FACTS:

The case involves a dispute over a tax refund or tax credit claimed by Fortune Tobacco Corporation (Fortune Tobacco) for specific taxes erroneously collected from its tobacco products. Fortune Tobacco is a domestic corporation engaged in the manufacturing and production of various cigarette brands. Prior to January 1, 1997, these cigarette brands were subject to ad valorem tax, but on that date, R.A. No. 8240 took effect, implementing a shift from the ad valorem tax system to the specific tax system. The Secretary of Finance issued Revenue Regulations No. 17-99 in December 1999, which provided for an increase in the applicable tax rates on cigars and cigarettes effective January 1, 2000.

The petitioner, a cigarette manufacturer, allegedly paid specific taxes on all brands manufactured and removed in the total amount of P585,705,250.00 for the period covering January 1-31, 2000. On February 7, 2000, the petitioner filed a claim for refund or tax credit of its purportedly overpaid excise tax for the month of January 2000 in the amount of P35,651,410.00. The respondent raised defenses that the petitioner's claim for refund should undergo administrative investigation/examination, that the claimed amount was not properly documented, and that the burden of proof is on the petitioner to establish its right to refund.

The Court of Tax Appeals (CTA) initially granted the petitioner's claim for refund, but later reversed its decision and denied the claim. However, on reconsideration, the CTA reinstated its decision and ordered the respondent to refund the amount of P680,387,025.00 representing erroneously paid excise taxes for the period January 1, 2000 to December 31, 2001, and the amount of P355,385,920.00 representing overpaid excise tax for the period January 1, 2002 to December 31, 2002.

The Commissioner appealed the decisions of the CTA, and the cases were consolidated and docketed as CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165.

The case involves a dispute regarding the proper interpretation and implementation of Section 145 of the Tax Code of 1997. The Commissioner of Internal Revenue (Commissioner) and Fortune Tobacco Corporation are the parties involved in the case. The Commissioner filed petitions for review with the Court of Tax Appeals (CTA) seeking the denial of Fortune Tobacco's refund claims for overpaid excise taxes. The CTA denied the petitions, ruling that the 12% increase in the excise tax rate should be based on the net retail price of the cigarettes in the market as specified in Section 145 of the Tax Code. The Commissioner appealed the CTA's decision to the Court of Appeals, which consolidated the petitions and eventually denied them.

ISSUES:

1. Whether Revenue Regulation 17-99 exceeded the allowable limits of legislative delegation.

2. Whether the interpretation of the 12% increase in excise taxes under the regulation is correct.

3. Whether Revenue Regulation No. 17-99 is valid in imposing a tax rate on cigarettes that is the higher amount between the ad valorem tax being paid at the end of the transition period and the specific tax under the 12% increase.

4. Whether Revenue Regulation No. 17-99 is consistent with the plain wording of Section 145 of the Tax Code.

5. Whether the Revenue Regulation No. 17-99 issued by the Commissioner of Internal Revenue imposing higher taxes on cigarettes is valid.

6. Whether the excise tax increase of 12% starting on January 1, 2000 applies to the brands of cigarettes listed under Annex "D".

7. Whether Fortune Tobacco is entitled to a tax refund for its erroneous payment of taxes.

8. Whether a claim for tax refund falls under quasi-contracts, specifically solutio indebiti.

9. Whether the government is exempt from the application of solutio indebiti.

10. What are the bases for a claim for tax refund under the Tax Code.

RULING:

1. The Court did not find that Revenue Regulation 17-99 exceeded the allowable limits of legislative delegation. The regulation was issued pursuant to the authority of the Secretary of Finance to promulgate rules for the effective implementation of the Tax Code.

2. The Court ruled that the interpretation of the 12% increase in excise taxes under the regulation is correct.

3. Revenue Regulation No. 17-99 is invalid in imposing a tax rate that is the higher amount between the ad valorem tax at the end of the transition period and the specific tax under the 12% increase. It effectively imposes a tax that is not supported by the plain wording of Section 145 of the Tax Code.

4. Revenue Regulation No. 17-99 is inconsistent with the plain wording of Section 145 of the Tax Code.

5. The Supreme Court held that Revenue Regulation No. 17-99 is invalid. The Court emphasized that administrative issuances should not override or modify the law they seek to apply. The regulation contradicted the clear language of the law and its purpose of promoting fair competition, equitable distribution of the tax burden, and simplifying tax administration.

6. The Court ruled that the excise tax increase of 12% applies to the brands of cigarettes listed under Annex "D". The provision explicitly states that the classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex "D", shall remain in force until revised by Congress. The increase in excise tax rates applies to all brands of cigarettes, including those listed under Annex "D".

7. The Court held that Fortune Tobacco is entitled to a tax refund for its erroneous payment of taxes. The claim for refund is not based on a tax exemption or tax refund statute, but on the absence of a law requiring the payment of taxes. The Court emphasized that tax exemptions must be strictly construed, and the taxpayer must show that the legislature intended to exempt them from the tax by words too plain to be mistaken. In this case, Fortune Tobacco's claim for refund is based on the government's exaction in the absence of a law, and therefore, it is entitled to the refund.

8. Yes, a claim for tax refund falls under quasi-contracts, specifically solutio indebiti.

9. No, the government is not exempt from the application of solutio indebiti. It has the duty to refund without any unreasonable delay what it has erroneously collected, and should not unjustly enrich itself at the expense of taxpayers.

10. A claim for tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected.

PRINCIPLES:

• Taxes are a grant of the people and must be made by their immediate representatives.

• The power to tax is inherent in the State and is inherently legislative.

• Tax exemptions must be strictly construed against the taxpayer.

• The interpretation of tax laws by the regulatory agencies tasked with their implementation is entitled to great respect and weight, unless it is shown to be clearly erroneous or arbitrary.

• In case of discrepancy between the law as amended and the implementing regulation based on the old law, the former necessarily prevails. The law must still be followed, even if the existing tax regulation provided for a different procedure.

• An administrative agency issuing regulations may not enlarge, alter, or restrict the provisions of the law it administers. It cannot engraft additional requirements not contemplated by the legislature.

• Administrative regulations must always be in harmony with the provisions of the law. Any discrepancy between the two will be resolved in favor of the basic law.

• Administrative issuances must not override, supplant, or modify the law, but must remain consistent with the law they intend to carry out.

• Administrative issuances should not override or modify the law they seek to apply and implement.

• The classification of each brand of cigarettes based on its average net retail price as set forth in a particular provision of the law remains in force until revised by Congress.

• Tax exemptions must be strictly construed and the taxpayer must show that the legislature intended to exempt them from the tax by words too plain to be mistaken.

• Tax refunds are not founded principally on legislative grace but on the legal principle that the taxpayer erroneously paid the tax, and the refund is allowed if the law does not require the payment of taxes.

• Quasi-contracts, including solutio indebiti, are founded on the legal principle of preventing unjust enrichment.

• The government is not exempt from the application of solutio indebiti and is expected to refund excess or erroneous tax payments.

• A claim for tax refund necessitates only preponderance of evidence for its approbation.

• Tax laws should be strictly interpreted, with burdens not being imposed beyond what statutes expressly and clearly import.

• In case of doubt, tax statutes are to be construed most strongly against the government and in favor of the subjects or citizens.