BIR Ruling

March 18, 1997 MEMORANDUM FOR: The Commissioner We have before us for resolution the protested internal revenue tax case of TOYOTA MOTOR PHILIPPINES CORPORATION (TMPC for convenience) involving the amounts of P7,700,012.80 and P9,720,564.08 representing alleged deficiency income and value-added taxes for taxable year 1989, inclusive of increments, and covered respectively by Assessment Nos. FAS-2-89-93-001110 and FAS-4-89-93-001111, both dated March 16, 1993. cdpr It appears from the records that on March 16, 1993, a demand was made on TMPC by the Bureau for the payment of the following deficiency tax assessments, to wit: 1989 Deficiency Income Tax Basic Tax P3,877,982.85 Add: Surcharge 25% 969,495.71 Interest (up to 3-15-93) 2,827,534.24 Compromise Penalty 25,000,00 Total Amount Due and Collectible P7,700,012.80 =========== 1989 Deficiency VAT Basic Tax P4,745,124.67 Add: Surcharge 25% 1,186,281.17 Interest (up to 3-15-93) 3,739,158.24 Compromise Penalty 50,000.00 Total Amount Due and Collectible P9,720,564.08 ========== BASIS OF THE ASSESSMENT a. For 1989 Deficiency Income Tax The assessment was principally based on the allegation that herein protestant-taxpayer, during the taxable year 1989, understated its sales by P11,079,951.00. The understatement was allegedly done thru manifest underpricing of its Toyota Crown units (numbering 271) sold during the year under investigation. The scheme was allegedly discovered when our Investigating Examiners compared the Expected Sales based on the Manufacturer's Wholesale Price submitted by TMPC to the Excise Tax Service of this Bureau against the recorded sales in books of accounts. prcd b. For 1989 Deficiency VAT This instant assessment, in essence, was based on the finding that herein taxpayer's value-added tax liabilities were unnecessarily reduced by the non-inclusion of the price of factory installed aircon and stereo/radio units in the selling price of its automobiles. RESOLUTION After a thorough and careful review of the facts of the case as well as the law and jurisprudence pertinent thereto, this Office finds the instant assessments wanting in merit. DISCUSSION It is extremely relevant to point out that previous to the issuance of the above-referred assessments, the Bureau, has issued similar assessments against herein taxpayer with basis akin to the one at hand. And these assessments were as follows: a) Sales of some models of automobiles at prices lower than cost of production as per Manufacturer's Sworn Statement filed with this Office, in contravention with Section 127(b) in relation to paragraph (c) of the same Section of the Tax Code, as amended. Deficiency ad valorem tax (basic) P21,691,341.35 Surcharge (25%) 5,422,835.34 Interest (20% P.A. up to 10/31/91) 4,961,862.10 TOTAL P32,076,028.79 ============ b) Underdeclaration of selling price of automobiles sold/removed, through non-inclusion in pricing of factory installed aircon and stereo units. Deficiency ad valorem tax (basic) P81,543,907.50 Surcharge (25%) 20,335,976.88 Interest (20% P. A. up to 10/31/91) 24,354,020.86 TOTAL P126,483,905.24 ============= It must be recalled that the above-mentioned assessments were eventually withdrawn and cancelled by the Bureau based on the following justifications, viz: a) On the deficiency ad valorem tax of P22,076,038 . 79 on sales of some models of automobiles at prices lower than their cost of manufacture in connection with Section 127(b) in relation to paragraph ( c) of the same Section of the Tax Code . cdtech Review of the records of the case disclosed that the Examiners, in issuing the assessment, relied on the provision of Section 127 of the Tax Code, as amended, pertinent-portion of which provides as follows: ". . . should such price be less than the cost to manufacture plus expenses incurred until the goods are finally sold, a proportionate margin of profit, not less than 10% if such manufacturing cost and expenses shall be added to constitute the gross selling price." Accordingly, the Examiners computed the various ad valorem tax deficiencies by using the cost to manufacture a particular vehicle model plus 10% thereof per Manufacturing Cost Statement submitted. Finding the assessment wanting in merit, the Bureau then declared that under paragraph (b) of the aforecited Section of the Tax Code, a margin of profit equivalent to 10% of the manufacturing cost can be imputed only or added to the gross selling price in determining the base for computing the excise tax if the following circumstances are present, viz: 1. The manufacturer sells its goods in another establishment which it owns or over the profits of which it has an interest; and 2. The gross selling price of the goods is less than the cost of manufacture and the expenses incurred. The absence of any of said circumstances makes the said provisions of law inapplicable. In this connection, the Bureau found that the franchise dealers are corporations with personalities separate and distinct from that of TMPC. TMPC does not own a single share of stock in any of its authorized franchise dealers nor does it have any interest in the profits thereof. Hence, the application of the aforecited paragraph (b) of the Section 127 of the Tax Code is erroneous. The Bureau further declared that the applicable provision of the Tax Code in this case is Section 149 which provides that the tax base for the computation of the ad valorem tax of automobiles is the manufacturer's or importer's selling price which is net of excise and value-added tax in accordance with engine displacement. It will be noted that Section 127 is a general provision on how to determine the gross selling price of goods as basis of the ad valorem tax while Section 149 is a specific provision which is exclusively applicable to the excise taxation of automobiles; hence, the provision of the said Section 149 should prevail over that of Section 127(b). Finally, the Bureau found merit in the taxpayer's contention that the Manufacturer's Sworn Statement prescribed under Section 127 of the Tax Code, whereby the manufacturer is required to declare, among other things, the gross selling price of the product manufactured, is intended merely as a guide or indicator of the price range at which the product will be sold. The declared wholesale selling price (WSP) is not meant to be the actual selling price of the manufacturer. The manufacturer is not bound to sell exactly at that price. Put differently, the manufacturer is not prohibited from selling at a price different from the wholesale selling price indicated in the said sworn statement as warranted by market factors. b) On the deficiency ad-valorem tax of P126,483,905 . 24 resulting from the alleged underdeclaration of the selling price of automobiles sold through non-inclusion in pricing of factory installed aircon/stereo units . The Bureau, in accepting the argument that the cost of the stereo and aircon units should not be included as part of the gross selling price of the Toyota vehicles in the computation of ad valorem tax due thereon, justified the same by adducing the following arguments: 1) As factually established, TMPC manufactures Toyota vehicles and sell them to its franchise dealers without aircon and stereo; 2) The aircons and stereos were ordered and purchased directly by the franchise dealers from the suppliers pursuant to an Agreement providing for a "blanket purchase order to the Supplier". These Agreements were duly authenticated and submitted as evidences; 3) Pursuant to another agreement between TMPC and the suppliers of aircon and stereo, the former installs the aircon and stereo at designated plant space for a flat fee varying with the motor vehicle model as indicated by the dealer through the Vehicle Sales Invoice; 4) The franchise dealers are corporations which have separate and distinct personalities from that of TMPC and the suppliers of aircon and stereos; 5) The treatment of car aircon and stereo as options or accessories established in Toyota's series of Dealer Price Circulars for CKD Corolla Models (1600 cc and 13 cc models) and the Liteace 1500 cc models. These Dealer Price Circulars always bear the footnote which reads: "excludes prices of aircon and radio/cassette option." Moreover, what is more telling in the cancellation of the above assessment is the acceptance of the Bureau of the argument that BIR Unnumbered Ruling dated January 19, 1983 is applicable to herein protestant-taxpayer's case, which, in essence, ruled that the value of the aircon and stereo should not be included in the gross selling price of the manufacturer (TMPC) of the automobile for the purpose of computing the ad valorem tax. cdt CONCLUSION We have painstakingly scrutinized and evaluated the issues raised in this instant case and compared them with the issues and bases raised and involved in the two tax assessments previously discussed, and we found no substantial difference between them. We cannot therefore find strong and unassailable evidence necessary to overturn the pronouncements made on the above-referred tax assessments. In view thereof, and to be consistent with our decision, in the said tax cases, the Legal Service through its Appellate Division respectfully recommends that the amounts of P7,700,012.80 and P9,720,564.08 representing alleged TOYOTA MOTOR PHILIPPINES CORPORATION's 1992 deficiency income and value-added taxes be withdrawn and cancelled and this case considered closed and terminated. cdll Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L TOMACRUZ Head Revenue Executive Assistant Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue