BIR Ruling

September 26, 1974 Yap & Associates Certified Public Accountants Suite 309 Captain Gonzaga Bldg. 414 Rizal Avenue, Manila Gentlemen : This refers to your letter dated February 12, 1973, stating the following: "Our client, the CAR HASIERS, INC. has four departments, namely Department A, Department B, Department C, and Department D. cdta " Department A sells brand-new cars under cash or installment basis. The sales or installment are covered by Contracts to sell with right to repossession in case the customer fails to pay more than two installments and/or to supply any terms of the control. " Department B sells second hand cars which are mostly repossessed from customers buying from Department A. Before the cars are sold, however, they, are first sent to Department C to undergo same minor repairs. In the backs of the Company, the expenses of the repairs are entered as part of Administrative and selling expenses which are considered in determining the gain or loss on the sale of the repossessed car, if the same is later on sold. Thus, the gain or the loss is computed as follows: Selling Price of Repossessed Car P. . . Less: Fair Market Value thereof at the time of repossession . . . Add: Post of Repairs made after repossession . . . . . . Gain (Less) on repossession . . . " Department C (Retail Department) is a retailer of our parts and accessories. This retail outlet is selling to the public and its sales are covered by separate sales invoices directly billed and issued to the customers. " Department D is the service and or repairs department. It is specifically provided in the contract with its customers (Job Order Agreement) that the Company contracts only the labor while the parts and accessories that may be needed in the repairs are to be supplied by the customers. It may be emphasized here that the customers are not obliged by their contracts with the Company to purchase the needed parts and accessories from Department C of the Company. The may get from other auto supply hardware. In case, however, they choose to make their purchase from Department C, the sales invoices covering the purchase, are billed and issued in the name of the customers. "On the basis of the foregoing (illegible portion) make a ruling on the following (illegible portion) : "1. What are the basis of the 3% contractor's tax payable by the (illegible portion) with respect to the receipts of Department D? "2. What taxes if any are payable by the company as far as the transactions made by Department A, B and C are concerned?" In reply, I have the honor to inform you as follows: 1. The basis of the 3% contractor's tax payable by your client, with respect to the receipts of Department D is the gross receipts of the said department which should (illegible portion) the cost of labor (illegible portion) if the same are supplied by your client. However, since under the foregoing, your company supplies the labor only, while the customer supplies the materials, the 3% tax shall be based on the cost of labor. 2. Since your client does not manufacture the parts and accessories which it sells in the public, it is subject only to the graduated fixed tax imposed by Section 182(A) (illegible portion) of the (illegible portion) said tax to be based on gross sales of its Department A, B, and C. The above rulings are predicated on the assumption that your client's transactions are at arm's length and may be revoked if, after investigation, it should appear that your client's transactions are not at arm's length or if the facts are found different from your representations. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5