British Tobaco

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[G.R. No. 163583, April 15, 2009]

BRITISH AMERICAN TOBACCO, PETITIONER, VS. 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 PHILIPPINES MANUFACTURING, INC.,

FORTUNE TOBACCO, CORP., MIGHTY CORPORATION, AND JT INTERNATIONAL, S.A.,

RESPONDENTS-IN-INTERVENTION.

RESOLUTION

YNARES-SANTIAGO, J.:

On August 20, 2008, the Court rendered a Decision partially granting the petition in this case, viz:

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, isCONSTITUTIONAL; 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.

In its Motion for Reconsideration, petitioner insists that the assailed provisions (1) violate the equal

protection and uniformity of taxation clauses of the Constitution, (2) contravene Section 19,[1] Article XII of the Constitution on unfair competition, and (3) infringe the constitutional provisions

on regressive and inequitable taxation. Petitioner further argues that assuming the assailed

provisions are constitutional, petitioner is entitled to a downward reclassification of Lucky Strike

from the premium-priced to the high-priced tax bracket.

The Court is not persuaded.

The assailed law does not violate the

equal protection and uniformity of

taxation clauses.

Petitioner argues that the classification freeze provision violates the equal protection and uniformity

of taxation clauses because Annex "D" brands are taxed based on their 1996 net retail prices while

new brands are taxed based on their present day net retail prices. Citing Ormoc Sugar Co. v.

Treasurer of Ormoc City,[2] petitioner asserts that the assailed provisions accord a special or

privileged status to Annex "D" brands while at the same time discriminate against other brands.

These contentions are without merit and a rehash of petitioner's previous arguments before this

Court. As held in the assailed Decision, the instant case neither involves a suspect classification nor

impinges on a fundamental right. Consequently, the rational basis test was properly applied to

gauge the constitutionality of the assailed law in the face of an equal protection challenge. It has

been held that "in the areas of social and economic policy, a statutory classification that neither

proceeds along suspect lines nor infringes constitutional rights must be upheld against equal

protection challenge if there is any reasonably conceivable state of facts that could provide a

rational basis for the classification."[3] Under the rational basis test, it is sufficient that the legislative


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classification is rationally related to achieving some legitimate State interest. As the Court ruled in

the assailed Decision, viz:

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.

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. (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 RA8240 provides interesting answers to this question.

x x x x

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 tomanipulate 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. 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


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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 taxadministration 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." 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. 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 forgovernment. 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.

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.

Moreover, petitioner's contention that the assailed provisions violate the uniformity of taxation

clause is similarly unavailing. In Churchill v. Concepcion,[4] we explained that a tax "is uniform when

it operates with the same force and effect in every place where the subject of it is found."[5] It does

not signify an intrinsic but simply a geographical uniformity.[6] A levy of tax is not unconstitutional

because it is not intrinsically equal and uniform in its operation.[7] The uniformity rule does not

prohibit classification for purposes of taxation.[8] As ruled in Tan v. Del Rosario, Jr.:[9]

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects

or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities

(citations omitted). Uniformity does not forfend classification as long as: (1) the standards that are

used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the

legislative purpose, (3) the law applies, all things being equal, to both present and future

conditions, and (4) the classification applies equally well to all those belonging to the same class(citations omitted).[10]

In the instant case, there is no question that the classification freeze provision meets the

geographical uniformity requirement because the assailed law applies to all cigarette brands in the

Philippines. And, for reasons already adverted to in our August 20, 2008 Decision, the above four-

fold test has been met in the present case.

Petitioner's reliance on Ormoc Sugar Co. is misplaced. In said case, the controverted municipal

ordinance specifically named and taxed only the Ormoc Sugar Company, and excluded any

subsequently established sugar central from its coverage. Thus, the ordinance was found


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unconstitutional on equal protection grounds because its terms do not apply to future conditions as

well. This is not the case here. The classification freeze provision uniformly applies to all cigarette

brands whether existing or to be introduced in the market at some future time. It does not purport

to exempt any brand from its operation nor single out a brand for the purpose of imposition of

excise taxes.

At any rate, petitioner's real disagreement lies with the legitimate State interests. Although itconcedes that the Court utilized the rationality test and that theclassification freeze provision was

necessitated by several legitimate State interests, however, it refuses to accept the justifications

given by Congress for the classification freeze provision. As we elucidated in our August 20, 2008

Decision, this line of argumentation revolves around the wisdom and expediency of the assailed law

which we cannot inquire into, much less overrule. Equal protection is not a license for courts to

judge the wisdom, fairness, or logic of legislative choices.[11] We reiterate, therefore, that

petitioner's remedy is with Congress and not this Court.

The assailed provisions do not violate

the constitutional prohibition on

unfair competition.

Petitioner asserts that the Court erroneously applied the rational basis test allegedly because thistest does not apply in a constitutional challenge based on a violation of Section 19, Article XII of the

Constitution on unfair competition. Citing Tatad v. Secretary of the Department of Energy,[12] it

argues that the classification freeze provision gives the brands under Annex "D" a decisive edge

because it constitutes a substantial barrier to the entry of prospective players; that the Annex "D"

provision is no different from the 4% tariff differential which we invalidated in Tatad; that some of

the new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes, and Canon, which were

introduced into the market after the effectivity of the assailed law on January 1, 1997, were "killed"

by Annex "D" brands because the former brands were reclassified by the BIR to higher tax brackets;

that the finding that price is not the only factor in the market as there are other factors like

consumer preference, active ingredients, etc. is contrary to the evidence presented and the

deliberations in Congress; that the classification freeze provision will encourage predatory pricing in

contravention of the constitutional prohibition on unfair competition; and that the cumulative effect

of the operation of the classification freeze provision is to perpetuate the oligopoly of intervenors

Philip Morris and Fortune Tobacco in contravention of the constitutional edict for the State to

regulate or prohibit monopolies, and to disallow combinations in restraint of trade and unfair

competition.

The argument lacks merit. While previously arguing that the rational basis test was not satisfied,

petitioner now asserts that this test does not apply in this case and that the proper matrix to

evaluate the constitutionality of the assailed law is the prohibition on unfair competition under

Section 19, Article XII of the Constitution. It should be noted that during the trial below, petitioner

did not invoke said constitutional provision as it relied solely on the alleged violation of the equal

protection and uniformity of taxation clauses. Well-settled is the rule that points of law, theories,

issues and arguments not adequately brought to the attention of the lower court will not be

ordinarily considered by a reviewing court as they cannot be raised for the first time on appeal.

[13]

Atany rate, even if we were to relax this rule, as previously stated, the evidence presented before the

trial court is insufficient to establish the alleged violation of the constitutional proscription against

unfair competition.

Indeed, in Tatadwe ruled that a law which imposes substantial barriers to the entry and exit of new

players in our downstream oil industry may be struck down for being violative of Section 19, Article

XII of the Constitution.[14] However, we went on to say in that case that "if they are insignificant

impediments, they need not be stricken down."[15] As we stated in our August 20, 2008 Decision,

petitioner failed to convincingly prove that there is a substantial barrier to the entry of new brands


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in the cigarette market due to the classification freeze provision. We further observed that several

new brands were introduced in the market after the assailed law went into effect thus negating

petitioner's sweeping claim that the classification freeze provisionis an insurmountable barrier to the

entry of new brands. We also noted that price is not the only factor affecting competition in the

market for there are other factors such as taste, brand loyalty, etc.

We see no reason to depart from these findings for the following reasons:

First, petitioner did not lay down the factual foundations, as supported by verifiable documentary

proof, which would establish, among others, the cigarette brands in competition with each other;

the current net retail prices of Annex "D" brands, as determined through a market survey, to

provide a sufficient point of comparison with those covered by the BIR's market survey of new

brands; and the causal connection with as well as the extent of the impact on the competition in the

cigarette market of the classification freeze provision. Other than petitioner's self-serving allegations

and testimonial evidence, no adequate documentary evidence was presented to substantiate its

claims. Absent ample documentary proof, we cannot accept petitioner's claim that the classification

freeze provision is an insurmountable barrier to the entry of new players.

Second, we cannot lend credence to petitioner's claim that it cannot produce cigarettes that can

compete with Marlboro and Philip Morris in the high-priced tax bracket. Except for its self-servingtestimonial evidence, no sufficient documentary evidence was presented to substantiate this claim.

The current net retail price, which is the basis for determining the tax bracket of a cigarette brand,

more or less consists of the costs of raw materials, labor, advertising and profit margin. To a large

extent, these factors are controllable by the manufacturer, as such, the decision to enter which tax

bracket will depend on the pricing strategy adopted by the individual manufacturer. The same holds

true for its claims that other new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes,

and Canon, were "killed" by Annex "D" brands due to the effects of the operation of

the classification freeze provision over time. The evidence that petitioner presented before the trial

court failed to substantiate the basis for these claims.

Essentially, petitioner would want us to accept its conclusions of law without first laying down the

factual foundations of its arguments. This Court, which is not a trier of facts, cannot take judicial

notice of the factual premises of these arguments as petitioner now seems to suggest. The evidence

should have been presented before the trial court to allow it to examine and determine for itself

whether such factual premises, as supported by sufficient documentary evidence, provide

reasonable basis for petitioner's conclusion that there arose an unconstitutional unfair competition

due to the operation of the classification freeze provision. Petitioner should be reminded that it

appealed this case from the adverse ruling of the trial court directly to this Court on pure questions

of law instead of resorting to the Court of Appeals.

Third, Tatadis not applicable to the instant case. In Tatad, we found that the 4% tariff differential

between imported crude oil and imported refined petroleum products erects a high barrier to the

entry of new players because (1) it imposes an undue burden on new players to spend billions of

pesos to build refineries in order to compete with the old players, and (2) new players, who opt not

to build refineries, suffer from the huge disadvantage of increasing their product cost by 4%.

[16]

Thetariff was imposed on the raw materials uniformly used by the players in the oil industry. Thus, the

adverse effect on competition arising from this discriminatory treatment was readily apparent. In

contrast, the excise tax under the assailed law is imposed based on the current net retail price of a

cigarette brand. As previously explained, the current net retail price is determined by the pricing

strategy of the manufacturer. This Court cannot simply speculate that the reason why a new brand

cannot enter a specific tax bracket and compete with the brands therein was because of

the classification freeze provision,rather than the manufacturer's own pricing decision or some

other factor solely attributable to the manufacturer. Again, the burden of proof in this regard is on

petitioner which it failed to muster.


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Fourth, the finding in our August 20, 2008 Decision that price is not the only factor which affects

consumer behavior in the cigarette market is based on petitioner's own evidence. On cross-

examination, petitioner's witness admitted that notwithstanding the change in price, a cigarette

smoker may prefer the old brand because of its addictive formulation.[17] As a result, even if we

were to assume that the classification freeze provision distorts the pricing scheme of the market

players, it is not clear whether a substantial barrier to the entry of new players would thereby becreated because of these other factors affecting consumer behavior.

Last, the claim that the assailed provisions encourage predatory pricing was never raised nor

substantiated before the trial court. It is merely an afterthought and cannot be given weight.

In sum, the totality of the evidence presented by petitioner before the trial court failed to

convincingly establish the alleged violation of the constitutional prohibition on unfair competition. It

is a basic postulate that the one who challenges the constitutionality of a law carries the heavy

burden of proof for laws enjoy a strong presumption of constitutionality as it is an act of a co-equal

branch of government. Petitioner failed to carry this burden.

The assailed law does not transgress

the constitutional provisions onregressive and inequitable taxation.

Petitioner argues that the classification freeze provision is a form of regressive and inequitable tax

system which is proscribed under Article VI, Section 28(1)[18] of the Constitution. It claims that

people in equal positions should be treated alike. The use of different tax bases for brands under

Annex "D" vis--vis new brands is discriminatory, and thus, iniquitous. Petitioner further posits that

the classification freeze provision is regressive in character. It asserts that the harmonization of

revenue flow projections and ease of tax administration cannot override this constitutional

command.

We note that the points raised by petitioner with respect to alleged inequitable taxation perpetuated

by the classification freeze provision are a mere reformulation of its equal protection challenge. As

stated earlier, the assailed provisions do not infringe the equal protection clause because the four-

fold test is satisfied. In particular, theclassification freeze provision has been found to rationally

further legitimate State interests consistent with rationality review. Petitioner's repackaged

argument has, therefore, no merit.

Anent the issue of regressivity, it may be conceded that the assailed law imposes an excise tax on

cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an

attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation

system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether

rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate. To this

extent, the tax does not take into account the person's ability to pay. Nevertheless, this does not

mean that the assailed law may be declared unconstitutional for being regressive in character

because the Constitution does not prohibit the imposition of indirect taxes but merely provides thatCongress shall evolve a progressive system of taxation. As we explained in Tolentino v. Secretary of

Finance:[19]

[R]egressivity is not a negative standard for courts to enforce. What Congress is required by the

Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress,

just like the directive to it to give priority to the enactment of laws for the enhancement of human

dignity and the reduction of social, economic and political inequalities [Art. XIII, Section 1] or for

the promotion of the right to "quality education" [Art. XIV, Section 1]. These provisions are put in

the Constitution as moral incentives to legislation, not as judicially enforceable rights.[20]


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Petitioner is not entitled to a

downward reclassification of Lucky

Strike.

Petitioner alleges that assuming the assailed law is constitutional, its Lucky Strike brand should be

reclassified from the premium-priced to the high-priced tax bracket. Relying on BIR Ruling No. 018-

2001 dated May 10, 2001, it claims that it timely sought redress from the BIR to have the marketsurvey conducted within three months from product launch, as provided for under Section 4(B)[21] of

Revenue Regulations No. 1-97, in order to determine the actual current net retail price of Lucky

Strike, and thus, fix its tax classification. Further, the upward reclassification of Lucky Strike

amounts to deprivation of property right without due process of law. The conduct of the market

survey after two years from product launch constitutes gross neglect on the part of the BIR.

Consequently, for failure of the BIR to conduct a timely market survey, Lucky Strike's classification

based on its suggested gross retail price should be deemed its official tax classification. Finally,

petitioner asserts that had the market survey been timely conducted sometime in 2001, the current

net retail price of Lucky Strike would have been found to be under the high-priced tax bracket.

These contentions are untenable and misleading.

First, BIR Ruling No. 018-2001 was requested by petitioner for the purpose of fixing Lucky Strike'sinitial tax classification based on its suggested gross retail price relative to its planned introduction

of Lucky Strike in the market sometime in 2001 and not for the conduct of the market survey within

three months from product launch. In fact, the said Ruling contained an express reservation that

the tax classification of Lucky Strike set therein "is without prejudice, however, to the subsequent

conduct of a survey x x x in order to determine if the actual gross retail price thereof is consistent

with [petitioner's] suggested gross retail price."[22] In short, petitioner acknowledged that the initial

tax classification of Lucky Strike may be modified depending on the outcome of the survey which

will determine the actual current net retail price of Lucky Strike in the market.

Second, there was no upward reclassification of Lucky Strike because it was taxed based on its

suggested gross retail price from the time of its introduction in the market in 2001 until the BIR

market survey in 2003. We reiterate that Lucky Strikes'actualcurrent net retail price was surveyed

for the first time in 2003 and was found to be from P10.34 to P11.53 per pack, which is within the

premium-priced tax bracket. There was, thus, no prohibited upward reclassification of Lucky Strike

by the BIR based on its current net retail price.

Third, the failure of the BIR to conduct the market survey within the three-month period under the

revenue regulations then in force can in no way make the initial tax classification of Lucky Strike

based on its suggested gross retail price permanent. Otherwise, this would contravene the clear

mandate of the law which provides that the basis for the tax classification of a new brand shall be

the current net retail price and not the suggested gross retail price. It is a basic principle of law that

the State cannot be estopped by the mistakes of its agents.

Last, the issue of timeliness of the market survey was never raised before the trial court because

petitioner's theory of the case was wholly anchored on the alleged unconstitutionality ofthe classification freeze provision. As a consequence, no documentary evidence as to the actual net

retail price of Lucky Strike in 2001, based on a market survey at least comparable to the one

mandated by law, was presented before the trial court. Evidently, it cannot be assumed that had

the BIR conducted the market survey within three months from its product launch sometime in

2001, Lucky Strike would have been found to fall under the high-priced tax bracket and not the

premium-priced tax bracket. To so hold would run roughshod over the State's right to due process.

Verily, petitioner prosecuted its case before the trial court solely on the theory that the assailed law

is unconstitutional instead of merely challenging the timeliness of the market survey. The rule is

that a party is bound by the theory he adopts and by the cause of action he stands on. He cannot


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be permitted after having lost thereon to repudiate his theory and cause of action, and thereafter,

adopt another and seek to re-litigate the matter anew either in the same forum or on appeal.[23]Having pursued one theory and lost thereon, petitioner may no longer pursue another

inconsistent theory without thereby trifling with court processes and burdening the courts with

endless litigation.

WHEREFORE, the motion for reconsideration is DENIED.

SO ORDERED.

Puno, C.J., Quisumbing, Carpio, Austria-Martinez, Corona, Carpio-Morales, Tinga, Chico-Nazario,

Velasco, Jr., Nachura, Leonardo-De Castro, Brion, Peralta, andBersamin, JJ.,

[1] The State shall regulate or prohibit monopolies when the public interest so requires. No

combinations in restraint of trade or unfair competition shall be allowed.

[2] G.R. No. L-23794, February 17, 1968, 22 SCRA 603.

[3]Federal Communications Commission v. Beach Communications, Inc., 508 U.S. 307, 313 (1993).

[4] 34 Phil. 969, 976-977 (1916).

[5]Id. at 976.

[6]Id.

[7] Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary(2003), p. 777.

[8]Id.

[9] G.R. No. 109289, October 3, 1994, 237 SCRA 324.

[10]Id. at 331.

[11]Supra note 3.

[12] 346 Phil. 321 (1997).

[13]Natalia v. Court of Appeals, G.R. No. 116216, June 20, 1997, 274 SCRA 527, 538-539.

[14]Supra note 12 at 368.

[15]

Id.

[16]Id.at 369.

[17] Q- In other words, Mr. Witness, you are also suggesting in your expert opinion that there is also

a possibility that notwithstanding the change in the price of the particular cigarette product

considering that cigarette smoking is habit forming, and considering also that that cigarette product

won or satisfied the taste of the market, there is a tendency that notwithstanding the price, a

particular consumer would still stick on the particular product?


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A- Yes, by your own word, you say that it is habit forming. So, it is loyalty to the brand. (Testimony

of Dennis Belgira, TSN February 20, 2004, records, vol. II, pp. 679-680.)

[18] Section 28(1). The rule of taxation shall be uniform and equitable. The Congress shall evolve a

progressive system of taxation.

[19] G.R. No. 115455, August 25, 1994, 235 SCRA 630.

[20]Id.at 684-685.

[21] 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 todetermine 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.

[22] Records, vol. 1, p. 66.

[23]Bashier v. Commission on Elections, G.R. No. L-33692, February 24, 1972, 43 SCRA 238, 266.

G.R. No. 163583 August 20, 2008

BRITISH AMERICAN TOBACCO, petitioner,vs.JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of theDepartment of Finance and GUILLERMO L. PARAYNO, JR., in his


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capacity as Commissioner of the Bureau of InternalRevenue, respondents.Philip Morris Philippines Manufacturing, Inc., fortune tobacco,corp., MIGHTY CORPORATION, and JT InTERNATIONAL,S.A., respondents-in-intervention.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for review assails the validity of: (1) Section 145 of theNational Internal Revenue Code (NIRC), as recodified by Republic Act(RA) 8424; (2) RA 9334, which further amended Section 145 of theNIRC on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003,and 22-2003; and (4) Revenue Memorandum Order No. 6-2003.

Petitioner argues that the said provisions are violative of the equalprotection and uniformity clauses of the Constitution.

RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 ofthe NIRC, as Amended and For Other Purposes," took effect onJanuary 1, 1997. In the same year, Congress passed RA 8424 or TheTax Reform Act of 1997, re-codifying the NIRC. Section 142 wasrenumbered as Section 145 of the NIRC.

Paragraph (c) of Section 145 provides for four tiers of tax rates based

on the net retail price per pack of cigarettes. To determine theapplicable tax rates of existing cigarette brands, a survey of the netretail prices per pack of cigarettes was conducted as of October 1,1996, the results of which were embodied in Annex "D" of the NIRC asthe duly registered, existing or active brands of cigarettes.

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 atthe rates prescribed below:
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(1) If the net retail price (excluding the excise tax and thevalue-added tax) is above Ten pesos (P10.00) per pack, thetax shall be Thirteen pesos and forty-four centavos (P13.44)per pack;

(2) If the net retail price (excluding the excise tax and thevalue-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 thevalue-added tax) is Five pesos (P5.00) but does not exceedSix pesos and fifty centavos (P6.50) per pack, the tax shallbe Five pesos and sixty centavos (P5.60) per pack;

(4) If the net retail price (excluding the excise tax and thevalue-added tax) is below Five pesos (P5.00) per pack, thetax shall be One peso and twelve centavos (P1.12) perpack.

Variants of existing brands of cigarettes which are introduced inthe domestic market after the effectivity of this Act shall be taxedunder the highest classification of any variant of that brand.

x x x x

New brands shall be classified according to theircurrent netretail price.

For the above purpose, net retail price shall mean the price atwhich the cigarette is sold on retail in 20 major supermarkets inMetro Manila (for brands of cigarettes marketed nationally),excluding the amount intended to cover the applicable excise taxand the value-added tax. For brands which are marketed only

outside Metro Manila, the net retail price shall mean the price atwhich the cigarette is sold in five major supermarkets in the regionexcluding the amount intended to cover the applicable excise taxand the value-added tax.

The classification of each brand of cigarettes based on itsaverage net retail price as of October 1, 1996, as set forth


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in Annex "D" of this Act, shall remain in force until revised byCongress. (Emphasis supplied)

As such, new brands of cigarettes shall be taxed according totheircurrent net retail price while existing or "old" brands shall be

taxed based on theirnet retail price as of October 1, 1996.

To implement RA 8240, the Bureau of Internal Revenue (BIR)issued Revenue Regulations No. 1-97,2which classified the existingbrands of cigarettes as those duly registered or active brands prior toJanuary 1, 1997. New brands, or those registered after January 1, 1997,shall be initially assessed at their suggested retail price until such timethat the appropriate survey to determine their current net retail price isconducted. Pertinent portion of the regulations reads

SECTION 2. Definition of Terms.

x x x x

3. Duly registered or existing brand of cigarettes shall includeduly registered, existing or active brands of cigarettes, prior toJanuary 1, 1997.

x x x x

6. New Brands shall mean brands duly registered after January1, 1997 and shall include duly registered, inactive brands ofcigarette not sold in commercial quantity before January 1, 1997.

Section 4. Classification and Manner of Taxation of ExistingBrands, New Brands and Variant of Existing Brands.

x x x x

B. New Brand

New brands shall be classified according to their current net retailprice. In the meantime that the current net retail price has not yetbeen established, the suggested net retail price shall be used todetermine the specific tax classification. Thereafter, a survey shallbe conducted in 20 major supermarkets or retail outlets in MetroManila (for brands of cigarette marketed nationally) or in five (5)


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major supermarkets or retail outlets in the region (for brandswhich are marketed only outside Metro Manila) at which thecigarette is sold on retail in reams/cartons, three (3) months afterthe initial removal of the new brand to determine the actual netretail price excluding the excise tax and value added tax whichshall then be the basis in determining the specific taxclassification. In case the current net retail price is higher than thesuggested net retail price, the former shall prevail. Any differencein specific tax due shall be assessed and collected inclusive ofincrements as provided for by the National Internal RevenueCode, as amended.

In June 2001, petitioner British American Tobacco introduced into themarket Lucky Strike Filter, Lucky Strike Lights and Lucky Strike MentholLights cigarettes, with a suggested retail price of P9.90 perpack.3 Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brandswere initially assessed the excise tax at P8.96 per pack.

On February 17, 2003, Revenue Regulations No. 9-2003,4 amendedRevenue Regulations No. 1-97 by providing, among others, a periodicreview every two years or earlier of the current net retail price of newbrands and variants thereof for the purpose of establishing and updatingtheir tax classification, thus:

For the purpose of establishing or updating the tax classificationof new brands and variant(s) thereof, their current net retail priceshall be reviewed periodically through the conduct of survey orany 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 taxclassification of such new brands shall remain in force until thesame is altered or changed through the issuance of anappropriate Revenue Regulations.

Pursuant thereto, Revenue Memorandum Order No. 6-20035 wasissued on March 11, 2003, prescribing the guidelines and procedures inestablishing current net retail prices of new brands of cigarettes andalcohol products.

Subsequently, Revenue Regulations No. 22-20036 was issued onAugust 8, 2003 to implement the revised tax classification of certain newbrands introduced in the market after January 1, 1997, based on the
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survey of their current net retail price. The survey revealed that LuckyStrike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, aresold at the current net retail price of P22.54, P22.61 and P21.23, perpack, respectively.7 Respondent Commissioner of the Bureau of InternalRevenue thus recommended the applicable tax rate of P13.44 per packinasmuch as Lucky Strikes average net retail price is above P10.00 perpack.

Thus, on September 1, 2003, petitioner filed before the Regional TrialCourt (RTC) of Makati, Branch 61, a petition for injunction with prayerfor the issuance of a temporary restraining order (TRO) and/or writ ofpreliminary injunction, docketed as Civil Case No. 03-1032. Said petitionsought to enjoin the implementation of Section 145 of the NIRC,Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and RevenueMemorandum Order No. 6-2003 on the ground that they discriminateagainst new brands of cigarettes, in violation of the equal protection anduniformity provisions of the Constitution.

Respondent Commissioner of Internal Revenue filed an Opposition8 tothe application for the issuance of a TRO. On September 4, 2003, thetrial court denied the application for TRO, holding that the courts haveno authority to restrain the collection of taxes.9 Meanwhile, respondentSecretary of Finance filed a Motion to Dismiss,10 contending that thepetition is premature for lack of an actual controversy or urgentnecessity to justify judicial intervention.

In an Order dated March 4, 2004, the trial court denied the motion todismiss and issued a writ of preliminary injunction to enjoin theimplementation of Revenue Regulations Nos. 1-97, 9-2003, 22-2003and Revenue Memorandum Order No. 6-2003.11 Respondents filed aMotion for Reconsideration12 and Supplemental Motion forReconsideration.13 At the hearing on the said motions, petitioner andrespondent Commissioner of Internal Revenue stipulated that the onlyissue in this case is the constitutionality of the assailed law, order, and

regulations.

14

On May 12, 2004, the trial court rendered a decision15 upholding theconstitutionality of Section 145 of the NIRC, Revenue Regulations Nos.1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003.The trial court also lifted the writ of preliminary injunction. Thedispositive portion of the decision reads:
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WHEREFORE, premises considered, the instant Petition ishereby DISMISSED for lack of merit. The Writ of PreliminaryInjunction previously issued is hereby lifted and dissolved.

SO ORDERED.16

Petitioner brought the instant petition for review directly with this Courton a pure question of law.

While the petition was pending, RA 9334 (An Act Increasing The ExciseTax Rates Imposed on Alcohol And Tobacco Products, Amending ForThe Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of1997, As Amended), took effect on January 1, 2005. The statute,among others,

(1) increased the excise tax rates provided in paragraph (c) of Section145;

(2) mandated that new brands of cigarettes shall initially be classifiedaccording to their suggested net retail price, until such time that theircorrect tax bracket is finally determined under a specified period and,after which, their classification shall remain in force until revised byCongress;

(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 beforeJanuary 1, 1997 and were being commercially produced and marketedon or after October 1, 1996, and which continue to be commerciallyproduced and marketed after the effectivity of this Act. Saidclassification shall remain in force until revised by Congress; and

(4) provided a legislative freeze on brands of cigarettes introducedbetween the period January 2, 199717 to December 31, 2003, such thatsaid cigarettes shall remain in the classification under which the BIR has

determined them to belong as of December 31, 2003, until revised byCongress.

Pertinent portions, of RA 9334, provides:

SEC. 145. Cigars and Cigarettes.
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x x x x

(C) Cigarettes Packed by Machine. There shall be levied,assessed and collected on cigarettes packed by machine a tax atthe 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 January 1, 2005, Two pesos (P2.00) per pack;

Effective on January 1, 2007, Two pesos and twenty-threecentavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-seven

centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and seventy-twocentavos (P2.72) per pack.

(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 pesosand fifty centavos (P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-five centavos

(P6.35) per pack;

Effective on January 1, 2007, Six pesos and seventy-fourcentavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and fourteen centavos(P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-six centavos(P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (P6.50) but doesnot exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-five centavos(10.35) per pack;


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Effective on January 1, 2007, Ten pesos and eighty-eightcentavos (P10.88) per pack;

Effective on January 1, 2009, Eleven pesos and forty-threecentavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00) per pack.

(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 shallbe:

Effective on January 1, 2005, Twenty-five pesos (P25.00) perpack;

Effective on January 1, 2007, Twenty-six pesos and six centavos(P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos and sixteencentavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and thirtycentavos (P28.30) per pack.

x x x x

New brands, as defined in the immediately following paragraph,shall initially be classified according to their suggested net retailprice.

New brands shall mean a brand registered after the date ofeffectivity of R.A. No. 8240.

Suggested net retail price shall mean the net retail price atwhich new brands, as defined above, of locally manufactured or

imported cigarettes are intended by the manufacturer or importerto be sold on retail in major supermarkets or retail outlets in MetroManila for those marketed nationwide, and in other regions, forthose with regional markets. At the end of three (3) months fromthe product launch, the Bureau of Internal Revenue shall validatethe suggested net retail price of the new brand against the netretail price as defined herein and determine the correct tax


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bracket under which a particular new brand of cigarette, asdefined above, shall be classified. After the end of eighteen (18)months from such validation, the Bureau of Internal Revenue shallrevalidate the initially validated net retail price against the netretail price as of the time of revalidation in order to finallydetermine the correct tax bracket under which a particular newbrand of cigarettes shall be classified; Provided however, Thatbrands of cigarettes introduced in the domestic marketbetween January 1, 1997 [should be January 2, 1997] andDecember 31, 2003 shall remain in the classification underwhich the Bureau of Internal Revenue has determined themto belong as of December 31, 2003. Such classification ofnew brands and brands introduced between January 1, 1997and December 31, 2003 shall not be revised except by an actof Congress.

Net retail price, as determined by the Bureau of Internal Revenuethrough a price survey to be conducted by the Bureau of InternalRevenue itself, or the National Statistics Office when deputized forthe purpose by the Bureau of Internal Revenue, shall mean theprice at which the cigarette is sold in retail in at least twenty (20)major supermarkets in Metro Manila (for brands of cigarettesmarketed nationally), excluding the amount intended to cover theapplicable excise tax and the value-added tax. For brands which

are marketed only outside Metro Manila, the "net retail price" shallmean the price at which the cigarette is sold in at least five (5)major supermarkets in the region excluding the amount intendedto cover the applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on itsaverage net retail price as of October 1, 1996, as set forth inAnnex "D", including the classification of brands for thesame 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 whichcontinue to be commercially produced and marketed afterthe effectivity of this Act, shall remain in force until revisedby Congress. (Emphasis added)

Under RA 9334, the excise tax due on petitioners products wasincreased to P25.00 per pack. In the implementation thereof,


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respondent Commissioner assessed petitioners importation of 911,000packs of Lucky Strike cigarettes at the increased tax rate of P25.00 perpack, rendering it liable for taxes in the total sum of P22,775,000.00.18

Hence, petitioner filed a Motion to Admit Attached Supplement19 and a

Supplement20 to the petition for review, assailing the constitutionality ofRA 9334 insofar as it retained Annex "D" and praying for a downwardclassification of Lucky Strike products at the bracket taxable at P8.96per pack. Petitioner contended that the continued use of Annex "D" asthe tax base of existing brands of cigarettes gives undue protection tosaid brands which are still taxed based on their price as of October1996 notwithstanding that they are now sold at the same or even at ahigher price than new brands like Lucky Strike. Thus, old brands ofcigarettes 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 ofP10.88 per pack, while Lucky Strike products are taxed at P26.06 perpack.

In its Comment to the supplemental petition, respondents, through theOffice of the Solicitor General (OSG), argued that the passage of RA9334, specifically the provision imposing a legislative freeze on theclassification of cigarettes introduced into the market between January2, 1997 and December 31, 2003, rendered the instant petitionacademic. The OSG claims that the provision in Section 145, asamended by RA 9334, prohibiting the reclassification of cigarettesintroduced during said period, "cured the perceived defect of Section145 considering that, like the cigarettes under Annex "D," petitionersbrands and other brands introduced between January 2, 1997 andDecember 31, 2003, shall remain in the classification under which theBIR has placed them and only Congress has the power to reclassifythem.

On March 20, 2006, Philip Morris Philippines ManufacturingIncorporated filed a Motion for Leave to Intervene with attached

Comment-in-Intervention.

21

This was followed by the Motions for Leaveto Intervene of Fortune Tobacco Corporation,22 MightyCorporation, 23 and JT International, S.A., with their respectiveComments-in-Intervention. The Intervenors claim that they are parties-in-interest who stand to be affected by the ruling of the Court on theconstitutionality of Section 145 of the NIRC and its Annex "D" becausethey are manufacturers of cigarette brands which are included in the
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said Annex. Hence, their intervention is proper since the protection oftheir interest cannot be addressed in a separate proceeding.

According to the Intervenors, no inequality exists because cigarettesclassified by the BIR based on their net retail price as of December 31,

2003 now enjoy the same status quo provision that prevents the BIRfrom reclassifying cigarettes included in Annex "D." It added that theCourt has no power to pass upon the wisdom of the legislature inretaining Annex "D" in RA 9334; and that the nullification of said Annexwould bring about tremendous loss of revenue to the government,chaos in the collection of taxes, illicit trade of cigarettes, and causedecline in cigarette demand to the detriment of the farmers who dependon the tobacco industry.

Intervenor Fortune Tobacco further contends that petitioner is estopped

from questioning the constitutionality of Section 145 and itsimplementing rules and regulations because it entered into the cigaretteindustry fully aware of the existing tax system and its consequences.Petitioner imported cigarettes into the country knowing that itssuggested retail price, which will be the initial basis of its taxclassification, will be confirmed and validated through a survey by theBIR to determine the correct tax that would be levied on its cigarettes.

Moreover, Fortune Tobacco claims that the challenge to the validity ofthe BIR issuances should have been brought by petitioner before theCourt of Tax Appeals (CTA) and not the RTC because it is the CTAwhich has exclusive appellate jurisdiction over decisions of the BIR intax disputes.

On August 7, 2006, the OSG manifested that it interposes no objectionto the motions for intervention.24Therefore, considering the substantialinterest of the intervenors, and in the higher interest of justice, the Courtadmits their intervention.

Before going into the substantive issues of this case, we must firstaddress the matter of jurisdiction, in light of Fortune Tobaccoscontention that petitioner should have brought its petition before theCourt of Tax Appeals rather than the regional trial court.

The jurisdiction of the Court of Tax Appeals is defined in Republic ActNo. 1125, as amended by Republic Act No. 9282. Section 7 thereofstates, in pertinent part:


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Sec. 7. Jurisdiction. The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as hereinprovided:

1. Decisions of the Commissioner of Internal Revenue in casesinvolving disputed assessments, refunds of internal revenuetaxes, fees or other charges, penalties in relation thereto, or othermatters arising under the National Internal Revenue or other lawsadministered by the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in casesinvolving disputed assessments, refunds of internal revenuetaxes, fees or other charges, penalties in relations thereto, orother 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 specificperiod of action, in which case the inaction shall be deemed adenial; xxx.25

While the above statute confers on the CTA jurisdiction to resolve taxdisputes in general, this does not include cases where theconstitutionality of a law or rule is challenged. Where what is assailed isthe validity or constitutionality of a law, or a rule or regulation issued bythe administrative agency in the performance of its quasi-legislative

function, the regular courts have jurisdiction to pass upon the same. Thedetermination of whether a specific rule or set of rules issued by anadministrative agency contravenes the law or the constitution is withinthe jurisdiction of the regular courts. Indeed, the Constitution vests thepower 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 regionaltrial courts. This is within the scope of judicial power, which includes theauthority of the courts to determine in an appropriate action the validityof the acts of the political departments. Judicial power includes the dutyof the courts of justice to settle actual controversies involving rightswhich are legally demandable and enforceable, and to determinewhether or not there has been a grave abuse of discretion amounting tolack or excess of jurisdiction on the part of any branch or instrumentalityof the Government.26

In Drilon v. Lim,27 it was held:
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We stress at the outset that the lower court had jurisdiction toconsider the constitutionality of Section 187, this authority beingembraced in the general definition of the judicial power todetermine what are the valid and binding laws by the criterion oftheir conformity to the fundamental law. Specifically, B.P. 129vests in the regional trial courts jurisdiction over all civil cases inwhich the subject of the litigation is incapable of pecuniaryestimation, even as the accused in a criminal action has the rightto question in his defense the constitutionality of a law he ischarged with violating and of the proceedings taken against him,particularly as they contravene the Bill of Rights. Moreover, ArticleX, Section 5(2), of the Constitution vests in the Supreme Courtappellate jurisdiction over final judgments and orders of lowercourts in all cases in which the constitutionality or validity of anytreaty, international or executive agreement, law, presidentialdecree, proclamation, order, instruction, ordinance, or regulationis in question.

The petition for injunction filed by petitioner before the RTC is a directattack on the constitutionality of Section 145(C) of the NIRC, asamended, and the validity of its implementing rules and regulations. Infact, the RTC limited the resolution of the subject case to the issue ofthe constitutionality of the assailed provisions. The determination ofwhether 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 todeclare a law, treaty, international or executive agreement, presidentialdecree, order, instruction, ordinance, or regulation in the courts,including the regional trial courts.28Petitioner, therefore, properly filed thesubject case before the RTC.

We come now to the issue of whether petitioner is estopped fromassailing 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 StrikeSoft Pack cigarettes was a "new brand" rather than a variant of anexisting brand, and thus subject to a lower specific tax rate, petitionerexecuted an undertaking to comply with the procedures under existingregulations for the assessment of deficiency internal revenue taxes.


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Fortune Tobacco argues that petitioner, after invoking the authority ofthe Commissioner of Internal Revenue, cannot later on turn aroundwhen 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 theprejudice of others who have relied on them.29 The principle is codifiedin Article 1431 of the Civil Code, which provides:

Through estoppel, an admission or representation is renderedconclusive upon the person making it and cannot be denied ordisproved as against the person relying thereon.

Estoppel can also be found in Rule 131, Section 2 (a) of the Rules ofCourt, viz:

Sec. 2. Conclusive presumptions. The following are instancesof conclusive presumptions:

(a) Whenever a party has by his own declaration, act or omission,intentionally and deliberately led another to believe a particularthing true, and to act upon such belief, he cannot, in any litigationarising out of such declaration, act or omission be permitted tofalsify it.

The elements of estoppel are: first, the actor who usually must haveknowledge, notice or suspicion of the true facts, communicatessomething to another in a misleading way, either by words, conduct orsilence;second, the other in fact relies, and relies reasonably or

justifiably, upon that communication; third, the other would be harmedmaterially if the actor is later permitted to assert any claim inconsistentwith his earlier conduct; and fourth, the actor knows, expects orforesees that the other would act upon the information given or that areasonable person in the actor's position would expect or foresee suchaction.30

In the early case ofKalalo v. Luz,31 the elements of estoppel, as relatedto the party to be estopped, are: (1) conduct amounting to falserepresentation or concealment of material facts; or at least calculated toconvey the impression that the facts are other than, and inconsistentwith, those which the party subsequently attempts to assert; (2) intent,or at least expectation that this conduct shall be acted upon by, or at
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least influence, the other party; and (3) knowledge, actual orconstructive, of the real facts.

We find that petitioner was not guilty of estoppel. When it made theundertaking to comply with all issuances of the BIR, which at that time it

considered as valid, petitioner did not commit any falsemisrepresentation or misleading act. Indeed, petitioner cannot befaulted for initially undertaking to comply with, and subjecting itself to theoperation of Section 145(C), and only later on filing the subject casepraying for the declaration of its unconstitutionality when thecircumstances change and the law results in what it perceives to beunlawful discrimination. The mere fact that a law has been relied uponin the past and all that time has not been attacked as unconstitutional isnot a ground for considering petitioner estopped from assailing itsvalidity. For courts will pass upon a constitutional question only whenpresented before it in bona fide cases for determination, and the factthat the question has not been raised before is not a valid reason forrefusing 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 firstdiscuss how the assailed law operates in order to identify, withprecision, the specific provisions which, according to petitioner, havecreated a grossly discriminatory classification scheme between old andnew brands. The pertinent portions of RA 8240, as amended by RA9334, 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 atthe 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 January 1, 2005, Two pesos (P2.00) per pack;


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Effective on January 1, 2007, Two pesos and twenty-threecentavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-sevencentavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and seventy-twocentavos (P2.72) per pack.

(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 pesosand fifty centavos (P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-fivecentavos (P6.35) per pack;

Effective on January 1, 2007, Six pesos and seventy-fourcentavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and fourteencentavos (P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-sixcentavos (P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (P6.50) but doesnot exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-fivecentavos (10.35) per pack;

Effective on January 1, 2007, Ten pesos and eighty-eightcentavos (P10.88) per pack;

Effective on January 1, 2009, Eleven pesos and forty-threecentavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00) perpack.


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(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 shallbe:

Effective on January 1, 2005, Twenty-five pesos (P25.00)

per pack;

Effective on January 1, 2007, Twenty-six pesos and sixcentavos (P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos andsixteen centavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and thirtycentavos (P28.30) per pack.

x x x x

New brands, as defined in the immediately following paragraph,shall initially be classified according to their suggested net retailprice.

New brands shall mean a brand registered after the date ofeffectivity of R.A. No. 8240.

Suggested net retail price shall mean the net retail price at whichnew brands, as defined above, of locally manufactured orimported cigarettes are intended by the manufacturer or importerto be sold on retail in major supermarkets or retail outlets in MetroManila for those marketed nationwide, and in other regions, forthose with regional markets. At the end of three (3) months fromthe product launch, the Bureau of Internal Revenue shall validatethe suggested net retail price of the new brand against the netretail price as defined herein and determine the correct taxbracket 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 shallrevalidate the initially validated net retail price against the netretail price as of the time of revalidation in order to finallydetermine the correct tax bracket under which a particular newbrand of cigarettes shall be classified; Provided however, Thatbrands of cigarettes introduced in the domestic market between


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January 1, 1997 [should be January 2, 1997] and December 31,2003 shall remain in the classification under which the Bureau ofInternal Revenue has determined them to belong as of December31, 2003. Such classification of new brands and brandsintroduced between January 1, 1997 and December 31, 2003shall not be revised except by an act of Congress.

Net retail price, as determined by the Bureau of Internal Revenuethrough a price survey to be conducted by the Bureau of InternalRevenue itself, or the National Statistics Office when deputized forthe purpose by the Bureau of Internal Revenue, shall mean theprice at which the cigarette is sold in retail in at least twenty (20)major supermarkets in Metro Manila (for brands of cigarettesmarketed nationally), excluding the amount intended to cover theapplicable excise tax and the value-added tax. For brands whichare marketed only outside Metro Manila, the "net retail price" shallmean the price at which the cigarette is sold in at least five (5)major supermarkets in the region excluding the amount intendedto cover the applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on itsaverage net retail price as of October 1, 1996, as set forth in

Annex "D", including the classification of brands for the sameproducts which, although not set forth in said Annex "D", wereregistered and were being commercially produced and marketedon or after October 1, 1996, and which continue to becommercially 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 mayrefer to as the low-priced,33 medium-priced,34 high-priced,35 andpremium-priced36 tax brackets. When a brand is introduced in themarket, the current net retail price is determined through theaforequoted specified procedure. The current net retail price is then

used to classify under which tax bracket the brand belongs in order tofinally determine the corresponding excise tax rate on a per pack basis.The assailed feature of this law pertains to the mechanism where, aftera brand is classified based on its current net retail price, theclassification is frozen and only Congress can thereafter reclassify thesame. From a practical point of view, Annex "D" is merely a by-productof the whole mechanism and philosophy of the assailed law. That is, the
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brands under Annex "D" were also classified based on their current netretail price, the only difference being that they were the first ones soclassified 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 ispossible that over timethe net retail price of a previously classified brand, whether it be a brandunder Annex "D" or a new brand classified after the effectivity of RA8240 on January 1, 1997, would increase (due to inflation, increase ofproduction costs, manufacturers decision to increase its prices, etc.) toa point that its net retail price pierces the tax bracket to which it was

previously classified.38 Consequently, even if its present day net retailprice would make it fall under a higher tax bracket, the previouslyclassified brand would continue to be subject to the excise tax rateunder the lower tax bracket by virtue of the legislative classificationfreeze.

Petitioner claims that this is what happened in 2004 to the Marlboro andPhilip Morris brands, which were permanently classified under Annex"D." As of October 1, 1996, Marlboro had net retail prices ranging fromP6.78 to P6.84 while Philip Morris had net retail prices ranging fromP7.39 to P7.48. Thus, pursuant to RA 8240,39 Marlboro and Philip Morriswere classified under the high-priced tax bracket and subjected to anexcise tax rate of P8.96 per pack. Petitioner then presented evidenceshowing that after the lapse of about seven years or sometime in 2004,Marlboros and Philip Morris net retail prices per pack both increased toabout P15.59.40 This meant that they would fall under the premium-priced tax bracket, with a higher excise tax rate of P13.44 perpack,41 had they been classified based on their 2004 net retail prices.However, due to the legislative classification freeze, they continued tobe classified under the high-priced tax bracket with a lower excise taxrate. 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, P11.59and P10.34,42 respectively, which are lower than those of Marlboro andPhilip Morris. However, since petitioners cigarettes were newlyintroduced brands in the market, they were taxed based on their currentnet retail prices and, thus, fall under the premium-priced tax bracket witha higher excise tax rate of P13.44 per pack. This unequal tax treatmentbetween Marlboro and Philip Morris, on the one hand, and Lucky Strike,
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on the other, is the crux of petitioners contention that the legislativeclassification freeze violates the equal protection and uniformity oftaxation 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 thetax classification of a cigarette brand based on its current net retailprice. Stated differently, the alleged discrimination arising from thelegislative classification freeze between the brands under Annex "D"and petitioners newly introduced brands arose only because the formerwere classified based on their "current" net retail price as of October 1,1996 andpetitioners newly introduced brands were classified based ontheir "current" net retail price as of 2003. Without this correspondingfreezing of the classification of petitioners newly introduced brandsbased on their current net retail price, it would be impossible to establishthat a disparate tax treatment occurred between the Annex "D" brandsand petitioners newly introduced brands.

This clarification is significant because, under these circumstances, adeclaration of unconstitutionality would necessarily entail nullifying thewhole mechanism of the law and not just Annex "D." Consequently, ifthe assailed law is declared unconstitutional on equal protectiongrounds, the entire method by which a brand of cigarette is classifiedwould have to be invalidated. As a result, no method to classify brandsunder Annex "D" as well as new brands would be left behind and thewhole Section 145 of the NIRC, as amended, would becomeinoperative.43

To simplify the succeeding discussions, we shall refer to the wholemechanism and philosophy of the assailed law which freezes the taxclassification of a cigarette brand based on its current net retail priceand which, thus, produced different classes of brands based on the timeof 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) asthe classification freeze provision.44

As thus formulated, the central issue is whether or not the classificationfreeze provision violates the equal protection and uniformity of taxationclauses of the Constitution.
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In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando,explained the applicable standard in deciding equal protection anduniformity of taxation challenges:

Now for equal protection. The applicable standard to avoid the

charge that there is a denial of this constitutional mandatewhether the assailed act is in the exercise of the police power orthe power of eminent domain is to demonstrate "that thegovernmental act assailed, far from being inspired by theattainment of the common weal was prompted by the spirit ofhostility, or at the very least, discrimination that finds no support inreason. It suffices then that the laws operate equally anduniformly on all persons under similar circumstances or that allpersons must be treated in the same manner, the conditions notbeing different, both in the privileges conferred and the liabilitiesimposed. Favoritism and undue preference cannot be allowed.For the principle is that equal protection and security shall begiven to every person under circumstances, which if not identicalare analogous. If law be looks upon in terms of burden orcharges, those that fall within a class should be treated in thesame fashion, whatever restrictions cast on some in the groupequally binding on the rest." That same formulation applies as wellto 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 beinggoverned by that serene and impartial uniformity, which is of thevery essence of the idea of law. There is, however, wisdom, aswell as realism, in these words of Justice Frankfurter: "Theequality at which the 'equal protection' clause aims is not adisembodied equality. The Fourteenth Amendment enjoins 'theequal protection of the laws,' and laws are not abstractpropositions. They do not relate to abstract units A, B and C, butare 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 aredifferent in fact or opinion to be treated in law as though they werethe same."Hence the constant reiteration of the view thatclassification if rational in character is allowable. As a matterof fact, in a leading case of Lutz v. Araneta, this Court, throughJustice J.B.L. Reyes, went so far as to hold "at any rate, it isinherent in the power to tax that a state be free to select the


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subjects of taxation, and it has been repeatedly held that'inequalities which result from a singling out of one particular classfor taxation, or exemption infringe no constitutional limitation.'"

Petitioner likewise invoked the kindred concept of uniformity.

According to the Constitution: "The rule of taxation shall beuniform and equitable." This requirement is met according toJustice Laurel in Philippine Trust Company v. Yatco, decided in1940, when the tax "operates with the same force and effect inevery place where the subject may be found." He likewise added:"The rule of uniformity does not call for perfect uniformity orperfect equality, because this is hardly attainable." The problem ofclassification did not present itself in that case. It did not arise untilnine years later, when the Supreme Court held: "Equality anduniformity in taxation means that all taxable articles or kinds ofproperty of the same class shall be taxed at the same rate. Thetaxing power has the authority to make reasonable andnatural classifications for purposes of taxation, . . . Asclarified by Justice Tuason, where "the differentiation" complainedof "conforms to the practical dictates of just

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