BIR Ruling

September 30, 1997 Balmeo, Baga & Peasales Law Offices Singapore Airlines Building H.V dela Costa Street, Salcedo Village Makati City Attention: Atty . Graciela Barleta Gentlemen : In connection with your protest in behalf of your client, CONSOLIDATED INDUSTRIAL GASES, INC. of CIGI Building, Sheridan corner Pioneer Street, Mandaluyong City, against the assessment in the total amount of P7,879,000.70 as alleged deficiency value-added tax for the years 1988 and 1989 under Assessment Notice Nos. FAS 4-88-92-000683 to 686 and FAS 4-89-92-000687 to 690, all dated February 10, 1992, please be informed that after due consideration of the documentary evidence you submitted to this Office, it was ascertained that your client is liable to the deficiency tax assessment of P620,512.73 detailed as follows: I. Cylinder Basic Surcharge Interest Compromise Total Deposits Deficiency Penalty 1988 -1st Quarter 11,312.00 2,828.00 24,038.00 1,000.00 39,178.00 -2nd Quarter 31,891.13 7,972.78 65,775.45 3,000.00 108,639.36 -3rd Quarter 6,840.00 1,710.00 13,680.00 1,000.00 23,230.00 50,043.13 12,510.78 103,493.45 5,000.00 171,047.36 II. Services to Texas Instruments 1988 -1st Quarter 57,614.07 14,403.52 122,429.90 12,000.00 206,447.49 -2nd Quarter 69,741.25 17,435.31 143,841.32 12,000.00 243,017.88 127,355.32 31,838.83 266,271.22 24,000.00 449,465.37 Grand Total 177,398.45 44,349.61 369,764.67 29,000.00 620,512.73 ======== ======= ======== ======= ======== In view thereof, you are requested to urge your client to pay the above deficiency value-added tax of P620,512.73 plus whatever interest that may have accrued thereon to the Revenue District Office nearest its place of business, within thirty (30) days from your receipt hereof; otherwise, the collection thereof shall be enforced by means of the summary remedies prescribed by law. This constitutes the final decision of this Office in the matter. cdta Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue September 30, 1997 MEMORANDUM FOR: The Commissioner This refers to the protested tax case of CONSOLIDATED INDUSTRIAL GASES, INC. (CIGI for brevity), with principal place of business at CIGI Bldg., Sheridan Street, Mandaluyong City, involving the respective amounts of P6,550,709.50 and P1,328,291.20 as alleged deficiency value-added tax for the years 1988 and 1989 under Assessment Notice Nos. FAS 4-88-92-000683 to 686 and FAS 4-89-92-000687 to 690, all dated February 10, 1992, itemized as follows: cdti I. 1988 Cylinder Deposits P6,268,717.33 Services to Texas Instruments 281,992.17 Total (inclusive of increments) P6,550,709.50 II. 1989 Cylinder Deposits 1,328,291.20 Grand Total (inclusive of increments) P7,879,000.70 =========== STATEMENT OF FACTS It is represented that CIGI is a domestic corporation duly registered with the Securities and Exchange Commission, primarily engaged in the business of selling industrial gases (e.g. acetylene, oxygen, argon, etc.); that when these gases which are contained in cylinder tanks are sold, CIGI collects from its customers a cash bond equivalent to the value of the cylinder tanks in addition to their selling price; that said bond is refunded to the customer upon return of the cylinder tank; that CIGI was assessed a deficiency value-added tax when a verification disclosed that the returnable cylinder deposits for the years 1988 and 1989 were not subjected to value-added tax pursuant to Revenue Regulations No. 3-89; that CIGI was assessed further on its sale of services to Texas Instruments representing delivery charges from January to August 1988, when verification showed that said sales were not subjected to value-added tax; that under BIR Ruling No. 295-88 only the sale of merchandise by the taxpayer is considered as export sales subject to zero-rate; that to all these, CIGI, thru counsel, timely protested and raised the following contentions: a) That CIGI did not concur with the assessment since its request for exemption from the coverage of Revenue Regulations No. 3-89 is still pending with the Bureau; b) That CIGI should not be made to pay for surcharges, interest and penalty because its non-payment of VAT relating to the sales of services to Texas Instruments was done in good faith, believing that its sale to Texas Instruments is zero-rated. DISCUSSION Re : Cylinders deposits for the years 1988 and 1989 With the end view of resolving this case at the soonest time possible , a conference hearing was set on July 6, 1993. This was reset anew to August 31, 1993, but despite due notice, our investigating examiner failed to appear. Inasmuch as the representative of the taxpayer, together with its counsel, were present on said date, manifesting their readiness for said hearing, perforce the conference hearing was conducted. cdll CIGI, thru counsel, presented documentary evidence(s) in support of the following representations: a) That CIGI considers the cash bond deposited by its customers as part of its liability account (particular account name not specified/mentioned), and the cylinders are treated as part of its fixed assets account (TSN p. 10); b) That when cylinders are returned, the cash bond are refunded and if returned beyond three (3) months, the cash bond plus interest of 8% less the facility charge will be refunded to customers. If cylinders are not returned, after confirmation of non-return by customers, CIGI considers the unreturned cylinders as sale of fixed assets in which CIGI pays the corresponding value-added tax, see Exhibits 1, 2 & 3 (TSN pp. 24-27); c) That CIGI admitted that no VAT payments were made on the proceeds of cylinders that were not returned during the period from January 1, 1988 to September 30, 1988 amounting to P500,431 . 30 (See Exhibit "6"); d) That CIGI made VAT payments for 1989 including the last quarter of 1988 from October 1, 1988 to December 31, 1988 (See Exhibit "5"). The foregoing representations being satisfactorily substantiated shall be given weight in the establishment of taxpayer's cause. Under Revenue Regulations No. 3-89, returnable containers such as bottles and shells, tanks and other similar items, may not be actually sold but deposits are collected from the customers to guarantee the return of the containers. Where the customers fail to return the containers, the deposits are forfeited. At the end of the year, taxpayers who treat their returnable containers as fixed assets, amortized the same for a certain period corresponding to the estimated life of the containers wherein depreciation is claimed. Conversely, where containers are returned, for purposes of value-added tax to which the deposits for returnable containers shall have been subjected to, refunds of deposit to customers shall be considered as sales returns and allowances allowable as deductions from the gross selling price or gross receipts of the taxpayer in the quarter when refund was made. (Sections 2, 3 & 5 thereof). In synthesis, the above mentioned Revenue Regulations sought to impose 10% value added tax on deposits of unreturned containers whether initially treated, accounting-wise, as supplies or part of fixed assets. In the case at bar, CIGI treated these deposits on containers as forming part of its fixed assets account, hence, when containers remain unreturned after confirmation of the customers of that fact, a sale transaction is recorded in CIGI's books. Consequently, as regards CIGI's tax liability, our focus shall be on the sale transaction treated as such, upon confirmation that certain cylinder tanks will no longer be returned/surrendered by the customers. llcd It might be well to note that the findings of our examiner must yield to the "figures" claimed by CIGI as proven by the evidences so submitted. Thus, after having established that its value-added tax liabilities for 1989 were paid and that no VAT payments for 1988 (January to September 1988) were made, thus, CIGI's VAT liability as regards cylinder deposits, amounts to P171,047.36. (See Schedule of Computation) Re : Services to Texas Instruments During the course of the conference hearing, CIGI, thru counsel, did not present any document/evidence that may controvert the above-mentioned assessment, thus, said assessment should no longer be disturbed. Thus, CIGI's VAT liability as regards its services to Texas Instruments amounts to P449,465.37 (See Schedule of Computation.) CONCLUSION/RECOMMENDATION Having admitted the fact of non-payment of value-added tax during the period from January 1, 1988 to September 30, 1988, CIGI shall be held liable to pay as deficiency value-added tax for the said period the amount of P171,047.36. It shall also be held liable to the deficiency value-added tax on the sale of its services to Texas Instruments in the amount of P449,465.37. cdtech I. Cylinder Basic Surcharge Interest Compromise Total Deposits Deficiency Penalty 1988 - 1st Quarter 11,312.00 2,828.00 24,038.00 1,000.00 39,178.00 - 2nd Quarter 31,891.13 7,972.78 65,775.45 3,000.00 108,639.36 - 3rd Quarter 6,840.00 1,710.00 13,680.00 1,000.00 23,230.00 50,043.13 12,510.78 103,493.45 5,000.00 171,047.36 II. Services to Texas Instruments 1988 - 1st Quarter 57,614.07 14,403.52 122,429.90 12,000.00 206,447.49 - 2nd Quarter 69,741.25 17,435.31 143,841.32 12,000.00 243,017.88 127,355.32 31,838.83 266,271.22 24,000.00 449,465.37 Grand Total 177,398.45 44,349.61 369,764.67 29,000.00 620,512.73 ======== ======= ======== ======= ======== In view thereof, it is respectfully recommended: 1. That the total assessed deficiency value-added tax against CIGI in the sum of P6,550,709.50 for the year 1988 be reduced to P620,512.73. 2. That the assessment of a deficiency value-added tax for the year 1989 be withdrawn and cancelled; and 3. That after payment of the reduced amount of P620,512.73, this case shall be considered closed and terminated. cdt Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) SIXTO S. ESQUIVIAS IV Assistant Commissioner Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue