G.R. No. 125346, November 11, 2014
LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

G.R. Nos. 136328-29, November 11, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. FORTUNE TOBACCO CORPORATION, Respondent.
G.R. No. 144942, November 11, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. LA SUERTE CIGAR & CIGARETTE FACTORY, Respondent.
G.R. No. 148605, November 11, 2014
STERLING TOBACCO CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 158197, November 11, 2014
LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 165499, November 11, 2014
LA SUERTE CIGAR & CIGARETTE FACTORY, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

These consolidated cases involve the taxability of stemmed leaf tobacco imported and locally purchased by cigarette manufacturers La Suerte Cigar & Cigarette Factory, Fortune Tobacco Corporation, and Sterling Tobacco Corporation as raw material for cigarette production. The transactions in question occurred from 1986 to 1995. Under the National Internal Revenue Code (NIRC) of 1997, stemmed leaf tobacco was subject to an excise tax of P0.75 per kilogram. However, the Code also provided that stemmed leaf tobacco “may be sold in bulk as raw material by one manufacturer directly to another without payment of the tax, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance.” The core dispute revolves around whether the cigarette manufacturers were liable to pay deficiency excise taxes on their importations and local purchases of stemmed leaf tobacco, and whether La Suerte was liable for taxes on its sales of stemmed leaf tobacco to another manufacturer. The cases reached the Supreme Court via petitions for review of several Court of Appeals decisions, which had rendered conflicting holdings on the tax liability of the manufacturers.

ISSUE

The principal issue is whether stemmed leaf tobacco imported or locally purchased by cigarette manufacturers for use as raw material in cigarette production is subject to excise tax under the applicable provisions of the National Internal Revenue Code, and whether the direct sale of such tobacco between manufacturers is tax-exempt.

RULING

The Supreme Court ruled that stemmed leaf tobacco is subject to excise tax upon its removal from the place of production or from customs custody, and the subsequent tax-free sale between manufacturers is merely an administrative convenience that does not extinguish the tax liability. The tax is imposed on the manufacturer-producer or importer of the stemmed leaf tobacco. When a manufacturer imports or locally purchases stemmed leaf tobacco, it steps into the shoes of the producer and becomes liable for the tax. The provision allowing tax-free sale between manufacturers is a procedural mechanism for the physical transfer of goods without prepayment, but the purchasing manufacturer assumes the tax liability. The Court emphasized that the tax attaches to the stemmed leaf tobacco as a taxable article itself, not merely as a component of a finished product. Therefore, the cigarette manufacturers were held liable for the deficiency excise taxes on their importations and local purchases of stemmed leaf tobacco. The Court reversed the Court of Appeals decisions that had absolved Fortune Tobacco and Sterling Tobacco from liability, and affirmed the decisions that held La Suerte liable for taxes on its purchases and sales of stemmed leaf tobacco.