G.R. No. 145275. November 15, 2001.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LA CAMPANA FABRICA DE TABACOS, INC., respondent.

FACTS

Respondent La Campana Fabrica de Tabacos, Inc., a domestic corporation, imported and locally purchased stemmed leaf tobacco as raw material for manufacturing cigars and cigarettes. For the period January 1, 1986, to June 30, 1989, the Commissioner of Internal Revenue assessed a deficiency specific tax of P2,785,338.75 against the respondent. The assessment was based on Section 141(b) of the National Internal Revenue Code (NIRC), which imposes a tax on partially prepared tobacco, a category under which stemmed leaf tobacco falls.
Respondent protested, arguing its purchases were exempt under Section 137 (now Section 140) of the NIRC, which allows the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without prepayment of the specific tax. It cited a 1972 BIR ruling and contended that since it purchased from manufacturers, the tax exemption applied. The BIR denied the protest, leading respondent to file a petition for review with the Court of Tax Appeals (CTA), which canceled the assessment. The Court of Appeals affirmed the CTA decision.

ISSUE

Whether respondent is liable for deficiency specific tax on its purchases of stemmed leaf tobacco for the stated period.

RULING

The Supreme Court reversed the decisions of the lower courts and held respondent liable. The legal logic centers on the strict interpretation of the tax exemption under Section 137 of the NIRC. The provision permits the tax-free transfer of stemmed leaf tobacco only when sold “by one manufacturer directly to another,” under conditions prescribed by the Department of Finance. Revenue Regulations No. 17-67 explicitly defines a “manufacturer” for this purpose as one holding an L-7 permit (manufacturer of tobacco products). The tax exemption mechanism applies only to transactions between L-7 permittees.
The Court found that respondent’s suppliers—Tobacco Industries of the Philippines, NGC Trading, and Philippine Tobacco Fluecuring Corporation—were L-6 permittees (wholesale leaf tobacco dealers or strippers), not L-7 manufacturers. Therefore, the purchases did not satisfy the stringent conditions for the exemption. The rationale is that stemmed leaf tobacco is subject to specific tax when first purchased by an L-7 manufacturer from an L-6 dealer. A subsequent transfer between L-7 manufacturers is exempt to avoid double taxation. Since the respondent bought directly from L-6 entities, not from an L-7 manufacturer, the prerequisite tax payment had not been made, and the exemption was inapplicable. Consequently, the deficiency assessment was reinstated.