BIR Ruling

September 4, 1969 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box 589, Manila Attention: Mr . B . V . Abela Tax Division Gentlemen : This refers to your letter dated August 1, 1969 requesting confirmation of your opinion that Oceanic Pharmacal, Inc. (hereinafter referred to as Pharmacal) is the bona fide manufacturer of toilets articles, drugs and other pharmaceutical products (hereinafter referred to as Products), hence, subject to the sales tax on its selling price to Oceanic Commercial, Inc. (hereinafter referred to as Commercial), that likewise, the income tax liability of Pharmacal will be based on income derived from its own sales and not on the sales of its products by Commercial; and that Commercial will be considered a dealer in locally manufactured merchandise and will be subject to the graduated fixed tax imposed under Section 182(A)(2) of the Tax Code. You stated that Pharmacal is a duly established and bona fide manufacturer of the products in the Philippines; that in order to increase the volume of sales of its products, Pharmacal, having only recently entered the field of drug manufacturing, desires to select an exclusive dealer who has a well-established reputation and goodwill in the Philippines; that Commercial has long been a distributor in the Philippines of drugs and other pharmaceutical products and has built up a lot of goodwill on this business; that it has the necessary personnel and advertising know-how in order to promote the sales of the products of Pharmacal; and that for these reasons, Pharmacal intends to enter into an exclusive dealership contract with Commercial and thereby take advantage of the established goodwill and reputation enjoyed by the letter in the Philippines. It is also stated that Commercial is engaged in various business activities such as the manufacture, assembly and distribution of medicinal, pharmaceutical and chemical products, perfumery and cosmetics, photographic supplies, tablewares, glasswares, watches, pens and other sundry items; that because of the variety of such activities. Commercial could not fully develop its business of manufacturing drug and pharmaceutical products; that sound business reason therefore dictated that the business of manufacturing drugs and pharmaceutical products of Commercial be conducted by a separate corporation which can concentrate its time and resources in the development of said business; that likewise, sound business judgment dictated that the business of manufacturing drugs and pharmaceutical products of Commercial be protected from the risks of liability that might arise from its various business activities; and that for these reasons, Pharmacal was organized to take over the business of manufacturing drugs and pharmaceutical products of Commercial. It is also represented that while shares of stock of Commercial and Pharmacal are substantially owned by the same persons, there is no common management control of both corporations. Each, corporation maintains a separate set of directors, officers, and employees. Likewise, each corporation has separate bank accounts, book of account, and accounting systems. Pharmacal occupies a building of its own with a separate warehouse located at 6797 Javier St., while Commercial occupies another building at 2155 Pasong Tamo. The principal terms and conditions of the dealership contract between Pharmacal, as the manufacturer, and Commercial, as the dealer, shall be as follows: llcd 1. Title to the products sold by Pharmacal to Commercial shall pass to the latter upon delivery, it being understood, however, that Commercial may return any product if it is found to be defective. 2. Commercial shall assume full credit responsibility for all sales made by it to its customers. 3. Pharmacal will invoice all products purchased by Commercial at the established list price which may be agreed upon from time to time between Pharmacal and Commercial. The list prices set will be realistic and at arm's-length and will assure that Pharmacal makes a reasonable profit on its manufacturing operations. 4. Commercial will sell the products at whatever prices it may fix. However, it may consult Pharmacal on the sales prices of the products to its customers only in order to keep the prices competitive in the trade. 5. Commercial shall not act or represent itself as the agent of Pharmacal for any purpose whatsoever. In reply, I have the honor to inform you that the sales of Pharmacal to Commercial may be recognized for purposes of the sales tax imposed in Sections 184, 185 and 186 all of the Tax Code, if, as represented, the transactions between the two companies is bona fide and at arm's length. However, if later it shall be found out that the intended dealership contract between the two entities would manifest and unreasonable discrepant margin of pricing between them and those at which sold by Commercial to the public then the latter shall form the tax base for sales tax purposes. It may not be amiss to state in this connection, that this Office shall feel free to investigate and verify the actual operation functions between the two corporations. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue