8/31/2016 G.R.No.

108524

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

SECONDDIVISION

G.R.No.108524November10,1994

MISAMISORIENTALASSOCIATIONOFCOCOTRADERS,INC.,petitioner,
vs.
DEPARTMENTOFFINANCESECRETARY,COMMISSIONEROFTHEBUREAUOFINTERNALREVENUE
(BIR),ANDREVENUEDISTRICTOFFICER,BIRMISAMISORIENTAL,respondents.

DamasingLawOfficeforpetitioner.

MENDOZA,J.:

This is a petition for prohibition and injunction seeking to nullify Revenue Memorandum Circular No. 4791 and
enjoin the collection by respondent revenue officials of the Value Added Tax (VAT) on the sale of copra by
membersofpetitionerorganization.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
allegesthatpriortotheissuanceofRevenueMemorandumCircular4791onJune11,1991,whichimplemented
VAT Ruling 19090, copra was classified as agricultural food product under $ 103(b) of the National Internal
RevenueCodeand,therefore,exemptfromVATatallstagesofproductionordistribution.

Respondentsrepresentdepartmentsoftheexecutivebranchofgovernmentchargedwiththegenerationoffunds
andtheassessment,levyandcollectionoftaxesandotherimposts.

ThepertinentprovisionoftheNIRCstates:

Sec.103.ExemptTransactions.Thefollowingshallbeexemptfromthevalueaddedtax:

(a) Sale of nonfood agricultural, marine and forest products in their original state by the primary
producerortheownerofthelandwherethesameareproduced

(b)Saleorimportationintheiroriginalstateofagriculturalandmarinefoodproducts,livestockand
poultry of a kind generally used as, or yielding or producing foods for human consumption, and
breedingstockandgeneticmaterialtherefor

Under103(a),asabovequoted,thesaleofagriculturalnonfoodproductsintheiroriginalstateisexemptfrom
VATonlyifthesaleismadebytheprimaryproducerorownerofthelandfromwhichthesameareproduced.The
salemadebyanyotherpersonorentity,likeatraderordealer,isnotexemptfromthetax.Ontheotherhand,
under 103(b) the sale of agricultural food products in their original state is exempt from VAT at all stages of
productionordistributionregardlessofwhotheselleris.

The question is whether copra is an agricultural food or nonfood product for purposes of this provision of the
NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue issued the circular in question,
classifyingcopraasanagriculturalnonfoodproductanddeclaringit"exemptfromVATonlyifthesaleismadeby
theprimaryproducerpursuanttoSection103(a)oftheTaxCode,asamended."2

Thereclassificationhadtheeffectofdenyingtothepetitionertheexemptionitpreviouslyenjoyedwhencoprawas
classified as an agricultural food product under 103(b) of the NIRC. Petitioner challenges RMC No. 4791 on
variousgrounds,whichwillbepresentlydiscussedalthoughnotintheorderraisedinthepetitionforprohibition.

First.PetitionercontendsthattheBureauofFoodandDrugoftheDepartmentofHealthandnottheBIRisthe
competentgovernmentagencytodeterminetheproperclassificationoffoodproducts.Petitionercitestheopinion
of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that copra should be considered "food"
becauseitisproducedfromcoconutwhichisfoodand80%ofcoconutproductsareedible.

Ontheotherhand,therespondentsarguethattheopinionoftheBIR,asthegovernmentagencychargedwith
theimplementationandinterpretationofthetaxlaws,isentitledtogreatrespect.

Weagreewithrespondents.Ininterpreting103(a)and(b)oftheNIRC,theCommissionerofInternalRevenue
gave it a strict construction consistent with the rule that tax exemptions must be strictly construed against the
taxpayerandliberallyinfavorofthestate.Indeed,evenDr.Kintanarsaidthathisclassificationofcopraasfood
wasbasedon"thebroaderdefinitionoffoodwhichincludesagriculturalcommoditiesandothercomponentsused
inthemanufacture/processingoffood."Thefulltextofhisletterreads:

10April1991

Mr.VICTORA.DEOFERIO,JR.
ChairmanVATReviewCommittee

http://www.lawphil.net/judjuris/juri1994/nov1994/gr_108524_1994.html 1/3
8/31/2016 G.R.No.108524

BureauofInternalRevenue
Diliman,QuezonCity

DearMr.Deoferio:

This is to clarify a previous communication made by this Office about copra in a letter dated 05
December1990statingthatcopraisnotclassifiedasfood.Thestatementwasmadeinthecontext
ofBFAD'sregulatoryresponsibilitieswhichfocusmainlyonfoodsthatareprocessedandpackaged,
andtherebycopraisnotcovered.

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.

Verytrulyyours,

QUINTINL.KINTANAR,M.D.,Ph.D.
Director
AssistantSecretaryofHealthfor
StandardsandRegulations

Moreover,asthegovernmentagencychargedwiththeenforcementofthelaw,theopinionoftheCommissioner
ofInternalRevenue,intheabsenceofanyshowingthatitisplainlywrong,isentitledtogreatweight.Indeed,the
rulingwasmadebytheCommissionerofInternalRevenueintheexerciseofhispowerunder245oftheNIRC
to "make rulings or opinions in connection with the implementation of the provisions of internal revenue laws,
includingrulingsontheclassificationofarticlesforsalestaxandsimilarpurposes."

Second. Petitioner complains that it was denied due process because it was not heard before the ruling was
made.Thereisadistinctioninadministrativelawbetweenlegislativerulesandinterpretativerules. 3 There would
beforceinpetitioner'sargumentifthecircularinquestionwereinthenatureofalegislativerule.Butitisnot.Itisamere
interpretativerule.

The reason for this distinction is that a legislative rule is in the nature of subordinate legislation, designed to
implementaprimarylegislationbyprovidingthedetailsthereof.Inthesamewaythatlawsmusthavethebenefit
of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this
connection,theAdministrativeCodeof1987provides:

PublicParticipation.Ifnototherwiserequiredbylaw,anagencyshall,asfaraspracticable,publish
or circulate notices of proposed rules and afford interested parties the opportunity to submit their
viewspriortotheadoptionofanyrule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have
beenpublishedinanewspaperofgeneralcirculationatleasttwo(2)weeksbeforethefirsthearing
thereon.

(3)Incaseofopposition,therulesoncontestedcasesshallbeobserved.4

Inadditionsuchrulemustbepublished.5 On the other hand, interpretative rules are designed to provide guidelines to
thelawwhichtheadministrativeagencyisinchargeofenforcing.

Accordingly,inconsideringalegislativeruleacourtisfreetomakethreeinquiries:(i)whethertheruleiswithinthe
delegated authority of the administrative agency (ii) whether it is reasonable and (iii) whether it was issued
pursuanttoproperprocedure.Butthecourtisnotfreetosubstituteitsjudgmentastothedesirabilityorwisdomof
the rule for the legislative body, by its delegation of administrative judgment, has committed those questions to
administrativejudgmentsandnottojudicialjudgments.Inthecaseofaninterpretativerule,theinquiryisnotinto
thevaliditybutintothecorrectnessorproprietyoftherule.Asamatterofpoweracourt,whenconfrontedwithan
interpretativerule,isfreeto(i)givetheforceoflawtotherule(ii)gototheoppositeextremeandsubstituteits
judgmentor(iii)givesomeintermediatedegreeofauthoritativeweighttotheinterpretativerule.6

Inthecaseatbar,wefindnoreasonforholdingthatrespondentCommissionererredinnotconsideringcopraas
an "agricultural food product" within the meaning of 103(b) of the NIRC. As the Solicitor General contends,
"copraperseisnotfood,thatis,itisnotintendedforhumanconsumption.Simplystated,nobodyeatscoprafor
food."ThatpreviousCommissionersconsidereditso,isnotreasonforholdingthatthepresentinterpretationis
wrong.TheCommissionerofInternalRevenueisnotboundbytherulingofhispredecessors.7Tothecontrary,the
overrulingofdecisionsisinherentintheinterpretationoflaws.

Third.PetitionerlikewiseclaimsthatRMCNo.4791isdiscriminatoryandviolativeoftheequalprotectionclause
oftheConstitutionbecausewhilecoconutfarmersandcopraproducersareexempt,tradersanddealersarenot,
althoughbothsellcoprainitsoriginalstate.PetitionersaddthatoilmillersdonotenjoytaxcreditoutoftheVAT
paymentoftradersanddealers.

The argument has no merit. There is a material or substantial difference between coconut farmers and copra
producers,ontheonehand,andcopratradersanddealers,ontheother.Theformerproduceandsellcopra,the
lattermerelysellcopra.TheConstitutiondoesnotforbidthedifferentialtreatmentofpersonssolongasthereisa
reasonablebasisforclassifyingthemdifferently.8

ItisnottruethatoilmillersareexemptfromVAT.Pursuantto102oftheNIRC,theyaresubjectto10%VATon
thesaleofservices.Under104oftheTaxCode,theyareallowedtocredittheinputtaxonthesaleofcopraby
tradersanddealers,butthereisnotaxcreditifthesaleismadedirectlybythecopraproducerasthesaleisVAT
exempt.Inthesamemanner,copratradersanddealersareallowedtocredittheinputtaxonthesaleofcopraby
othertradersanddealers,butthereisnotaxcreditifthesaleismadebytheproducer.

Fourth.ItisfinallyarguedthatRMCNo.4791iscounterproductivebecausetradersanddealerswouldbeforced
tobuycoprafromcoconutfarmerswhoareexemptfromtheVATandthattotheextentthatpricesarereduced
thegovernmentwouldloserevenuesasthe10%taxbaseiscorrespondinglydiminished.
http://www.lawphil.net/judjuris/juri1994/nov1994/gr_108524_1994.html 2/3
8/31/2016 G.R.No.108524

This is not so. The sale of agricultural nonfood products is exempt from VAT only when made by the primary
producerorownerofthelandfromwhichthesameisproduced,butinthecaseofagriculturalfoodproductstheir
saleintheiroriginalstateisexemptatallstagesofproductionordistribution.Atanyrate,theargumentthatthe
classification of copra as agricultural nonfood product is counterproductive is a question of wisdom or policy
whichshouldbeaddressedtorespondentofficialsandtoCongress.

WHEREFORE,thepetitionisDISMISSED.

SOORDERED.

Narvasa,C.J.,RegaladoandPuno,JJ.,concur.

#Footnotes

1Thevalueaddedtaxisapercentagetaxonthesale,barter,exchangeorimportationofgoodsor
services.(NIRC,99)Insofarasthesale,barterorexchangeofgoodsisconcerned,thetaxis
equivalentto10%ofthegrosssellingpriceorgrossvalueinmoneyofthegoodssold,barteredor
exchanged,suchtaxtobepaidbythesellerortransferor.(100(a))Thetaxisdeterminedas
follows:

(d)Determinationofthetax.(1)Taxbilledasseparateitemintheinvoice.Ifthetaxisbilledasa
separateitemintheinvoice,thetaxshallbebasedonthegrosssellingprice,excludingthetax.
"Grosssellingprice"meansthetotalamountofmoneyoritsequivalentwhichthepurchaserpaysor
isobligatedtopaytothesellerintheconsiderationofthesale,barterorexchangeofthegoods,
excludingthevalueaddedtax.Theexcisetax,ifany,onsuchgoodsshallformpartofthegross
sellingprice.

(2)Taxnotbilledseparatelyorisbillederroneouslyinthe
invoice.Incasethetaxisnotbilledseparatelyorisbillederroneouslyintheinvoice,thetaxshall
bedeterminedbymultiplyingthegrosssellingprice,includingtheamountintendedbythesellerto
coverthetaxorthetaxbillederroneously,bythefactor1/11orsuchfactorasmaybeprescribedby
regulationsincaseofpersonspartiallyexemptunderspeciallaws.

(3)Salesreturns,allowancesandsalesdiscounts.Thevalueofgoodssoldandsubsequently
returnedorforwhichallowancesweregrantedbyaVATregisteredpersonmaybedeductedfrom
thegrosssalesorreceiptsforthequarterinwhicharefundismadeoracreditmemorandumor
refundisissued.Salesdiscountsgrantedandindicatedintheinvoiceatthetimeofsalemaybe
excludedfromthegrosssaleswithinthesamequarter.(100(d))

2ThiscircularisbasedonVATRulingNo.19090datedAugust17,1990whichrevokedVATRuling
No.00988andVATRulingNo.27988,June30,1988,classifyingcopraasanagriculturalfood
product.

3SeeVictoriasMillingCo.v.SocialSecurityCommission,114Phil.555(1962)PhilippineBlooming
Millsv.SocialSecuritySystem,124Phil.499(1966).

4Bk.VII,Ch.2,9.

5Taadav.Tuvera,146SCRA446(1986).SeeVictoriasMillingCo.v.SSC,supranote3.

6K.DAVIS,AdministrativeLaw116(1965).

7Petitioner'sclaimthatRMCNo.4791erroneouslyrevokedirrelevantVATrulingsoftheBIRisnot
correct.RMCNo.4791revokedVATRulingsNo.00988andNo.27988,whichdealtwiththe
questionwhethercopraisanagriculturalfoodornonfoodproduct.VATrulingNo.00988heldthat
"copraasanagriculturalproductisexemptfromVATinallstagesofdistribution."Ontheotherhand,
VATRulingNo.27988treated"copra...asanagriculturalfoodproductinitsoriginalstate"and,
therefore,"exemptfromVATunderSection103(b)oftheTAXCode,asamendedbyEO273
regardlessofwhetherthesaleismadebyproducerorsubsequentsale."

8KapatiranngmgaNaglilingkodsaPamahalaanngPilipinas,Inc.v.Tan,163SCRA371(1988)
(sustainingthevalidityofE.O.273adoptingtheVAT)Sison,Jr.v.Ancheta,130SCRA653(1984)
(sustainingthevalidityofB.P.Blg.135providingfortaxableincometaxation).

TheLawphilProjectArellanoLawFoundation

http://www.lawphil.net/judjuris/juri1994/nov1994/gr_108524_1994.html 3/3