BIR Ruling

May 25, 1967 Messrs. Gamo, de Jesus, Lugue & Associates Attorneys-at-Law 222 E. Rodriguez, Sr. Blvd. Quezon City Attention: Mr . Napoleon M . Gamo Gentlemen : This refers to your letter dated February 23, 1967 stating the following: "Our client, the Magdalena Estate, Inc., through its manufacturing division, the Ysmael Steel Manufacturing Company, is engaged in the business of manufacturing and selling refrigeration appliances. As a manufacturer of integrated products, our client also manufactures component parts, such as condensers, evaporators, food liners, ice trays, hermetic compressors, etc. for sale of other local appliance manufacturers. cdpr "Under Section 185-A of the National Internal Revenue Code (Republic Act No. 3029), our client pays percentage tax of only seven per cent (7%) on the sale of such component parts, while the other local manufacturers buying parts from our client, pay fifteen per cent (15%) percentage tax on their finished products. In view of the difference in rates, the buyers of our client's products, are apprehensive that they may not be allowed to deduct the cost of the component parts purchased by them from our client, and as a matter of fact, some have requested our client to pay fifteen per cent (15%) percentage tax on the component parts so that the rate would be uniform. If the cost of such parts cannot be deducted, then, they would have no alternative but to import the parts. "Our client has informed its buyers that they would be able to deduct the cost of the components inasmuch as Section 185-A expressly provides "that where the articles . . . are manufactured out of materials subject to tax under this section, the total cost of such materials, as duly established, shall be deductible from the gross selling price or gross value in money of such manufactured article." In other words, the criterion is not the rate, but the section under which the tax is paid. The apparent discrepancy arises from the fact that under Section 185-A, there are three tax rates namely, seven per cent (7%) for integrated products, fifteen per cent (15%) for non-integrated products, and thirty per cent (30%) for others." In reply, I have the honor to inform you that the last proviso of the first paragraph of Section 185-A of the Tax Code provides "that where the articles enumerated hereinbelow are manufactured out of materials subject to tax under this section, the total cost of such materials, as duly established, shall be deductible from the gross selling price or gross value in money of such manufactured articles." Such being the case, your client's customers who pay 15% sales tax on their manufactured products may deduct the cost of the component parts purchased from your client, although your client pays only 7% sales tax on the component parts as a duly qualified manufacturer of integrated manufactured products. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue