BIR Ruling

May 28, 1975 Mr. Michael D. Ty General Manager Refrigeration Division Asia Industries, Inc. 2281 Pasong Tamo Ext. Makati, Rizal S i r : This refers to your letter dated May 21, 1975 requesting a ruling as to the rate of advance sales tax applicable to Thermo King bus air-conditioning units and components thereof which you intend to import. cdt You believed that Thermo King bus air conditioning units, sub-assemblies and components should be subject to 7% advance sales tax with a 25% mark-up under Section 186 of the Tax Code for the following reasons: "1. Bus air conditioning units of this type are specifically designed for large sized buses and are either equipped with its own diesel or gasoline engine or are powered by the bus engine. "2. This type of air conditioning units are not being manufactured locally for the following reasons: "a. There is not enough volume to attain economies of scale as only 30 to 50 units per annum is the projected market demand. "b. The major sub-assemblies and components like the engine, compressor, fan motors, thermostat, expansion valves, are especially designed for transport application and their manufacture locally cannot be justified as this requires capital intensive equipment. These components alone would represent at least 80% of the cost of the airconditioners. "c. No manufacturer would give licensing and technical aid for local manufacture of this equipment. "3. Although Section 185-A of the code covers articles produced or manufactured locally including air conditioning units [185-A(c)], you believed that Thermo King bus air conditioning units and components do not fall under this category since bus air conditioning units of this type are not manufactured locally as explained on Item 2 above. This section is so classified primarily to provide assistance or protection to the local manufacturers of room air conditioning units through the application of different sales tax rates. "In view of this, the Thermo King bus air conditioners, sub-assemblies and components should be subject to 7% sales tax on a 25% mark-up under Section 186 of the Internal Revenue Code. "4. Bus air conditioning units are accessories of tourist buses without which a bus cannot be acceptable for use by tourists. In fact, the Board of Investments and the Department of Tourism have allowed the importation of air conditioned tourist buses and bus air conditioning units free of tax to several companies. "5. Local bus builders are trying to build tourist bus coaches but find themselves unable to provide the necessary air conditioning thereby losing out to foreign tourist bus manufacturers. Should Thermo King bus air conditioners be available locally, this would boost the local bus body manufacturing business which is a labor incentive industry." In reply, I have the honor to inform you as follows: There is no dispute that buses are subject to the 7% sales tax under Section 186 of the Tax Code; and that air-conditioning units are subject to the 40% tax under Section 185-A(c) of the same Code. There is also no dispute that under our sales tax law, parts and accessories are taxed at the same rate as the finished articles. There is no question that if a bus air conditioning unit is a part and accessory with which a tourists bus is usually equipped the value thereof would form part of the total landed cost of the tourist bus within the meaning of the law. While our Tax Code does not define the terms "part" and "accessory", the Supreme Court in the case of Collector of Internal Revenue vs. Hon. Eulogio Rodriguez, Jr., et al., G.R. No. L-12783, March 25, 1961 gave the following definitions of the aforesaid terms: "The term 'part' is any article designed or manufactured for the special purpose of being used as, or to replace, a component part of such vehicle, and which by reason of some characteristic is not such a commercial article as ordinarily would be sold for general use, but is primarily adapted for use as a component part of such vehicle. (Universal Battery Co. v. ZU.S. 281 580, 553, 74 L Ed. 1051, 1955; Marvel Products Co. vs. U.S. 35 F. 2d 979, citing 15, Treas. Reg. No. 47.) "The term 'accessory' is any article designed to be used in connection with such vehicle to add to its utility or ornamentation and which is primarily adapted for such use whether or not essential to the operation of the vehicle." (Universal Battery vs. U.S. supra; Marvel Products Co. vs. U.S. 35 F 2d 979; Chua Engineering Corp. vs. U.S. 43 F. 2d 259; 262, citing Art. 16, Treas. Reg. No. 47)." Applying the foregoing interpretation of the terms "part" and "accessory", it is safe to conclude that bus air conditioning units are component parts of tourist and passenger buses. Not all buses could be equipped with air conditioning units. Thus, when a tourist operator or a transportation operator orders the body of a bus, he orders them with the intent of equipping the same with air condition unit. Another factor that may be considered is the fact that bus air conditioning units imported are especially designed for buses. The Thermo King bus air conditioning unit as could be gleaned in the brochures submitted, cannot be made to operate with the use of the ordinary house current. They are operated by diesel or gasoline engines or are powered by the bus engines. Because of this distinguishing feature, they cannot be advertised and sold for general use. (See Collector of Internal Revenue vs. Hon. Eulogio Rodrigues, supra). Consequently, bus air conditioning units do not fall under the provision of Section 185-A(c) of the Tax Code. For the foregoing reasons, it is the opinion of this Office, as it hereby holds, that imported Thermo King bus air conditioning units and components thereof are subject to the 7% advance sales tax, the tax to be based on the landed cost thereof plus 25% mark-up pursuant to Section 183(b) in relation to Section 186, both of the Tax Code. aisa dc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."