BIR Ruling

September 23, 1969 MEMORANDUM FOR: The Revenue Operations Head (Assessment) Bureau of Internal Revenue Manila This has reference to the three (3) assessments issued against CONSOLIDATED ASSEMBLY, INC., FILIPINAS AUTO SALES CORPORATION and PRODUCTS, INC. (hereinafter called Consolidated, Filipinas, and Products, respectively) requiring them to pay the liabilities, detailed hereunder: cdll Taxpayer Kind of Tax Period Total Amount Consolidated: a) 3% contractor's tax 1959-63 P160,783.13 b) 100% compensating tax 1963 30,096.86 c) Deficiency advance sales tax on imported CKD cars and trucks 1959-63 789,846.80 Filipinas: Deficiency Manufacturer's Sales Tax 1957-63 13,439,347.93 Products: Deficiency Manufacturer's Sales Tax 1963 1,116,149.52 (Please see Assessments Nos. BT-66-115, October 5, 1966; BT-57, March 7, 1966; and BT-66-61, March 14, 1966, dockets of Consolidated, Filipinas and Products.) The facts of these cases may be briefly stated, as follows: On the basis of documentary evidences unearthed by the team head by Examiner Pablito J. Enano of the Investigation Division, now Audit Division (see final report dated October 30, 1964 and two (2) supplementary reports dated October 29 and October 30, 1964, respectively, in the docket of Products), this Office assessed the foregoing amounts against Consolidated, Filipinas and Products on the theory that Consolidated, Filipinas and Products, all domestic corporations, collaborated with one another in order to minimize the manufacturer's sales tax due on the sales of assembled completely knocked-down (CKD) cars and trucks, by making it appear that the importer and manufacturer of the assembled CKD's was Consolidated. However, documentary evidences gathered in the investigation showed that the actual importer of the CKD's and the manufacturer's of the imported CKD's were Filipinas and Products, it appearing that Consolidated merely imported and assembled the CKD's for and in behalf of Filipinas and Products. Following this line of reasoning, this Office did not consider Consolidated (the entity that physically assembled the CKD's) as the manufacturer of the CKD's but instead held it (Consolidated) liable to the 3% contractor's tax on the "sales" of the assembled CKD's from Consolidated to Filipinas and Products. Basing its stand on the rule that the one who causes the manufacture of articles is considered a manufacturer (Hancock v. State, 144 6. 439, 441, 40 S. E. 317), and on the strength of documentary evidence indicating that Filipinas and Products had caused the manufacture by Consolidated of the CKD's, this Office assessed the above deficiency sales taxes of P13,439,347.93 and P1,116,149.52 against Filipinas and Products, respectively, computed on the sales of the assembled CKD's by the latter entities the public. Going over the disputed assessments, we notices that there are certain errors therein that need rectification and other relevant points which call for clarification, they are: 1. Deficiency advance sales tax of P789,846 . 80 assessed against Consolidated . For the sake of consistency, the assessment against Consolidated (BT-66-115 dated October 5, 1966) should be revised so as to delete therefrom the advance sales tax of P789,846.80. Obviously, Consolidated, under the theory of this Office, is not the importer of the CKDs. The importers are Filipinas and Products. It is well-settled that it is the importer that is liable for the advance sales tax. (Sec. 183(b), Tax Code.) However, should the advance sales tax of P789,846.80 be passed over to Filipinas and Products as the actual importer's? There is no legal basis for taking this step because the actual amount of the tax due on the imported CKD's, correctly computed at 7% has already been paid. BT-66-115 assesses the abovesaid sum of P789,846.80 as a deficiency on the ground that the rate imposable on the CKD's is 100%; evidently on the theory that Filipinas and Consolidated do not qualify for the 7% tax rate prescribed by Section 184, Tax Code, as they are not car assemblers because they did not physically assemble the imported CKDs. (see Final Report dated October 30, 1964, docket of Products) This point is not, however, well-taken for it cannot be denied here that the importers (Filipinas and Products) being at the same time the manufacturers are, legally speaking, the actual assemblers and as such assemblers they are, therefore within the scope of the benefit extended by Section 184. 2. Deductible materials, re : manufacturer's sales tax of P13,439,347 . 93 and P1,116,149 . 52 assessed against Filipinas and Products, respectively . Inasmuch as the rate imposable on the imported CKDs is 7% and not 100%, there is, therefore, room for a re-examination of the abovestated assessments in order to determine whether arriving at the taxable base, the correct mark-up of 25% was deducted together with the landed cost of the CKDs (see BIR Ruling 105.02, Nov. 10, 1956, II Araas 255) from the total sales of the assembled CKDs to the public. In view of the foregoing, you are, therefore, requested to cause (1) The immediate revision and issuance of Assessment No. BT-66-115, dated October 5, 1966 so as to exclude therefrom, the sum P789,846.80, as deficiency advance sales tax; and (2) The ascertainment for sales tax purposes of the correct mark-up (25%) for form part of the amount that can be deducted from the total sales of the assembled vehicles to the public. As soon as the desired actions have been completed, the corresponding report, together with the enclosed dockets of the said cases, should be forwarded to the Chief, Appellate Division for appropriate action on the administrative appeals. Immediate attention hereto is desired. (SGD.) MISAEL P. VERA Commissioner of Internal Revenue