BIR Ruling

December 11, 1974 Messrs. Joaquin Cunanan & Co. Certified Public Accountants P. O. Box 2288 Manila Gentlemen : This refers to your letter dated September 19, 1974 requesting opinion on the following: aisa dc "Our client, Palm Inc., is selling raw materials to a chemical company for processing into lotions as one of the several items in the latter's product line. This lotion is marketed by the Chemical Company in 6-oz. and 18-oz. bottles. Although the raw materials processed into lotion in 6-oz. and 18-oz. bottles are the same, the sales price of said raw materials is higher if processed into 6-oz. bottle than if processed into 18-oz. bottles. "Since it cannot be determined at the time of sale how much of the raw materials will be processed into 6-oz. bottle and how much into 18-oz. bottle, our client will issue an invoice for the raw materials at the price agreed for that our client will refund to the buyer the price differential on the raw materials processed into 18-oz. bottles. "At monthly intervals, the buyer will make a certified report to our client as to the quantity of raw materials processed into 18-oz. bottle and after verification, our client will refund to the buyer the price differential. "To illustrate the above agreement, let us assume that our client sells one jar of raw materials to the buyer, Chemical Company, one will be processed into lotion in 6-oz. bottle, the price per liter will be P10.00; if the same raw materials is processed into lotion in 18-oz. bottle, the price per litter will be P9.00. This is probably for marketing strategy to encourage the buyer to sell more of the 18-oz. bottle. It is agreed that at the time of sale, our client will issue an invoice for one jar or raw materials at P1,000.00 (using the price for 6-oz. bottle). Let us further assume that the buyer processed 50 liters of the raw materials into lotion in 6-oz. bottle and the other 50 liters into lotion in 18-oz. bottle. "At the end of the month, the buyer submit a certified report that 50 liters of the raw materials were processed into lotion in 18-oz. bottle. After verification of the report, our client will reimburse the buyer P50.00 computed as follows: Price for 50 liters, 6-oz. bottle P500.00 Price for 50 liters, 18-oz. bottle P450.00 Total P950.00 Invoice Price 1,000.00 Amount to be reimbursed (P50.00) ======== "In actual practice, however, the billings is continuous in such a way that at the time the actual reimbursement is made, it cannot be identified with any particular invoice. It should also be noted that while it is expressly agreed at the time of sale that there will be refund for price differential, the actual amount is not yet known since it is based on actual usage. Query: "For purpose of computing the quarterly sales, is the reimbursement of P50.00 as shown above deductible from the amount subject to sales tax?" In reply, I have the honor to inform you that the reimbursement of the P50.00 as shown above assumes the character of a discount given by Palm Inc., to its customer as a consideration agreed upon in the sales agreement between them. Considering that the discount is already agreed upon at the time of sale, said reimbursement, which as aforesaid is in reality a discount, is deductible from the gross selling price of Palm Inc. for purposes of the sales tax payable by Palm. Inc. on its sales of the raw materials during the quarter the discount was given. It is understood, however, that there must be an actual reimbursement. cdi Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5