BIR Ruling

March 21, 1967 Messrs. J. S. Zulueta & Co. Certified Public Accountants P. O. Box 2405 Manila Gentlemen : This refers to your letter dated January 26 and February 7, 1967 requesting reconsideration of the ruling contained in our twin letters to your client, the Philipps Electrical Lamps, Inc., both dated December 28, 1966, holding that since your client manufactures only TV picture tubes, it cannot be considered a manufacturer of locally manufactured television sets entitled to the reduced rate of tax provided for in Section 185-B of the Tax Code, and consequently, its importations of materials, supplies and equipment for the manufacture of TV picture tubes are subject to the 30% advance sales tax. In your aforesaid letter you argued that the manufacture and sale of TV picture tubes, as complete units, should fall under the 7% tax prescribed in Section 185-B of the Code and under Revenue Memorandum Circular No. 4-65 as amended by Revenue Memorandum Circular No. 34-65 because: (1) TV picture tubes, if manufactured and assembled as a complete finished unit and sold to manufacturers of TV sets, are "parts and accessories locally manufactured" under Sec. 1 (2)(e) of Revenue Memorandum Circular No. 34-65 which provide for a tax of 7%; (2) any manufacturer of Television Sets using the finished picture tube produced by your client will pay a 7% tax and it is inconceivable that your client will be made to pay 30% on the sales of TV picture tubes while the assembler of the complete TV set will be made to pay only 7%; and (3) that under BIR Ruling No. 65-014 dated April 12, 1965 it was held that locally manufactured component parts and accessories of the articles covered by Section 185-B of the Tax Code, a provision inserted in the Tax Code, by Republic Act No. 4122, are subject to only 7% sales tax. In reply thereto, I have the honor to inform you that under Republic Act No. 4122 (now section 185-B of the Tax Code), only manufacturers of "locally manufactured articles" are entitled to the reduced rate of tax. And pursuant to said law, the words "locally manufactured articles" mean articles (such as phonographs, combination radio and phonograph sets of all types, television sets, combination radio-phonographs television sets, gramophones, and similar articles for reproducing and for recording music and sound, like tape recorders, etc.) manufactured in a manufacturing enterprise which processes physically and/or chemically raw materials such as copper clad boards, silicon, steel laminations, other metal sheets, wires, plastic powder and/or pallets, fiber boards, wood, metallic and non-metallic tubes, rods, special paper, etc., with the various intermediate components and parts, and subsequently assemblying or fitting them together with other imported collaterals or intermediate components and parts into such completed and finished articles. LLjur The same law further provides that if the following parts are intermediate components of the finished articles, they must be locally manufactured within the manufacturing enterprise or any other local manufacturing enterprise: 1. Printed circuit boards; 2. Transformers; 3. Coils, except yoke and flyback, and sheet metalwork attached thereto except the mask; 4. Cabinets; and 5. Chassis It will thus be seen that the articles covered by the law are subject to the 30% tax and it is only when such articles are "locally manufactured" as described in the law, that they become subject to the 7% tax. B.I.R. Ruling No. 65-014 was promulgated on the presumption that the importers of parts and materials are local manufacturers as defined in the aforementioned law and the parts or materials imported by them are not those required to be locally manufactured. However, because the said ruling is too broad and therefore likely to be misconstrued, this Office issued the ruling of July 15, 1966, which clearly states that only those who are manufacturers of electronic products as defined in Section 185-B are entitled to enjoy the reduced rate of tax provided for in said law. LLphil It appearing that your client is manufacturing only TV picture tubes, which are sold as such and are not used by it in the assembly and manufacture of finished television sets, it cannot be considered a manufacturer of locally manufactured electronic products within the contemplation of Republic Act No. 4122 (Section 185-B). In view thereof, your request for reconsideration of the ruling hereinabove mentioned has to be, as it is hereby denied. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue