we are about to tax, this means
relating the tax burden to their market share, not only in terms of
quantity, Mr. President, but in terms of value.
In case of consumers, this
will mean evolving a multi-tiered rate structure so that low-priced products
are subject to lower tax rates and higher-priced products are subject to higher
tax rates.
Third, to
simplify the tax administration and compliance with the tax laws that are about
to unfold in order to minimize losses arising from inefficiencies and tax
avoidance scheme, if not outright tax evasion.[54]
In the
initial stages of the crafting of the assailed law, the Department of Finance
(DOF) recommended to Congress a shift from the then existing ad valorem taxation system to a specific
taxation system with respect to sin products, including cigarettes. The DOF noted that the ad valorem taxation system was a source of massive tax leakages
because the taxpayer was able to evade paying the correct amount of taxes through
the undervaluation of the price of cigarettes using various marketing arms and
dummy corporations. In order to address
this problem, the DOF proposed a specific taxation system where the cigarettes would
be taxed based on volume or on a per pack basis which was believed to be less
susceptible to price manipulation. The
reason was that the BIR would only need to monitor the sales volume of
cigarettes, from which it could easily compute the corresponding tax liability
of cigarette manufacturers. Thus, the
DOF suggested the use of a three-tiered system which operates in substantially the
same manner as the four-tiered system under RA 8240 as earlier discussed. The
proposal of the DOF was embodied in House Bill (H.B.) No. 6060, the pertinent
portions of which states—
SEC. 142. Cigars and
cigarettes.—
(c) Cigarettes packed by machine.— There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the manufacturer’s or importer’s wholesale price (net of
excise tax and value-added tax) per pack exceeds four pesos and twenty centavos
(P4.20), the tax shall be seven pesos and fifty centavos (P7.50);
(2) If the manufacturer’s or importer’s wholesale price (net of
excise tax and value-added tax) per pack exceeds three pesos and ninety
centavos (P3.90) but does not exceed four pesos and twenty centavos (P4.20),
the tax shall be five pesos and fifty centavos (P5.50): provided, that after two (2) years from the effectivity of this Act,
cigarettes otherwise subject to tax under this subparagraph shall be taxed
under subparagraph (1) above.
(3) If the manufacturer’s or importer’s wholesale price (net of
excise tax and value-added tax) per pack does not exceeds three pesos and
ninety centavos (P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands
and new brands of cigarettes packed by machine to be introduced in the domestic
market after the effectivity of this Act, shall be taxed under paragraph (c)(1)
hereof.
The rates of specific tax on cigars and cigarettes
under paragraphs (a), (b), and (c) hereof, including the price levels for
purposes of classifying cigarettes packed by machine, shall be revised upward
two (2) years after the effectivity of this Act and every two years thereafter
by the Commissioner of Internal Revenue, subject to the approval of the
Secretary of Finance, taking into account the movement of the consumer price
index for cigars and cigarettes as established by the National Statistics
Office: provided, that the increase
in taxes and/or price levels shall be equal to the present change in such
consumer price index for the two-year period: provided, further, that the President, upon the recommendation of
the Secretary of Finance, may suspend or defer the adjustment in price levels
and tax rates when the interest of the national economy and general welfare so
require, such as the need to obviate unemployment, and economic and social
dislocation: provided, finally, that
the revised price levels and tax rates authorized herein shall in all cases be
rounded off to the nearest centavo and shall be in force and effect on the date
of publication thereof in a newspaper of general circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is
that it contained a provision for the periodic adjustment of the excise tax
rates and tax brackets, and a corresponding periodic resurvey and
reclassification of cigarette brands based on the increase in the consumer
price index as determined by the Commissioner of Internal Revenue subject to
certain guidelines. The evident intent
was to prevent inflation from eroding the value of the excise taxes that would
be collected from cigarettes over time by adjusting the tax rate and tax
brackets based on the increase in the consumer price index. Further, under this proposal, old brands as
well as new brands introduced thereafter would be subjected to a resurvey and
reclassification based on their respective values at the end of every two years
in order to align them with the adjustment of the excise tax rate and tax
brackets due to the movement in the consumer price index.[55]
Of course, we now know that the DOF
proposal, insofar as the periodic adjustment of tax rates and tax brackets, and
the periodic resurvey and reclassification of cigarette brands are concerned, did
not gain approval from Congress. The
House and Senate pushed through with their own versions of the excise tax
system on beers and cigarettes both denominated as H.B. No. 7198. For convenience, we shall refer to the bill
deliberated upon by the House as the House Version and that of the Senate as
the Senate Version.
The House’s Committee on Ways and
Means, then chaired by Congressman Exequiel B. Javier (Congressman Javier),
roundly rejected the DOF proposal. Instead,
in its Committee Report submitted to the plenary, it proposed a different
excise tax system which used a specific tax as a basic tax with an ad valorem comparator. Further, it deleted the proposal to have a
periodic adjustment of tax rates and the tax brackets as well as periodic resurvey
and reclassification of cigarette brands, to wit:
The
rigidity of the specific tax system calls for the need for frequent congressional
intervention to adjust the tax rates to inflation and to keep pace with the
expanding needs of government for more revenues. The DOF admits this flaw
inherent in the tax system it proposed. Hence, to obviate the need for remedial
legislation, the DOF is asking Congress to grant to the Commissioner the power
to revise, one, the specific tax rates: and two, the price levels of beer and
cigarettes. What the DOF is asking, Mr. Speaker, is for Congress to delegate to
the Commissioner of Internal Revenue the power to fix the tax rates and
classify the subjects of taxation based on their price levels for purposes of
fixing the tax rates. While we sympathize with the predicament of the DOF, it
is not for Congress to abdicate such power. The power sought to be delegated to
be exercised by the Commissioner of Internal Revenue is a legislative power
vested by the Constitution in Congress pursuant to Section 1, Article VI of the
Constitution. Where the power is vested, there it must remain— in Congress, a
body of representatives elected by the people. Congress may not delegate such
power, much less abdicate it.
x x x x
Moreover, the grant of such
power, if at all constitutionally permissible, to the Commissioner of Internal
Revenue is fraught with ethical implications. The debates on how much revenue
will be raised, how much money will be taken from the pockets of taxpayers,
will inexorably shift from the democratic Halls of Congress to the secret and
non-transparent corridors of unelected agencies of government, the Department
of Finance and the Bureau of Internal Revenue, which are not accountable to our
people. We cannot countenance the shift for ethical reasons, lest we be accused
of betraying the trust reposed on this Chamber by the people. x x x
A final point on this
proposal, Mr. Speaker, is the exercise of the taxing power of the Commissioner
of Internal Revenue which will be triggered by inflation rates based on the
consumer price index. Simply stated, Mr. Speaker, the specific tax rates will
be fixed by the Commissioner depending on the price levels of beers and
cigarettes as determined by the consumers’ price index. This is a novel idea,
if not necessarily weird in the field of taxation. What if the brewer or the
cigarette manufacturer sells at a price below the consumers’ price index? Will
it be taxed on the basis of the consumer’s price index which is over and above
its wholesale or retail price as the case may be? This is a weird form of
exaction where the tax is based not on what the brewer or manufacturer actually
realized but on an imaginary wholesale or retail price. This amounts to a
taxation based on presumptive price levels and renders the specific tax a
presumptive tax. We hope, the DOF and the BIR will also honor a presumptive tax
payment.
Moreover, specific tax rates
based on price levels tied to consumer’s price index as proposed by the DOF
engenders anti-trust concerns. The proposal if enacted into law will serve as a
barrier to the entry of new players in the beer and cigarette industries which
are presently dominated by shared monopolies. A new player in these industries
will be denied business flexibility to fix its price levels to promote its
product and penetrate the market as the price levels are dictated by the
consumer price index. The proposed tax regime, Mr. Speaker, will merely enhance
the stranglehold of the oligopolies in the beer and cigarette industries, thus,
reversing the government’s policy of dismantling monopolies and combinations in
restraint of trade.[56]
For its part, the Senate’s Committee on Ways and Means, then chaired by
Senator Juan Ponce Enrile (Senator Enrile), developed its own version of the
excise tax system on cigarettes. The Senate
Version consisted of a four-tiered system and, interestingly enough, contained a
periodic excise tax rate and tax bracket adjustment as well as a periodic
resurvey and reclassification of brands provision (“periodic adjustment and
reclassification provision,” for brevity) to be conducted by the DOF in
coordination with the BIR and the National Statistics Office based on the
increase in the consumer price index— similar to the one proposed by the DOF, viz:
SEC. 4 Section 142 of the
National Internal Revenue Code, as amended, is hereby further amended to read
as follows:
“SEC. 142. Cigars and
cigarettes. –
x x x x
(c) Cigarettes packed by machine. – There
shall be levied, assessed and collected on cigarettes packed by machine a tax
at the rates prescribed below:
(1) If the net retail price (excluding the
excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the
tax shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the
excise tax and the value-added tax) exceeds Six pesos and fifty centavos
(P6.50) per pack, the tax shall be Eight pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the
value-added tax) is Five pesos (P5.00) up to Six pesos and fifty centavos
(P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One
peso (P1.00) per pack.
Variants of existing brands of
cigarettes which are introduced in the domestic market after the effectivity of
this Act shall be taxed under the highest classification of any variant of that
brand.
x x x
The rates of specific tax on cigars and cigarettes
under subparagraph (a), (b) and (c) hereof, including the net retail prices for
purposes of classification, shall be adjusted on the sixth of January three
years after the effectivity of this Act and every three years thereafter. The
adjustment shall be in accordance with the inflation rate measured by the
average increase in the consumer price index over the three-year period. The
adjusted tax rates and net price levels shall be in force on the eighth of
January.
Within the period hereinabove mentioned, the Secretary
of Finance shall direct the conduct of a survey of retail prices of each brand
of cigarettes in coordination with the Bureau of Internal Revenue and the
National Statistics Office.
For purposes of this Section, net
retail price shall mean the price at which the cigarette is sold on retail in
20 major supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable excise tax
and the value-added tax. For brands
which are marketed only outside Metro Manila, the net retail price shall mean
the price at which the cigarette is sold in five major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and the
value-added tax.
The classification of each brand of cigarettes in the
initial year of implementation of this Act shall be based on its average net
retail price as of October 1, 1996. The said classification by brand shall
remain in force until January 7, 2000.
New brands shall be classified
according to their current net retail price.[57]
(Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco (Senator
Roco) expressed doubts as to the legality and wisdom of putting a periodic
adjustment and reclassification provision:
Senator Enrile: This will be the first time that a tax burden
will be allowed to be automatically adjusted upwards based on a system of
indexing tied up with the Consumers Price Index (CPI). Although I must add that
we have adopted a similar system in adjusting the personal tax exemption from
income tax of our individual taxpayers.
Senator
Roco: They are not exactly the same, Mr.
President. But even then, we do note that this the first time we are trying to
put an automatic adjustment. My concern is, why do we propose now this
automatic adjustment? What is the reason that impels the committee? Maybe we
can be enlightened and maybe we shall embrace it forthwith. But what is the
reason?
Senator Enrile: Mr. President, we will recall that in the
House of Representatives, it has adopted a tax proposal on these products based
on a specific tax as a basic tax with an ad
valorem comparator. The Committee on Ways and Means of the Senate has not
seen it fit to adopt this system, but it recognized the possibility that there
may be an occasion where the price movement in the country might unwarrantedly
move upwards, in which case, if we peg the government to a specific tax rate of
P6.30, P9.30 and P12.30 for beer, since we are talking of beer, [58] the
government might lose in the process.
In order to consider the
interest of the government in this, Mr. President, and in order to obviate the
possibility that some of these products categorized under the different tiers
with different specific tax rates from moving upwards and piercing their own
tiers and thereby expose themselves to an incremental tax of higher magnitude, it
was felt that we should adopt a system where, in spite of any escalation in the
price of these products in the future, the tax rates could be adjusted upwards
so that none of these products would leave their own tier. That was the basic
principle under which we crafted this portion of the tax proposal.
Senator
Roco: Mr. President, we certainly share
the judgment of the distinguished gentleman as regards the comparator provision
in the House of Representatives and we appreciate the reasons given. But we are
under the impression that the House also, aside from the comparator, has an
adjustment clause that is fixed. It has fixed rates for the adjustment. So that
one of the basic differences between the Senate proposed version now and the
House version is that, the House of Representatives has manifested its will and
judgment as regards the tax to which we will adjust, whereas the Senate version
relegates fundamentally that judgment to the Department of Finance.
Senator
Enrile: That is correct, Mr. President,
because we felt that in imposing a fixed adjustment, we might be fixing an
amount that is either too high or too low. We cannot foresee the economic
trends in this country over a period of two years, three years, let alone ten
years. So we felt that a mechanism ought to be adopted in order to serve the
interest of the government, the interest of the producers, and the interest of
the consuming public.
Senator
Roco: This is where, Mr. President, my
policy difficulties start. Under the Constitution— I think it is Article VI,
Section 24, and it was the distinguished chairman of the Committee on Ways and
Means who made this Chamber very conscious of this provision— revenue measures
and tariff measures shall originate exclusively from the House of Representatives.
The
reason for this, Mr. President, is, there is a long history why the House of
Representatives must originate judgments on tax. The House members represent
specific districts. They represent specific constituencies, and the whole
history of parliamentarism, the whole history of Congress as an institution is
founded on the proposition that the direct representatives of the people must
speak about taxes.
Mr.
President, while the Senate can concur and can introduce amendments, the
proposed change here is radical. This is the policy difficulty that I wish to
clarify with the gentleman because the judgment call now on the amount of tax
to be imposed is not coming from Congress. It is shifted to the Department of
Finance. True, the Secretary of Finance may have been the best finance officer
two years ago and now the best finance officer in
Senator
Enrile: Mr. President, precisely the law, in effect, authorizes this rate
beforehand. The computation of the rate is the only thing that was left to the
Department of Finance as a tax implementor of Congress. This is not unusual
because we have already, as I said, adopted a system similar to this. If we
adjust the personal exemption of an individual taxpayer, we are in effect
adjusting the applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr.
President, is that we depart precisely from the mandate of the Constitution
that judgment on revenue must emanate from Congress. Here, it is shifted to the
Department of Finance for no visible or patent reason insofar as I could
understand. The only difference is, who will make the judgment? Should it be
Congress?
Senator Enrile: Mr. President, forgive me for answering sooner
than I should. My understanding of the Constitution is that all revenue
measures must emanate from the House. That is all the Constitution says.
Now,
it does not say that the judgment call must belong to the House. The judgment
call can belong both to the House and to the Senate. We can change whatever
proposal the House did. Precisely, we are now crafting a measure, and we are
saying that this is the rate subject to an adjustment which we also provide. We
are not giving any unusual power to the Secretary of Finance because we tell
him, “This is the formula that you must adopt in arriving at the adjustment so
that you do not have to come back to us.”[59]
Apart from his doubts as to the legality of the delegation of taxing
power to the DOF and BIR, Senator Roco also voiced out his concern about the
possible abuse and corruption that will arise from the periodic adjustment and
reclassification provision. Continuing—
Senator
Roco: Mr. President, if that is the
argument, that the distinguished gentleman has a different legal
interpretation, we will then now examine the choice. Because his legal
interpretation is different from mine, then the issues becomes: Is it more advantageous that this judgment
be exercised by the House? Should we not concur or modify in terms of the
exercise by the House of its power or are we better off giving this judgment
call to the Department of Finance?
Let me now submit, Mr. President, that in
so doing, it is more advantageous to fix the rate so that even if we modify the
rates identified by Congress, it is better and less susceptible to abuse.
For
instance, Mr. President, would the gentlemen wish to demonstrate to us how this
will be done? On page 8, lines 5 to 9, there is a provision here as to when the
Secretary of Finance shall direct the conduct of survey of retail prices of
each brand of fermented liquor in coordination with the Bureau of Internal Revenue
and the National Statistics Office.
These
offices are not exactly noted, Mr. President, for having been sanctified by the
Holy Spirit in their noble intentions. x
x x[60] (Emphasis supplied)
Pressing this
point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that
during the two-year period, the Secretary of Finance shall direct the conduct
of the survey. How? When? Which retail prices and what brand shall he consider?
When he coordinates with the Bureau of Internal Revenue, what is the Bureau of
Internal Revenue supposed to be doing? What is the National Statistics Office
supposed to be doing, and under what guides and standards?
May
the gentleman wish to demonstrate how this will be done? My point, Mr. President, is, by giving the Secretary of Finance, the
BIR and the National Statistics Office discretion over a two-year period will
invite corruption and arbitrariness, which is more dangerous than letting the
House of Representatives and this Chamber set the adjustment rate. Why not
set the adjustment rate? Why should Congress not exercise that judgment now? x
x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman
consider choosing the judgment of this Chamber and the House of Representatives
over a delegated judgment of the Department of Finance.
Again,
it is not to say that I do not trust the Department of Finance. It has won
awards, and I also trust the undersecretary. But that is beside the point.
Tomorrow, they may not be there.[61]
(Emphasis supplied)
This point was further dissected by the two senators. There was a genuine difference of opinion as
to which system— one with a fixed excise tax rate and classification or the
other with a periodic adjustment of excise tax rate and reclassification— was
less susceptible to abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of
these products from the viewpoint of exerted pressures because of the
understandable impact of this measure on the pockets of the major players
producing these products, the committee felt that perhaps to lessen such
pressures, it is best that we now establish a norm where the tax will be
adjusted without incurring too much political controversy as has happened in
the case of this proposal.
Senator Roco: But that is exactly the same reason we say we
must rely upon Congress because Congress, if it is subjected to pressure, at
least balances off because of political factors.
When the Secretary of Finance
is now subjected to pressure, are we saying that the Secretary of Finance and
the Department of Finance is better-suited to withstand the pressure? Or are we
saying “Let the Finance Secretary decide whom to yield”?
I am saying that the
temptation and the pressure on the Secretary of Finance is more dangerous and
more corruption-friendly than ascertaining for ourselves now a fixed rate of
increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not
agree with this representation, but in my humble opinion, this formulation is
less susceptible to pressure because there is a definite point of reference
which is the consumer price index, and that consumer price index is not going
to be used only for this purpose. The CPI is used for a national purpose, and
there is less possibility of tinkering with it.[62]
Further, Senator Roco, like Congressman Javier, expressed the view that
the periodic adjustment and reclassification provision would create an
anti-competitive atmosphere. Again,
Senators Roco and Enrile had genuine divergence of opinions on this matter, to
wit:
Senator Roco: x x x On the marketing level, an adjustment
clause may, in fact, be disadvantageous to both companies, whether it is the
Lucio Tan companies or the San Miguel companies. If we have to adjust our
marketing position every two years based on the adjustment clause, the
established company may survive, but the new ones will have tremendous
difficulty. Therefore, this provision tends to indicate an anticompetitive
bias.
It is
good for San Miguel and the Lucio Tan companies, but the new companies—
assuming there may be new companies and we want to encourage them because of
the old point of liberalization— will be at a disadvantage under this
situation. If this observation will find receptivity in the policy
consideration of the distinguished Gentleman, maybe we can also further, later
on, seek amendments to this automatic adjustment clause in some manner.
Senator
Enrile: Mr. President, I cannot foresee any anti-competitiveness of this
provision with respect to a new entrant, because a new entrant will not just
come in without studying the market. He is a lousy businessman if he will just
come in without studying the market. If he comes in, he will determine at what
retail price level he will market his product, and he will be coming under any
of the tiers depending upon his net retail price. Therefore, I do not see how
this particular provision will affect a new entrant.
Senator
Roco: Be that as it may, Mr. President,
we obviously will not resort to debate until this evening, and we will have to
look for other ways of resolving the policy options.
Let
me just close that particular area of my interpellation, by summarizing the
points we were hoping could be clarified.
1. That the automatic adjustment clause is at best
questionable in law.
2. It is
corruption-friendly in the sense that it shifts the discretion from the House
of Representatives and this Chamber to the Secretary of Finance, no matter how
saintly he may be.
3. There is,— although
the judgment call of the gentleman disagrees— to our view, an anticompetitive
situation that is geared at…[63]
After these
lengthy exchanges, it appears that the views of Senator Enrile were sustained
by the Senate Body because the Senate Version was passed on Third Reading
without substantially altering the periodic adjustment and reclassification provision.
It was actually at the Bicameral Conference Committee level where the
Senate Version underwent major changes. The
Senate Panel prevailed upon the House Panel to abandon the basic excise tax
rate and ad valorem comparator as the
means to determine the applicable excise tax rate. Thus, the Senate’s four-tiered system was
retained with minor adjustments as to the excise tax rate per tier. However, the House Panel prevailed upon the
Senate Panel to delete the power of the DOF and BIR to periodically adjust the
excise tax rate and tax brackets, and periodically resurvey and reclassify the
cigarette brands based on the increase in the consumer price index.
In lieu thereof, the classification of existing brands based on their
average net retail price as of October 1, 1996 was “frozen” and a fixed across-the-board
12% increase in the excise tax rate of each tier after three years from the
effectivity of the Act was put in place. There is a dearth of discussion in the
deliberations as to the applicability of the freezing mechanism to new brands
after their classification is determined based on their current net retail
price. But a plain reading of the text
of RA 8240, even before its amendment by RA 9334, as well as the previously
discussed deliberations would readily lead to the conclusion that the intent of
Congress was to likewise apply the freezing mechanism to new brands. Precisely, Congress rejected the proposal to
allow the DOF and BIR to periodically adjust the excise tax rate and tax
brackets as well as to periodically resurvey and reclassify cigarettes brands which
would have encompassed old and new
brands alike. Thus, it would be absurd for us to conclude that Congress
intended to allow the periodic reclassification of new brands by the BIR after their
classification is determined based on their current net retail price. We shall
return to this point when we tackle the second issue.
In explaining the changes made at the Bicameral Conference Committee
level, Senator Enrile, in his report to the Senate plenary, noted that the
fixing of the excise tax rates was done to avoid confusion.[64] Congressman
Javier, for his part, reported to the House plenary the reasons for fixing the
excise tax rate and freezing the classification, thus:
Finally, this twin feature,
Mr. Speaker, fixed specific tax rates and frozen classification, rejects the
Senate version which seeks to abdicate the power of Congress to tax by pegging
the rates as well as the classification of sin products to consumer price index
which practically vests in the Secretary
of Finance the power to fix the rates and to classify the products for tax
purposes.[65] (Emphasis
supplied)
Congressman Javier later added that the frozen classification was
intended to give stability to the industry as the BIR would be prevented from
tinkering with the classification since it would remain unchanged despite the
increase in the net retail prices of the previously classified brands.[66] This would also assure the industry players
that there would be no new impositions as long as the law is unchanged.[67]
From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary,
or motivated by a hostile or oppressive attitude to unduly favor older brands
over newer brands. Congress was unequivocal in its unwillingness to delegate
the power to periodically adjust the excise tax rate and tax brackets as well
as to periodically resurvey and reclassify the cigarette brands based on the
increase in the consumer price index to the DOF and the BIR. Congress doubted
the constitutionality of such delegation of power, and likewise, considered the
ethical implications thereof. Curiously,
the classification freeze provision
was put in place of the periodic adjustment and reclassification provision
because of the belief that the latter would foster an anti-competitive
atmosphere in the market. Yet, as it is, this same criticism is being foisted by
petitioner upon the classification freeze
provision.
To our mind, the classification
freeze provision was in the main the result of Congress’s earnest efforts
to improve the efficiency and effectivity of the tax administration over sin
products while trying to balance the same with other state interests. In particular, the questioned provision addressed
Congress’s administrative concerns regarding delegating too much authority to
the DOF and BIR as this will open the tax system to potential areas for abuse
and corruption. Congress may have
reasonably conceived that a tax system which would give the least amount of
discretion to the tax implementers would address the problems of tax avoidance and
tax evasion.
To elaborate a little, Congress could have reasonably foreseen that,
under the DOF proposal and the Senate Version, the periodic reclassification of
brands would tempt the cigarette manufacturers to manipulate their price levels
or bribe the tax implementers in order to allow their brands to be classified
at a lower tax bracket even if their net retail prices have already migrated to
a higher tax bracket after the adjustment of the tax brackets to the increase
in the consumer price index. Presumably,
this could be done when a resurvey and reclassification is forthcoming. As briefly touched upon in the Congressional deliberations,
the difference of the excise tax rate between the medium-priced and the high-priced
tax brackets under RA 8240, prior to its amendment, was P3.36. For a moderately popular brand which sells
around 100 million packs per year, this easily translates to P336,000,000.[68] The incentive for tax avoidance, if not
outright tax evasion, would clearly be present. Then again, the tax implementers may use the
power to periodically adjust the tax rate and reclassify the brands as a tool to
unduly oppress the taxpayer in order for the government to achieve its revenue
targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for
sin products to remove these potential areas of abuse and corruption from both
the side of the taxpayer and the government. Without doubt, the classification freeze provision was an integral part of this
overall plan. This is in line with one of
the avowed objectives of the assailed law “to simplify the tax administration
and compliance with the tax laws that are about to unfold in order to minimize
losses arising from inefficiencies and tax avoidance scheme, if not outright
tax evasion.”[69] RA 9334 did not alter this classification freeze provision of RA 8240.
On the contrary, Congress affirmed this
freezing mechanism by clarifying the wording of the law. We can thus reasonably conclude, as the
deliberations on RA 9334 readily show, that the administrative concerns in tax
administration, which moved Congress to enact the classification freeze provision in RA 8240, were merely continued by
RA 9334. Indeed, administrative concerns may provide a
legitimate, rational basis for legislative classification.[70]
In the case at bar, these administrative
concerns in the measurement and collection of excise taxes on sin products are readily
apparent as afore-discussed.
Aside from the major concern regarding the
elimination of potential areas for abuse and corruption from the tax
administration of sin products, the legislative deliberations also show that
the classification freeze provision was
intended to generate buoyant and stable revenues for government. With the frozen tax classifications, the
revenue inflow would remain stable and the government would be able to predict
with a greater degree of certainty the amount of taxes that a cigarette
manufacturer would pay given the trend in its sales volume over time. The reason for this is that the previously
classified cigarette brands would be prevented from moving either upward or
downward their tax brackets despite the changes in their net retail prices in
the future and, as a result, the amount of taxes due from them would remain
predictable. The classification freeze provision would, thus, aid in the revenue
planning of the government.[71]
All in all, the classification
freeze provision addressed Congress’s administrative concerns in the
simplification of tax administration of sin products, elimination of potential
areas for abuse and corruption in tax collection, buoyant and stable revenue
generation, and ease of projection of revenues. Consequently,
there can be no denial of the equal protection of the laws since the rational-basis
test is amply satisfied.
Going now to the contention of petitioner that the classification freeze provision unduly favors older brands over
newer brands, we must first contextualize the basis of this claim. As previously discussed, the evidence
presented by the petitioner merely showed that in 2004, Marlboro and Philip
Morris, on the one hand, and Lucky Strike, on the other, would have been taxed
at the same rate had the classification
freeze provision been not in place. But
due to the operation of the classification
freeze provision, Lucky Strike was taxed higher. From here, petitioner generalizes that this differential
tax treatment arising from the classification
freeze provision adversely impacts the fairness of the playing field in the
industry, particularly, between older and newer brands. Thus, it is virtually impossible for new
brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact extent of such
impact. It has not been shown that the
net retail prices of other older brands previously classified under this classification
system have already pierced their tax brackets, and, if so, how this has
affected the overall competition in the market. Further, it does not necessarily follow that
newer brands cannot compete against older brands because price is not the only
factor in the market as there are other factors like consumer preference, brand
loyalty, etc. In other words, even if
the newer brands are priced higher due to the differential tax treatment, it
does not mean that they cannot compete in the market especially since
cigarettes contain addictive ingredients so that a consumer may be willing to
pay a higher price for a particular brand solely due to its unique formulation.
It may also be noted that in 2003, the
BIR surveyed 29 new brands[72] that
were introduced in the market after the effectivity of RA 8240 on January 1,
1997, thus negating the sweeping generalization of petitioner that the classification freeze provision has
become an insurmountable barrier to the entry of new brands. Verily, where there is a claim of breach of
the due process and equal protection clauses, considering that they are not
fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail.[73]
Be that as it may, petitioner’s evidence does suggest that, at least in
2004, Philip Morris and Marlboro, older brands, would have been taxed at the
same rate as Lucky Strike, a newer brand, due to certain conditions (i.e., the increase of the older brands’
net retail prices beyond the tax bracket to which they were previously
classified after the lapse of some time) were it not for the classification freeze provision. It may be conceded that this has adversely affected,
to a certain extent, the ability of petitioner to competitively price its newer
brands vis-à-vis the subject older brands. Thus, to a limited extent, the assailed law
seems to derogate one of its avowed objectives, i.e. promoting fair competition among the players in the industry. Yet, will this occurrence, by itself, render
the assailed law unconstitutional on equal protection grounds?
We answer in
the negative.
Whether Congress acted improvidently in derogating, to a limited extent,
the state’s interest in promoting fair competition among the players in the
industry, while pursuing other state interests regarding the simplification of
tax administration of sin products, elimination of potential areas for abuse
and corruption in tax collection, buoyant and stable revenue generation, and
ease of projection of revenues through the classification
freeze provision, and whether the questioned provision is the best means to
achieve these state interests, necessarily go into the wisdom of the assailed
law which we cannot inquire into, much less overrule. The classification
freeze provision has not been shown to be precipitated by a veiled attempt,
or hostile attitude on the part of Congress to unduly favor older brands over
newer brands. On the contrary, we must
reasonably assume, owing to the respect due a co-equal branch of government and
as revealed by the Congressional deliberations, that the enactment of the
questioned provision was impelled by an earnest desire to improve the
efficiency and effectivity of the tax administration of sin products. For as long as the legislative classification
is rationally related to furthering some legitimate state interest, as here,
the rational-basis test is satisfied and the constitutional challenge is
perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law
is passed by Congress, which state interest is superior over another, or which
method is better suited to achieve one, some or all of the state’s interests,
or what these interests should be in the first place. This policy-determining power, by
constitutional fiat, belongs to Congress as it is its function to determine and
balance these interests or choose which ones to pursue. Time and again we have ruled that the judiciary
does not settle policy issues. The Court
can only declare what the law is and not what the law should be. Under our
system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all
state power.[74] Thus, the legislative classification under the
classification freeze provision,
after having been shown to be rationally related to achieve certain legitimate
state interests and done in good faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited
extent, one of its avowed objectives (i.e.
promoting fair competition among the players in the industry) would suggest
that, by Congress’s own standards, the current excise tax system on sin
products is imperfect. But, certainly,
we cannot declare a statute unconstitutional merely because it can be improved
or that it does not tend to achieve all of its stated objectives.[75] This
is especially true for tax legislation which simultaneously addresses and
impacts multiple state interests.[76] Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast experience and
expertise in the field of taxation, must be given sufficient leeway to formulate
and experiment with different tax systems to address the complex issues and problems
related to tax administration. Whatever
imperfections that may occur, the same should be addressed to the democratic
process to refine and evolve a taxation system which ideally will achieve most,
if not all, of the state’s objectives.
In fine, petitioner may have valid reasons to disagree with the policy
decision of Congress and the method by which the latter sought to achieve the
same. But its remedy is with Congress
and not this Court. As succinctly
articulated in Vance v. Bradley:[77]
The Constitution presumes that, absent some reason to infer
antipathy, even improvident decisions will eventually be rectified by the
democratic process, and that judicial
intervention is generally unwarranted no matter how unwisely we may think a
political branch has acted. Thus, we will not overturn such a statute unless
the varying treatment of different groups or persons is so unrelated to the
achievement of any combination of legitimate purposes that we can only conclude
that the legislature's actions were irrational.[78]
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue
Regulations No. 9-2003, Revenue Regulations No. 22-2003 and Revenue Memorandum
Order No. 6-2003, are invalid insofar as they empower the BIR to reclassify or
update the classification of new brands of cigarettes based on their current
net retail prices every two years or earlier. It claims that RA 8240, even prior to its
amendment by RA 9334, did not authorize the BIR to conduct said periodic
resurvey and reclassification.
The questioned provisions are found in the following sections of the
assailed issuances:
(1)
Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations
No. 1-97, as amended by Section 2 of Revenue Regulations 9-2003, viz:
For the purpose of establishing or updating the tax
classification of new brands and variant(s) thereof, their current net retail
price shall be reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless earlier
ordered by the Commissioner. However,
notwithstanding any increase in the current net retail price, the tax
classification of such new brands shall remain in force until the same is
altered or changed through the issuance of an appropriate Revenue Regulations.
(2)
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b)
of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes
packed by machine, viz:
II. POLICIES
AND GUIDELINES
1. The
conduct of survey covered by this Order, for purposes of determining the
current retail prices of new brands of cigarettes and alcohol products
introduced in the market on or after January 1, 1997, shall be undertaken in
the following instances:
x x x x
b. For reclassification of new brands of
said excisable products that were introduced in the market after January 1,
1997.
x x x x
4. The
determination of the current retail prices of new brands of the aforesaid
excisable products shall be initiated as follows:
x x x x
b. After the lapse of the prescribed
two-year period or as the Commissioner may otherwise direct, the appropriate
tax reclassification of these brands based on the current net retail prices
thereof shall be determined by a survey to be conducted upon a written
directive by the Commissioner.
For this purpose, a memorandum
order to the Assistant Commissioner, Large Taxpayers Service, Heads, Excise Tax
Areas, and Regional Directors of all Revenue Regions, except Revenue Region
Nos. 4, 5, 6, 7, 8 and 9, shall be issued by the Commissioner for the
submission of the list of major supermarkets/retail outlets where the above
excisable products are being sold, as well as the list of selected revenue
officers who shall be designated to conduct the said activity(ies).
x x x
x
6. The
results of the survey conducted in Revenue Region Nos. 4 to 9 shall be
submitted directly to the Chief, LT Assistance Division II (LTAD II), National
Office for consolidation. On the other hand, the results of the survey
conducted in Revenue Regions other than Revenue Region Nos. 4 to 9, shall be
submitted to the Office of the Regional Director for regional consolidation. The
consolidated regional survey, together with the accomplished survey forms shall
be transmitted to the Chief, LTAD II for national consolidation within three
(3) days from date of actual receipt from the survey teams. The LTAD II shall
be responsible for the evaluation and analysis of the submitted survey forms
and the preparation of the recommendation for the updating/revision of the tax
classification of each brand of cigarettes and alcohol products. The said
recommendation, duly validated by the ACIR, LTS, shall be submitted to the
Commissioner for final review within ten (10) days from the date of actual
receipt of complete reports from all the surveying Offices.
7. Upon
final review by the Commissioner of the revised tax classification of the
different new brands of cigarettes and alcohol products, the appropriate
revenue regulations shall be prepared and submitted for approval by the
Secretary of Finance.
x x x x
III. PROCEDURES
x x x
x
Large Taxpayers Assistance Division
II
x x x
x
1. Perform
the following preparatory procedures on the identification of brands to be
surveyed, supermarkets/retail outlets where the survey shall be conducted, and
the personnel selected to conduct the survey.
x x x
x
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the
survey pursuant to the provisions of Item II.2 of this Order containing the
complete description of each brand, existing net retail price and the
corresponding tax rate thereof.
ii. Submit to the ACIR, LTS, a list of major
supermarkets/retail outlets within the territorial jurisdiction of the
concerned revenue regions where the survey will be conducted to be used as
basis in the issuance of Mission Orders. Ensure that the minimum number of establishments
to be surveyed, as prescribed under existing revenue laws and regulations, is
complied with. In addition, the names and designations of revenue officers
selected to conduct the survey shall be clearly indicated opposite the names of
the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1,
1997, the BIR issued Revenue Regulations No. 1-97, dated
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97,
as amended by Section 2 of Revenue Regulations 9-2003, and Revenue Memorandum
Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the
NIRC because they authorize the Commissioner of Internal Revenue to update the
tax classification of new brands every two years or earlier subject only to its
issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is
such authority granted to the Bureau. Unless expressly granted to the BIR, the
power to reclassify cigarette brands remains a prerogative of the legislature
which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent
was for new brands to benefit from the same freezing mechanism accorded to
Annex “D” brands. To reiterate, in enacting RA 8240, Congress categorically
rejected the DOF proposal and Senate Version which would have empowered the DOF
and BIR to periodically adjust the excise tax rate and tax brackets, and to
periodically resurvey and reclassify cigarette brands. (This resurvey and
reclassification would have naturally encompassed both old and new brands.) It
would thus, be absurd for us to conclude that Congress intended to allow the
periodic reclassification of new brands by the BIR after their classification
is determined based on their current net retail price while limiting the freezing
of the classification to Annex “D” brands. Incidentally, Senator Ralph G. Recto
expressed the following views during the deliberations on RA 9334, which later
amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to
adopt a specific tax system [under R.A. 8240], when Congress did not index the
brackets, and Congress did not index the rates but only provided for a one rate
increase in the year 2000, we shifted from ad
valorem which was based on value to a system of specific which is based on
volume. Congress then, in effect, determined the classification based on the
prices at that particular period of time and classified these products
accordingly.
Of course, Congress then
decided on what will happen to the new brands or variants of existing brands.
To favor government, a variant would be classified as the highest rate of tax
for that particular brand. In case of a new brand, Mr. President, then the BIR
should classify them. But I do not think
it was the intention of Congress then to give the BIR the authority to
reclassify them every so often. I do not think it was the intention of Congress
to allow the BIR to classify a new brand every two years, for example, because
it will be arbitrary for the BIR to do so. x x x[80]
(Emphasis supplied)
For these
reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the
freezing mechanism is concerned, must be seen merely as underscoring the
legislative intent already in place then, i.e.
new brands as being covered by the freezing mechanism after their classification
based on their current net retail prices.
Unfortunately for petitioner, this
result will not cause a downward reclassification of Lucky Strike. It will be recalled that petitioner
introduced Lucky Strike in June 2001. However,
as admitted by petitioner itself, the BIR did not conduct the required market
survey within three months from product launch.
As a result, Lucky Strike was never classified based on its actual
current net retail price. Petitioner
failed to timely seek redress to compel the BIR to conduct the requisite market
survey in order to fix the tax classification of Lucky Strike. In the meantime, Lucky Strike was taxed based
on its suggested net retail price of P9.90
per pack, which is within the high-priced tax bracket. It was only after the lapse of two years or
in 2003 that the BIR conducted a market survey which was the first time that Lucky Strike’s actual current net retail price was
surveyed and found to be from P10.34 to P11.53 per pack, which is
within the premium-priced tax bracket.
The case of petitioner falls under a situation where there was no reclassification based on its current
net retail price which would have been invalid as previously explained. Thus, we
cannot grant petitioner’s prayer for a downward reclassification of Lucky
Strike because it was never reclassified
by the BIR based on its actual
current net retail price.
It should be noted though that on
Finally, it must be noted that RA 9334
introduced changes in the manner by which the current net retail price of a new
brand is determined and how its classification is permanently fixed, to wit:
New
brands, as defined in the immediately following
paragraph, shall initially be classified according to their suggested net
retail price.
New
brands shall mean a brand registered after the date of effectivity of R.A. No.
8240 [on
Suggested
net retail price shall mean the net retail price at which new brands, as
defined above, of locally manufactured or imported cigarettes are intended by
the manufacture or importer to be sold on retail in major supermarkets or
retail outlets in Metro Manila for those marketed nationwide, and in other
regions, for those with regional markets.
At the end of three (3) months
from the product launch, the Bureau of Internal Revenue shall validate the
suggested net retail price of the new brand against the net retail price as
defined herein and determine the correct tax bracket under which a particular
new brand of cigarette, as defined above, shall be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which
a particular new brand of cigarettes shall be classified; Provided however, That brands of cigarettes
introduced in the domestic market between January 1, 1997 and December 31, 2003
shall remain in the classification under which the Bureau of Internal Revenue
has determined them to belong as of December 31, 2003. Such classification of new brands and
brands introduced between
Thus, Revenue
Regulations No. 9-2003 and Revenue Memorandum Order No. 6-2003 should be deemed
modified by the above provisions from the date of effectivity of RA 9334 on
January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd
paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue
Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b)
of Revenue Memorandum Order No. 6-2003, as pertinent to cigarettes packed by
machine, are invalid insofar as they grant the BIR the power to reclassify or
update the classification of new brands every two years or earlier. Further, these provisions are deemed modified
upon the effectivity of RA 9334 on January 1, 2005 insofar as the manner of
determining the permanent classification of new brands is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its
implementing rules and regulations violate the General Agreement on Tariffs and
Trade (GATT) of 1947, as amended, specifically, Paragraph 2, Article III, Part
II:
2. The products of the territory of any
contracting party imported into the territory of any other contracting party
shall not be subject, directly or indirectly, to internal taxes or other
internal charges of any kind in excess of those applied, directly or
indirectly, to like domestic products. Moreover, no contracting party shall
otherwise apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in paragraph
1.
It claims
that it is the duty of this Court to correct, in favor of the GATT, whatever
inconsistency exists between the assailed law and the GATT in order to prevent
triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.
We disagree.
The classification freeze provision
uniformly applies to all newly introduced brands in the market, whether
imported or locally manufactured. It does not purport to single out imported
cigarettes in order to unduly favor locally produced ones. Further, petitioner’s evidence was anchored on
the alleged unequal tax treatment between old and new brands which involves a different
frame of reference vis-à-vis local and imported products. Petitioner has, therefore, failed to clearly prove
its case, both factually and legally, within the parameters of the GATT.
At any rate, even assuming arguendo
that petitioner was able to prove that the classification
freeze provision violates the GATT, the outcome would still be the same. The GATT is a treaty duly ratified by the Philippine
Senate and under Article VII, Section 21[81] of
the Constitution, it merely acquired the status of a statute.[82] Applying the basic principles of statutory
construction in case of irreconcilable conflict between statutes, RA 8240, as
amended by RA 9334, would prevail over the GATT either as a later enactment by
Congress or as a special law dealing with the taxation of sin products. Thus, in Abbas
v. Commission on Elections,[83]
we had occasion to explain:
Petitioners premise their
arguments on the assumption that the Tripoli Agreement is part of the law of
the land, being a binding international agreement. The Solicitor General
asserts that the Tripoli Agreement is neither a binding treaty, not having been
entered into by the Republic of the
We find it neither necessary
nor determinative of the case to rule on the nature of the Tripoli Agreement
and its binding effect on the Philippine Government whether under public international
or internal Philippine law. In the first place, it is now the Constitution
itself that provides for the creation of an autonomous region in Muslim
Mindanao. The standard for any inquiry into the validity of R.A. No. 6734 would
therefore be what is so provided in the Constitution. Thus, any conflict
between the provisions of R.A. No. 6734 and the provisions of the Tripoli
Agreement will not have the effect of enjoining the implementation of the
Organic Act. Assuming for the sake of
argument that the
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of
the Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED with MODIFICATION. As modified, this Court declares that:
(1) Section 145 of the NIRC, as
amended by Republic Act No. 9334, is CONSTITUTIONAL;
and that
(2) Section 4(B)(e)(c), 2nd
paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue
Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b)
of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes
packed by machine, are INVALID insofar
as they grant the BIR the power to reclassify or update the classification of
new brands every two years or earlier.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate
Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
LEONARDO A. QUISU
Associate
Justice Associate Justice
MA. ALICIA AUSTRIA-MARTINEZ RENATO C. CORONA
Associate
Justice Associate
Justice
CONCHITA CARPIO MORALES ADOLFO
S. AZCUNA
Associate
Justice Associate Justice
Associate Justice
Associate Justice
PRESBITERO
J. VELASCO, JR. ANTONIO EDUARDO B. NACHURA
Associate
Justice Associate Justice
RUBEN T.
REYES TERESITA J. LEONARDO-DE CASTRO
Associate Justice Associate
Justice
ARTURO D. BRION
Associate Justice
Pursuant to Section 13,
Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned
to the writer of the opinion of the Court.
REYNATO S. PUNO
Chief Justice
[1]
Based on the updated rates, effective January 1, 2000.
[2] Rollo, pp. 50-113.
[3]
Annex “A,” Revenue Regulations No. 22-2003.
[4] Rollo, pp. 114-120.
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
New brands as defined are those introduced into the market after the
effectivity of R.A. 8240 on January 1, 1997, meaning, on January 2, 1997; while
existing brands for purposes of inclusion in Annex “D” are those registered on
or before January 1, 1997.
[18]
[19]
[20]
[21]
[22]
[23]
[24]
[25]
Republic Act No. 9282.
[26] Smart Communications, Inc. v. National
Telecommunications Commission, G.R. No. 151908, August 12, 2003, 408 SCRA
678, 689.
[27]
G.R. No. 112497, August 4, 1994, 235 SCRA 135.
[28] Smart Communications, Inc. v. National
Telecommunications Commission, supra.
[29] Philippine National Bank v.
[30] Philippine Bank of Communications v. Court
of Appeals, 352 Phil. 1, 9 (1998).
[31]
G.R. No. L-27782, July 31, 1970, 34 SCRA 337, 347.
[32] People v. Vera, 65 Phil. 56, 93 (1937).
[33]
If the net retail price (excluding the excise tax and the value-added tax) of a
brand is below Five pesos (P5.00) per pack.
[34]
If the net retail price (excluding the excise tax and the value-added tax) of a
brand is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack.
[35]
If the net retail price (excluding the excise tax and the value-added tax) of a
brand exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten
pesos (P10.00) per pack.
[36]
If the net retail price (excluding the excise tax and the value-added tax) of a
brand is above Ten pesos (P10.00) per pack.
[37]
Upon the request of the Senate Committee on Ways and Means and prior to the
effectivity of R.A. 8240 on January 1, 1997, the BIR conducted a survey on the
average net retail prices of existing brands of cigarettes as of October 1,
1996 which is now embodied in Annex “D” and which became the basis for
determining the applicable specific excise tax rates of said brands.
[38]
The exception, of course, would be those brands classified under the
premium-priced tax bracket (or the highest tax bracket). No matter how high
their net retail price increases in the future, they would still remain in the
premium-priced bracket. Further, the assumption is that the norm in the future
is inflation. If it were deflation, than the older brands would possibly be the
ones which would encounter a tax disadvantage after the lapse of some time.
[39] SEC.
145. Cigars and cigarettes. –
x x x x
(c) Cigarettes
packed by machine. – There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below: x x x
(2) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos and ninety-six
centavos (P8.96) per pack; x x x
[40]
This was computed as follows: Net Retail Price (P15.59) = Gross Retail Price
(P27.00)*- Value-Added Tax (P2.45) – Excise Tax (8.96)
*The gross retail price was
established through the receipt of purchase of Marlboro and Philip Morris from
a grocery store. (Exhibit “B,” records, vol. II, p. 407. See also TSN, February 20, 2004, records, vol. II, pp. 614-617)
[41] SEC.
145. Cigars and cigarettes. –
x x x x
(c) Cigarettes
packed by machine. – There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below: x x x
(1) If
the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be Thirteen pesos and
forty-four centavos (P13.44) per pack;
[42]
Annex “A,” Revenue Regulations No. 22-2003.
[43]
It may be argued that, perhaps, only the freezing mechanism of the law may be
declared unconstitutional so that the current net retail price can still be
used to determine the corresponding tax brackets of old and new brands. This
becomes problematic since there is no guide as to when or how frequent the
current net retail prices shall be determined precisely because the freezing mechanism assumes this function in
the assailed law. This Court cannot fill this void that will be created in the
law; otherwise, it would be tantamount to judicial legislation. In short, the
freezing mechanism is an integral and indispensable part of the classification
scheme devised by Congress, without which, it cannot function. Thus, the whole
of Section 145(C) of the NIRC, as amended, becomes unavoidably inoperative
should a declaration of unconstitutionality be decreed.
This result is in accordance
with the ruling case law on the matter:
The general rule is that where part of a statute is void as
repugnant to the Constitution, while another part is valid, the valid portion,
if separable from the invalid, may stand and be enforced. The presence of a separability clause in a
statute creates the presumption that the legislature intended separability,
rather than complete nullity of the statute.
To justify this result, the valid portion must be so far independent of
the invalid portion that it is fair to presume that the legislature would have
enacted it by itself if it had supposed that it could not constitutionally
enact the other. Enough must remain to
make a complete, intelligible and valid statute, which carries out the
legislative intent. x x x
The exception to the general rule is that
when the parts of a statute are so mutually dependent and connected, as
conditions, considerations, inducements, or compensations for each other, as to
warrant a belief that the legislature intended them as a whole, the nullity of
one part will vitiate the rest. In
making the parts of the statute dependent, conditional, or connected with one
another, the legislature intended the statute to be carried out as a whole and
would not have enacted it if one part is void, in which case if some parts are
unconstitutional, all the other provisions thus dependent, conditional, or
connected must fall with them. (Agpalo, Statutory
Construction, 1986 ed., pp. 28-29)
[44]
The practical effect of the operation of the classification freeze provision may be visualized as a timeline
starting with brands in Annex “D” which were classified based on their net
retail prices as of October 1, 1996. As new brands were introduced in the
market, new classes of brands were likewise created depending on the time they
were introduced and the time their classifications were finally fixed by the
BIR pursuant to the relevant revenue regulations. The characterization of
petitioner that the classification freeze
provision merely created two classes of brands, i.e., old brands under Annex “D” and new brands introduced after
the effectivity of R.A. 8240 is thus, inaccurate.
In line with this observation, the succeeding discussions
shall make use as point of comparison older
brands vis-à-vis newer brands and not old brands (under Annex “D”)
vis-à-vis new brands. In concrete terms, the disparate tax treatment that
appears to have taken place between brands in Annex “D” classified in 1996 and
petitioner’s new brands classified in 2003 may, under the same conditions (i.e., piercing of the tax bracket by the
older brand through increase of net retail price over time), occur between an
older brand classified in 2004 (assuming that it is not classified under the
highest tax bracket) and a newer brand that will be classified, say, in 2010.
[45]
215 Phil. 582 (1984).
[46]
[47] Central Bank Employees Association, Inc. v.
Bangko Sentral ng Pilipinas, G.R. No. 148208, December 15, 2004, 446 SCRA
299, 370.
[48] Nordlinger v. Hahn, 505
[49] F.S. Royster Guano Co. v.
[50]
See Basco v. Philippine Amusements and
Gaming Corp., 274 Phil. 323, 334-335 (1991).
[51] Madden v.
[52] Government Service Insurance System v.
Montesclaros, G.R. No. 146494, July 14, 2004, 434 SCRA 441, 451-452.
[53]
The application of the freezing mechanism to newer brands is reflected in the
following amendments introduced by R.A. No. 9334 to R.A. No. 8240, to wit:
Suggested net retail price shall mean the net retail price at
which new brands, as defined above, of locally manufactured or imported
cigarettes are intended by the manufacturer or importer to be sold on retail in
major supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the end of three (3) months from the
product launch, the Bureau of Internal Revenue shall validate the suggested net
retail price of the new brand against the net retail price as defined herein
and determine the correct tax bracket under which a particular new brand of
cigarette, as defined above, shall be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which
a particular new brand of cigarettes shall be classified; Provided however, That brands of
cigarettes introduced in the domestic market between January 1, 1997 and
December 31, 2003 shall remain in the classification under which the Bureau of
Internal Revenue has determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1, 1997 and
December 31, 2003 shall not be revised except by an act of Congress.
x x x x
The
classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex “D”, including the classification of brands for the same products which,
although not set forth in said Annex “D”, were registered and were being
commercially produced and marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed after the effectivity of this
Act, shall remain in force until revised by Congress. (Emphasis supplied)
[54]
II Record, Senate 10th
Congress (October 15, 1996).
[55]
It may be noted that after six (6) years from the passage of R.A. No. 8240 or
in 2003, several bills were filed in Congress seeking to amend the classification freeze provision by
shifting to a periodic adjustment of tax rate and tax brackets as well as
periodic resurvey and reclassification of old and new brands to be conducted by
the BIR. This was intended to address the perceived unfair differential tax
treatment between old and new brands that occurs over the lapse of time.
Petitioner views these bills as the remedy to solve the alleged unfair tax treatment
arising from the classification freeze
provision (See petitioner’s petition before the trial court, records, vol.
I, p. 21) Interestingly, these bills filed in 2003 are substantially the same
as the above discussed DOF proposal which was rejected by Congress in enacting
R.A. No. 8240 for reasons that will be discussed in what follows.
[56] Record, House 10th Congress (March
11, 1996).
[57]
Senator Enrile explained how this periodic adjustment and reclassification
provision would operate, thusly:
Since
1996 is the year during which we are adopting this law— and it will take effect
January of next year— the two-year period covered will be 1997 and 1998. So in
order to find out the rate of adjustment both of the cutoff point price (tax
bracket), retail price and the corresponding specific tax rate, we divide the
So, in effect, what I am saying is, if we
take 100% out of 1.1272 which is the quotient of dividing 257, the CPI of 1998
by 228, the CPI of 1996, then, we end up with .1272 or 12%, a little less than
13%.
If we
multiply the net retail price now, which is the cut off point (of the tax
brackets) established by law as of the time we enact this law, by approximately
13%, that will be the cutoff point price, and we increase the net retail price
used as a base when we adopted this law by 13%. It increases the corresponding
specific tax by 13% and this will be the adjusted cutoff point and adjusted
specific tax as of 1999.
[58]
The discussion is in reference to the periodic adjustment and reclassification
provision of beer. However, under the
Senate Version, the same periodic adjustment and reclassification provision is
applied to cigarettes so that the same reasoning is applicable to cigarettes.
[59]
II Record, Senate 10th
Congress (November 4, 1996).
[60]
[61]
[62]
[63]
[64]
II Record, Senate 10th
Congress (November 21, 1996).
[65] Record, House 10th Congress (November
21, 1996).
[66]
[67]
[68]
To give a better perspective of the cigarette market based on volume, in 2003
alone, sales volume was as follows: 2.1 billion packs under the low-priced
segment, 898 million packs under the medium-priced segment, 1.3 billion packs
under the high-priced segment. [Record,
Senate 13th Cong
[69] Supra note 47.
[70] AMJUR STATELOCL § 122 citing Chicago Freight Car Leasing
Co. v. Limbach, 62 Ohio St. 3d 489, 584 N.E.2d 690 (1992);
Sandy Springs Water Co. v.
Department of Health and Environmental Control,
324 S.C. 177, 478 S.E.2d 60 (1996). See also Skyscraper Corporation v. County of Newberry, 323 S.C.
412, 475 S.E.2d 764 (1996).
[71]
II Record, Senate 10th
Congress (October 15, 1996).
[72] See Annex “A,” Revenue Regulations No.
22-2003.
[73] Supra note 40 at 588-589.
[74] Valmonte v. Belmonte, Jr., G.R. No.
74930, February 13, 1989, 170 SCRA 256, 268.
[75]
Cf. Roschen v. Ward, 279
[76]
It may be observed that tax legislation is not solely a revenue-generating
measure as it also functions as a regulatory tool, a policy instrument to
affect consumer behavior (e.g.,
sumptuary effect), etc..
[77]
440
[78]
[79]
Section 4(B) of Revenue Regulations No. 1-97 provides:
Section
4. Classification and Manner of Taxation
of Existing Brands, New Brands and Variant of Existing Brands.
x x x
B. New Brand
New
brands shall be classified according to their current net retail price. In the
meantime that the current net retail price has not yet been established, the
suggested net retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in 20 major
supermarkets or retail outlets in Metro Manila (for brands of cigarette
marketed nationally) or in five (5) major supermarkets or retail outlets in the
region (for brands which are marketed only outside Metro Manila) at which the
cigarette is sold on retail in reams/carton, three (3) months after the initial
removal of the new brand to determine the actual net retail price excluding the
excise tax and value added tax which shall then be the basis in determining the
specific tax classification. In case the current net retail price is higher than
the suggested net retail price, the former shall prevail. Otherwise, the
suggested net retail price shall prevail. Any difference in the specific tax
due shall be assessed and collected inclusive of increments as provided for by
the National Internal Revenue Code, as amended.
The
survey contemplated herein to establish the current net retail price on locally
manufactured and imported cigarettes shall be conducted by the duly authorized
representatives of the Commissioner of Internal Revenue together with a
representative of the Regional Director from each Regional Office having
jurisdiction over the retail outlet within the Region being surveyed, and who
shall submit, without delay, their consolidated written report to the
Commissioner of Internal Revenue.
[80] Record, Senate 13th Congress (December
6, 2004).
[81]
Section 21. No treaty or international agreement shall be valid and effective
unless concurred in by at least two-thirds of all the Members of the Senate.
[82]
The Philippine Senate ratified the
[83] G.R. No. 89651, November 10, 1989, 179
SCRA 287, 294 cited in Magallona, supra at 552.