MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., PETITIONER, VS. DEPARTMENT OF FINANCE SECRE­TARY, COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE (BIR), AND REVENUE DISTRICT …

This is a petition for prohibition and injunction seeking to
nullify Revenue Memorandum Circular No. 47-91 and enjoin the collection by respondent
revenue officials of the Value Added Tax (VAT) on the sale of copra by members
of petitioner organization.^[1]

Petitioner Misamis Oriental Association of Coco Traders, Inc. is
a domestic corporation whose members, individually or collectively, are engaged
in the buying and selling of copra in Misamis Oriental. The petitioner alleges that prior to the
issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which
implemented VAT Ruling 190-90, copra was classified as agricultural food
product under § 103(b) of the National Internal Revenue Code and, therefore,
exempt from VAT at all stages of production or distribution.

Respondents represent departments of the executive branch of
government charged with the generation of funds and the assessment, levy and
collection of taxes and other imposts.

The pertinent provision of the NIRC states:

SEC. 103. Exempt
Transactions. – The following shall
be exempt from the value-added tax:

(a) Sale of nonfood agricultural, marine and
forest products in their original state by the primary producer or the owner of
the land where the same are produced;

(b) Sale or importation in their original state
of agricultural and marine food products, livestock and poultry of a kind
generally used as, or yielding or producing foods for human consumption, and
breeding stock and genetic material therefor;

Under § 103(a), as above quoted, the sale of agricultural
non-food products in their original state is exempt from VAT only if the sale
is made by the primary producer or owner of the land from which the same are
produced. The sale made by any other
person or entity, like a trader or dealer, is not exempt from the tax. On the other hand, under § 103(b) the sale
of agricultural food products in their original state is exempt from VAT at all
stages of production or distribution regardless of who the seller is.

The question is whether copra is an agricultural food or non-food
product for purposes of this provision of the NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue
issued the circular in question, classifying copra as an agricultural non-food
product and declaring it “exempt from VAT only if the sale is made by the
primary producer pursuant to Section 103(a) of the Tax Code, as amended.”^[2]

The reclassification had the effect of denying to the petitioner
the exemption it previously enjoyed when copra was classified as an
agricultural food product under § 103(b) of the NIRC. Petitioner challenges RMC No. 47-91 on various grounds, which
will be presently discussed although not in the order raised in the petition
for prohibition.

First. Petitioner
contends that the Bureau of Food and Drug of the Department of Health and not
the BIR is the competent government agency to determine the proper
classification of food products. Petitioner cites the opinion of Dr. Quintin Kintanar of the Bureau of
Food and Drug to the effect that copra should be considered “food”
because it is produced from coconut which is food and 80% of coconut products
are edible.

On the other hand, the respondents argue that the opinion of the
BIR, as the government agency charged with the implementation and
interpretation of the tax laws, is entitled to great respect.

We agree with respondents. In interpreting § 103(a) and (b) of the NIRC, the Commissioner of
Internal Revenue gave it a strict construction consistent with the rule that
tax exemptions must be strictly construed against the taxpayer and liberally in
favor of the state. Indeed, even Dr.
Kintanar said that his classification of copra as food was based on “the
broader definition of food which includes agricultural commodities and other
components used in the manufacture/processing of food.” The full text of
his letter reads:

10 April 1991

Mr. VICTOR A. DEOFERIO,
JR.

Chairman VAT Review
Committee

Bureau of Internal
Revenue

Diliman, Quezon City

Dear Mr. Deoferio:

This is to clarify a previous communication made by this Office
about copra in a letter dated 05 December 1990 stating that copra is not
classified as food. The statement was made
in the context of BFAD’s regulatory responsibilities which focus mainly on
foods that are processed and packaged, and thereby copra is not covered.

However, in the broader definition of food which include
agricultural commodities and other components used in the
manufacture/processing of food, it is our opinion that copra should be
classified as an agricultural food product since copra is produced from coconut
meat which is food and based on available information, more than 80% of
products derived from copra are edible products.

Very truly yours,

QUINTIN L. KINTANAR, M.D., Ph.D.

Director

Assistant Secretary of Health

for Standards and Regulations

Moreover, as the government agency charged with the enforcement
of the law, the opinion of the Commissioner of Internal Revenue, in the absence
of any showing that it is plainly wrong, is entitled to great weight. Indeed, the ruling was made by the
Commissioner of Internal Revenue in the exercise of his power under § 245 of
the NIRC to “make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings
on the classification of articles for sales tax and similar purposes.”

Second. Petitioner
complains that it was denied due process because it was not heard before the
ruling was made. There is a distinction
in administrative law between legislative rules and interpretative rules.^[3]
There would be force in petitioner’s argument if the circular in question were
in the nature of a legislative rule. But it is not. It is a mere
interpretative rule.

The reason for this distinction is that a legislative rule is in
the nature of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws must have the benefit of public hearing, it is
generally required that before a legislative rule is adopted there must be
hearing. In this connection, the
Administrative Code of 1987 provides:

Public Participation. —
If not otherwise required by law, an agency shall, as far as practicable,
publish or circulate notices of proposed rules and afford interested parties
the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final
order shall be valid unless the proposed rates shall have been published in a
newspaper of general circulation at least two (2) weeks before the first
hearing thereon.

(3) In case of opposition, the rules on
contested cases shall be observed.^[4]

In addition such rule must be published.^[5] On
the other hand, interpretative rules are designed to provide guidelines to the
law which the administrative agency is in charge of enforcing.

Accordingly, in considering a legislative rule a court is free to
make three inquiries: (i)
whether the rule is within the delegated authority of the administrative
agency; (ii) whether it is reasonable; and (iii) whether it was
issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the
desirability or wisdom of the rule for the legislative body, by its delegation
of administrative judgment, has committed those questions to administrative
judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is not into the
validity but into the correctness or propriety of the rule. As a matter of power a court, when
confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.^[6]

In the case at bar, we find no reason for holding that respondent
Commissioner erred in not considering copra as an “agricultural food
product” within the meaning of § 103(b) of the NIRC. As the Solicitor General contends,
“copra per se is not
food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for
food.” That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling
of his predecessors.^[7] To
the contrary, the overruling of decisions is inherent in the interpretation of
laws.

Third. Petitioner
likewise claims that RMC No. 47-91 is discriminatory and violative of the equal
protection clause of the Constitution because while coconut farmers and copra
producers are exempt, traders and dealers are not, although both sell copra in
its original state. Petitioners add
that oil millers do not enjoy tax credit out of the VAT payment of traders and
dealers.

The argument has no merit. There is a material or substantial difference between coconut farmers
and copra producers, on the one hand, and copra traders and dealers, on the
other. The former produce and sell
copra, the latter merely sell copra. The Constitution does not forbid the differential treatment of persons
so long as there is a reasonable basis for classifying them differently.^[8]

It is not true that oil millers are exempt from VAT. Pursuant to § 102 of the NIRC, they are
subject to 10% VAT on the sale of services. Under § 104 of the Tax Code, they are allowed to credit the input tax on
the sale of copra by traders and dealers, but there is no tax credit if the
sale is made directly by the copra producer as the sale is VAT exempt. In the same manner, copra traders and
dealers are allowed to credit the input tax on the sale of copra by other
traders and dealers, but there is no tax credit if the sale is made by the
producer.

Fourth. It is
finally argued that RMC No. 47-91 is counterproductive because traders and
dealers would be forced to buy copra from coconut farmers who are exempt from
the VAT and that to the extent that prices are reduced the government would
lose revenues as the 10% tax base is correspondingly diminished.

This is not so. The sale
of agricultural non-food products is exempt from VAT only when made by the
primary producer or owner of the land from which the same is produced, but in
the case of agricultural food products their sale in their original state is
exempt at all stages of production or distribution. At any rate, the argument that the classification of copra as
agricultural non-food product is counterproductive is a question of wisdom or
policy which should be addressed to respondent officials and to Congress.

WHEREFORE, the petition is DISMISSED.

SO ORDERED.

Narvasa, C.J., (Chairman), Regalado, and Puno, JJ., concur.

^[1]
The value-added tax is a percentage tax on the sale, barter, exchange or
importation of goods or services. (NIRC, § 99) Insofar as the sale, barter or exchange of goods is
concerned, the tax is equivalent to 10% of the gross selling price or gross
value in money of the goods sold, bartered or exchanged, such tax to be paid by
the seller or transferor. (§ 100(a))
The tax is determined as follows:

(d) Determination of the tax. — (1) Tax billed as separate item in the invoice. If the tax is billed as a separate item in
the invoice, the tax shall be based on the gross selling price, excluding the
tax. “Gross selling price”
means the total amount of money or its equivalent which the purchaser pays or
is obligated to pay to the seller in the consideration of the sale, barter or
exchange of the goods, excluding the value-added tax. The excise tax, if any, on such goods shall form part of the
gross selling price.

(2) Tax not billed separately or
is billed erroneously in the invoice. — In case the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined
by multiplying the gross selling price, including the amount intended by the
seller to cover the tax or the tax billed erroneously, by the factor 1/11 or
such factor as may be prescribed by regulations in case of persons partially
exempt under special laws.

(3) Sales returns, allowances
and sales discounts. — The value of goods sold and
subsequently returned or for which allowances were granted by a VAT-registered
person may be deducted from the gross sales or receipts for the quarter in
which a refund is made or a credit memorandum or refund is issued. Sales discounts granted and indicated in the
invoice at the time of sale may be excluded from the gross sales within the
same quarter.

(§ 100(d))

^[2]
This circular is based on VAT Ruling No. 190-90 dated August 17, 1990 which
revoked VAT Ruling No. 009-88 and VAT Ruling No. 279-88, June 30,1988,
classifying copra as an agricultural food product.

^[3]
See Victorias Milling Co. v. Social Security Commission, 114
Phil. 555 (1962); Philippine Blooming Mills v. Social Security System,
124 Phil. 499 (1966).

^[4]
Bk. VII, Ch. 2, § 9.

^[5]
Tañada v. Tuvera, 146 SCRA 446 (1986). See Victorias
Milling Co. v. SSC, supra note
3.

^[6]
K. DAVIS, ADMINISTRATIVE LAW 116 (1965).

^[7]
Petitioner’s claim that RMC No. 47-91 erroneously revoked irrelevant VAT
rulings of the BIR is not correct. RMC
No. 47-91 revoked VAT Rulings No. 009-88 and No. 279-88, which dealt with the
question whether copra is an agricultural food or non­food product. VAT ruling No. 009-88 held that “copra
as an agricultural product is exempt from VAT in all stages of
distribution.” On the other hand, VAT Ruling No. 279-88 treated
“copra . . . as an agricultural food product in its original state”
and, therefore, “exempt from VAT under Section 103(b) of the TAX Code, as
amended by EO 273 regardless of whether the sale is made by producer or
subsequent sale.”

^[8]
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,
163 SCRA 371 (1988) (sustaining the validity of E.O. 273 adopting the VAT);
Sison, Jr. v. Ancheta, 130 SCRA 653 (1984) (sustaining the validity of
B.P. Blg. 135 providing for taxable income taxation).