BIR Ruling

December 12, 1973 MEMORANDUM FOR: The Commissioner This refers to the internal revenue case of the MANILA TIMES PUBLISHING CO., INC., Florentino Torres St., Manila consisting of two (2) dockets involving the amounts of P19,991.14, P15,052.97 and P14,371.98 as advance sales tax and surcharges for the years 1967, 1968 and 1969, respectively, under Letters of Demand Nos. BT-72-176 and BT-72-177 dated March 16, 1970 and BT-73-0022 dated February 22, 1973. cdta Investigation disclosed that taxpayer is a domestic corporation engaged in the publication business publishing the following newspapers and magazines namely, Manila Times, Daily Mirror, Taliba, Sunday Times Magazine and Women's Weekly Magazine; that as publisher it imports newsprint for its exclusive used for which it pays only 7% compensating tax that during the years 1967, 1968 and 1969 taxpayer sold to outside parties portions of its imported newsprint in the form of bumbong, loose, tinistis, cortadillas, throw away scraps and trimmings which can no longer be used for newspaper printing; that according to the taxpayer it sold said waste or scrap newsprint because the same could no longer be fed into its machines on account of the papers almost nearing the core and/or because such papers are defective or bears stains; and that the sale is made with no intention to profit but to recover any amount on something which otherwise can be treated as waste or scrap. It was, however, pointed out that although the sale of the said waste or throw away scraps were not made for profit, the same is subject to advance sales tax under Section 186 of the Tax Code since the privilege of paying compensating tax on imports is granted subject to the condition that the imported article shall be for the exclusive use of the importer. Based on the foregoing findings, abovementioned letters of demand were issued against the taxpayer. Taxpayer through its counsel in its letters dated May 30, 1972 and April 16, 1973 however, contested the legality of the assessments and requested for the cancellation of the letters of demand stating that advance sales tax is imposed only on the business of importing goods or commodities intended for sale; that said waste or throw away scraps were the results of the cuttings of the newsprint rolls into the desired sizes to fit the printing machineries or were the damaged portions caused in the process of handling and storage; that rather than throwing away or giving away these portions free, it found it an opportunity to reduce its cost of importation by selling them; that the sale of these scraps were not intended for profit and were not pursued as a distinct and separate business but were merely incidental to its publication business; that the imported newsprint rolls were used in its publishing business; the main purpose for which they were imported; that it did not import scrap for sale as scrap, neither did it import newsprint rolls to be stripped into scrap for sale; and that the compensating tax due on its importations of newsprint rolls had been fully paid. On January 15, 1973, the Chief Tax Accounts Division in pursuance to Revenue Memorandum Order No. 38-72 dated December 11, 1972, implementing Presidential Decree No. 68 dated November 24, 1972, granting amnesty to taxpayers with delinquent tax accounts in the Bureau sent a letter to the taxpayer for the collection of the unpaid account stated in Letter of Demand No. BT-72-176 and BT-72-177 dated March 16, 1970 with the information that if the taxpayer should avail of the concessions of Presidential Decree No. 68, said unpaid account in the total amount of P35,044.11 shall be reduced by 40% if paid in full on or before January 31, 1973 or by 20% if paid in full on or before February 28, 1973. Taxpayer, however, did not avail of the concessions granted under the said Decree, instead in its letter dated February 7, 1973 through counsel reiterated its protest against the assessment. The issue to be resolved in this case is whether or not the taxpayer is liable for the payment of the amounts of P19,991.14, P15,052.97 and P14,371.98 as advance sales tax and surcharges prescribed in Section 183(b) in relation to Section 186 both of the Tax Code, under which the assessments were made, in connection with the sale of newsprint scraps during the period 1967, 1968 and 1969. In resolving the issue it is important to know first the meaning of advance sales tax and the nature of the sale which is the subject of the assessments. Advance sales tax is a tax paid by importers on articles or goods received for the purpose of sale, barter, exchange or similar transactions or for use in the manufacturer or preparation of articles for sale, barter, exchange or similar transactions and are to form part thereof. In other words, it is a tax imposed upon articles imported from abroad for the purpose of sale or for use in the manufacture or articles for sale. The records of the case show that taxpayer imported newsprint primarily for its publishing business. There is no showing however, that newsprint rolls or any part thereof was imported purposely for resale. On the other hand, the records show that only newsprint scraps or trimmings resulting from cuttings to suit its machineries in its publication business or portions torn or otherwise damaged during shipping, handling and storage were sold. It stands to reason therefore, that the taxpayer is not engaged in the business of selling newsprint so as to justify the imposition of advance sales tax on portions of its importations. While it is an established fact that newsprint scraps or waste were sold to outside parties, such fact is merely incidental to its publication business. There is not clear indication that the taxpayer sold the newsprint scraps purposely to gain profit or as a source of livelihood. On the other hand, the records show that it was organized primarily to engaged in the publication business. So much so that the income derived from the sale of newsprint scraps are necessarily incidental to its primary object of publishing newspapers and magazines. What is determinative of whether or not the taxpayer is engaged in the business of importing newsprint for resale is its object or purpose as stated in its articles of incorporation and by-laws. "It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation." (Collector of Internal Revenue vs. The Club Filipino, Inc. G. R. No. L-12719, May 31, 1962) It appearing therefore, that the Manila Times Publishing Co., Inc., is not engaged in the business of importing newsprint for resale, it is not liable for the payment of advance sales tax on the newsprint scraps it sold, and it follows that it is not liable for any penalty. In view of the foregoing, it is respectfully recommended that the assessments against the Manila Times Publishing Co., Inc. in the amounts of P19,991.14, P15,052.97 and P14,371.98 be withdrawn and cancelled, and this case considered closed and terminated. cdtech Respectfully submitted: (SGD.) BALBINO GATDULA, JR. Chief, Law Division TAN 1246-954-0 APPROVED: (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5