MISAMIS ORIENTAL ASSOC. V. DOF, G.R. NO.
108524, NOVEMBER 10, 1994
Construction and Interpretation of Tax Laws, Rules, and Regulations
DOCTRINE/PROVISION
In interpreting Section 103(a) and (b) of the NIRC, the Commissioner of Internal Revenue (CIR) gave it a
strict construction consistent with the rule that tax exemptions must be strictly construed against the
taxpayer and liberally in favor of the state.
FACTS
The Misamis Oriental Association of Coco Traders, Inc. (petitioner) is comprised of members engaged in
the buying and selling of copra in Misamis Oriental, Philippines.
Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation whose members,
individually or collectively, are engaged in the buying and selling of copra in Misamis Oriental. The petitioner
alleges that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which
implemented VAT Ruling 190-90, copra was classified as agricultural food product under Sec. 103(b) of the
National Internal Revenue Code and, therefore, exempt from VAT at all stages of production or distribution.
Respondents represent departments of the executive branch of government charged with the generation of
funds and the assessment, levy and collection of taxes and other imposts.
The pertinent provision of the NIRC states:
Sec. 103. Exempt Transactions. — The following shall be exempt from the value-added tax:
a) Sale of nonfood agricultural, marine and forest products in their original state by the primary
producer or the owner of the land where the same are produced;
b) Sale or importation in their original state of agricultural and marine food products, livestock and
poultry of a kind generally used as, or yielding or producing foods for human consumption, and
breeding stock and genetic material therefor;
Under Sec. 103(a), as above quoted, the sale of agricultural non-food products in their original state is
exempt from VAT only if the sale is made by the primary producer or owner of the land from which
the same are produced. The sale made by any other person or entity, like a trader or dealer, is not
exempt from the tax. On the other hand, under Sec. 103(b) the sale of agricultural food products in their
original state is exempt from VAT at all stages of production or distribution regardless of who the seller is.
Respondent Commissioner of Internal Revenue issued the circular in question, classifying copra as an
agricultural non-food product and declaring it "exempt from VAT only if the sale is made by the primary
producer pursuant to Section 103(a) of the Tax Code, as amended." The reclassification had the effect of
denying to the petitioner the exemption it previously enjoyed when copra was classified as an agricultural
food product under Section 103(b) of the NIRC.
The petitioners filed a petition for prohibition and injunction with the Supreme Court, seeking the nullification
of RMC No. 47-91, arguing violation of due process, incorrect classification by BIR, and infringement of
equal protection clause rights.
ISSUES
1. Whether the BIR had the authority to classify copra as an agricultural non-food product for VAT
purposes.
2. Whether the petitioner was denied due process when the circular was issued without a hearing.
3. Whether the classification under RMC No. 47-91 was discriminatory, violating the equal protection
clause.
4. Whether RMC No. 47-91 was counterproductive to government revenue generation.
RULING
1. Whether the BIR had the authority to classify copra as an agricultural non-food product for VAT
purposes.
Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the BIR is the
competent government agency to determine the proper classification of food products. Petitioner
cites the opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that copra should be
considered "food" because it is produced from coconut which is food and 80% of coconut products are
edible. On the other hand, the respondents argue that the opinion of the BIR, as the government agency
charged with the implementation and interpretation of the tax laws, is entitled to great respect.
The Court agreed with the respondents. In interpreting Section 103(a) and (b) of the NIRC, the
Commissioner of Internal Revenue (CIR) gave it a strict construction consistent with the rule that tax
exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Indeed, even
Dr. Kintanar said that his classification of copra as food was based on "the broader definition of food which
includes agricultural commodities and other components used in the manufacture/processing of food.
Moreover, as the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great
weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the exercise of his power
under Section 245 of the NIRC to "make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar
purposes."
2. Whether the petitioner was denied due process when the circular was issued without a hearing.
The BIR’s issuance of RMC No. 47-91 was deemed a valid interpretative rule that did not require public
hearings, distinct from legislative rules which require such procedures. The reason for this distinction is that
a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by
providing the details thereof. In the same way that laws must have the benefit of public hearing, it is
generally required that before a legislative rule is adopted there must be hearing.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering
copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As the Solicitor General
contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody
eats copra for food." That previous Commissioners considered it so, is not reason for holding that the
present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his
predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws.
3. Whether the classification under RMC No. 47-91 was discriminatory, violating the equal protection
clause.
Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the equal protection clause
of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers
are not, although both sell copra in its original state. Petitioners add that oil millers do not enjoy tax credit
out of the VAT payment of traders and dealers.
The argument has no merit. There is a material or substantial difference between coconut farmers and
copra producers, on the one hand, and copra traders and dealers, on the other. The former produce and
sell copra, the latter merely sell copra. The Constitution does not forbid the differential treatment of persons
so long as there is a reasonable basis for classifying them differently.
It is not true that oil millers are exempt from VAT. Pursuant to § 102 of the NIRC, they are subject to 10%
VAT on the sale of services. Under § 104 of the Tax Code, they are allowed to credit the input tax on the
sale of copra by traders and dealers, but there is no tax credit if the sale is made directly by the copra
producer as the sale is VAT exempt. In the same manner, copra traders and dealers are allowed to credit
the input tax on the sale of copra by other traders and dealers, but there is no tax credit if the sale is made
by the producer.
4. Whether RMC No. 47-91 was counterproductive to government revenue generation.
The Court acknowledged the petitioner’s concern but noted this kind of argument needed to be raised in
legislative or policy-making bodies rather than court since it pertains to the wisdom or policy of the tax law.
It is finally argued that RMC No. 47-91 is counterproductive because traders and dealers would be forced to
buy copra from coconut farmers who are exempt from the VAT and that to the extent that prices are
reduced the government would lose revenues as the 10% tax base is correspondingly diminished. LexLib
This is not so. The sale of agricultural non-food products is exempt from VAT only when made by the
primary producer or owner of the land from which the same is produced, but in the case of agricultural food
products
DISPOSITIVE
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
