BIR Ruling

February 17, 1997 Sycip, Gorres, Velayo & Co. P.O. Box 589, Manila Central Post Office, Ermita, Manila Attention: Atty . F . G . Tagao Tax Division Gentlemen : This refers to your protest filed in behalf of your client, TAGUM AGRICULTURAL DEVELOPMENT CORPORATION (TADECO for brevity), against the 1985 deficiency income tax assessment involving the amount of P4,002,600.27 covered by the Assessment No. FAS-1-85-89-000547 dated April 7, 1989. The above assessment was based on the partial disallowance of your application for Reduced Income Tax pursuant to Art. 48(b) of P.D. No. 1789, otherwise known as the "Omnibus Investment Code." Records show that in 1985, TADECO claimed a Reduced Income Tax incentive in the amount of P28,929,569.00 for its banana export. Our examiner, however, allowed only P21,723,112.00 representing direct labor cost. The difference in the amount of P7,206,457.00 representing cost of raw materials (fertilizers, insecticides, packing material containers) was disallowed on the ground that the local contents of which are not equal to or greater than 50% of the manufacturing cost of the exported bananas as required by Section 1(x), Rule 1 of the Rules and Regulations Implementing P.D. 1789. You assailed our assessment on the ground of lack of legal basis. You opined that the term "manufacturing cost" refers to the cost of the semi-finished product (raw materials) not of the exported product invoking the doctrine of last antecedent in statutory construction. Your view, allegedly, is supported by BOI Memorandum dated March 3, 1989, which provides that: "The "manufacturing cost" adverted to in the aforecited provision refers to the manufacturing cost of the semi-finished product purchased by subject firm and not the manufacturing cost of the registered product which is exported, in accordance with the so-called doctrine of the last antecedent. Under this principle, relative or qualifying words, phrases and clauses are to be applied to the word or phrase immediately preceding and not extended to others more remote." [p. 92; 109; 118 of the docket] Hence, being the Office charged with the implementation and enforcement thereof, said interpretation must be given weight. Finally, you ascribed procedural error in our assessment for failure to confer with BOI to arrive at a common position. We find your contentions unmeritorious. The only issue involved is the interpretation of the term "manufacturing cost" in Section 1(x), Rule I, Part I of the General Provisions of the Rules and Regulations Implementing PD 1789, quoted in part hereunder: "(x) "Local raw materials," for purposes of computing reduced income tax shall mean . . . semi-finished products directly and actually used as inputs in the manufacture or processing of the registered export product . . . Provided, that the semi-finished product has a local content equal to or greater than fifty percent (50%) of the manufacturing cost ." (All emphasis supplied) Taken in isolation, the aforesaid provision is ambiguous with respect to the meaning of the term "manufacturing cost". It is, therefore, necessary to analyze the entire provisions of the implementing rules to discover the intent thereof. Export producers enjoy tax credit and reduced income tax incentives pursuant to Sections 1 and 2, respectively, of Rule XVII, Rules and Regulations Implementing PD 1789. While Section 2 is silent regarding the issue on hand, its preceding Section provides us a glimpse of the intendment of the law. Section 1 speaks of granting tax credit to export producers for taxes paid "on the supplies, raw materials, and semi-manufactured products used in the manufacture, processing or production of its registered export products and forming part thereof; Provided, that where the cost of certain supplies or raw materials constitutes at least forty percent (40%) of the cost of production of the registered export product , tax credit . . . may also be granted even if they do not form part of the registered product." Clearly, the tax incentives granted under Sections 1 and 2 of Rule XVII (Implementing Regulation of P.D. 1789) to export producers for the use of raw materials, supplies or semi-finished products has reference to the production cost/manufacturing cost of the registered product. To read otherwise would lead to absurdity since what is given for tax credit or Reduced Income Tax incentive is the registered export product not the raw materials, supplies or semi-finished product. Moreover, it is difficult, if not impossible, to know the manufacturing cost of the semi-finished product because first, the cost is not usually stated in the purchase invoice and, secondly, the product is purchased from various suppliers who may not have the knowledge of the manufacturing cost themselves. Having ascertained the intent of the Implementing Regulations of P.D. 1789 from the four corners thereof, all other rules of construction are deemed unnecessary. Regarding our assessment, Section 3 of the Tax Code provides that the power to assess and collect all internal revenue taxes, fees and charges is the sole prerogative of the Bureau of Internal Revenue. No less than the courts are unauthorized to compel, through mandamus, the Commissioner of Internal Revenue to impose tax assessment which she believes is not proper [Meralco Securities Corporation vs. Savellano, 117 SCRA 804]. With more reason that the Bureau cannot be required to confer with a co-equal office, the BOI in this case, in discharging its assessment function. In view of the foregoing, your request for consideration has to be as it is hereby DENIED. Consequently, it is requested that you advise your client, TAGUM AGRICULTURAL DEVELOPMENT CORPORATION to pay the amount of P4,022,600.27 representing deficiency income tax for 1985, plus interest that may have accrued thereon to the Revenue District Office nearest its place of business, within ten (10) days from your receipt hereof, in order that this case may be closed and terminated. This constitutes the final decision of this Office on the matter. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue