BIR Ruling

November 13, 1970 1st Indorsement Returned to the Chief, Audit Division, thru the Revenue Operations Head (Special Operations), the within papers bearing on the tax liability of Gotao & Company, Inc. on the crude corn oil milled by it. As a result of an investigation, it appears that crude corn oil is obtained as follows: "In a mill designed and fabricated in accordance with modern technology, corn grains are introduced in a receptacle for the purpose of cleaning and conveyance afterwards through fixed connecting conduits to a fixed unit called the grain separators where those grains are cleansed and sprayed are again transferred or conveyed successively to corn hullers units where the sprayed and softened grains are hulled and degerminated preparatory for conveyance to the roller mills and sifters. In the sifter units, and after the aspirator unit operation, the finished and by-products of corn grits, hulls, corn bran, and corn germ are separated, while the by-product corn germs, all in a single and continuous process, are conveyed automatically by means of fixed connecting conduits to the steam drier unit for removal of moisture at a predetermined level which are from thence further automatically conveyed also through fixed connecting conduits to units called oil extraction consisting of mechanical grinder or crusher which grinds or crushes the corn germs thereby separating in the process the oil in the crude form from the corn germs and leaving behind other by-products called the corn cakes and corn germ meals. The crude oil thus obtained is the one marketed in an "as is" condition to food processors, while the resulting corn cakes and corn germ meals are sold to poultry feed manufacturers . Furthermore, such crude oil has no other use except as raw material in the manufacture of refined corn oil, in the production or manufacture of which the corporation is not engaged. The process involved is one single complete continuous mechanical process, uninterrupted by any other intervening processes." cd From the foregoing description of the milling process, the crude corn oil is still the by-product of the milled corn. This is so because, in the process of milling corn, the crude corn oil is one of those that have remained over and which possess or can be brought to possess a market value of its own (Phil. Manufacturing Co. vs. Meer, G.R. No. L-48483, March 25, 1946). Another reason why the crude corn oil is a by-product is that it is a secondary or additional product of value; something produced in the course of business in addition to the principal product which is milled corn. (Bishop v. City of Tulsa, 27 A.L.R. 1008) Operators of corn mills are no longer subject to the 2% miller's tax imposed by Section 189 of the Tax Code on the corn and its by-products in accordance with the amendment effected by Republic Act No. 3704. The explanatory note of House Bill No. 2818 which later became Republic Act No. 3704 clearly states that said bill seeks to exempt operators of rice and corn mills from the 2% tax imposed by Section 189 of the Tax Code. Consequently, the crude corn oil in question, being a by-product of milled corn is not subject to the said 2% tax. Neither is said crude corn oil subject to the 7% sales tax imposed by Section 186 of the Tax Code. To hold otherwise would be manifestly inconsistent with the clear intention of Congress in exempting rice and corn mill operators from the 2% miller's tax which is to lower the price of commodities milled by them. However, the purchaser of crude corn oil who refines the same is subject to the 7% sales tax on the refined corn oil. BIR Ruling No. 65-135 dated December 20, 1965 which holds that crude corn oil extracted from corn germ is subject to the 7% sales tax imposed by Section 186 of the Tax Code should be interpreted to apply only in cases where the extraction is done by a party other than the miller. In such case, the extraction by chemical or mechanical process constitutes manufacturing and the corn oil thus extracted is subject to the 7% sales tax. However, if the crude corn oil is extracted by the miller himself in his corn mill by means of a single and continuous process as described above, BIR Ruling No. 65-135 does not apply. MISAEL P. VERA Commissioner of Internal Revenue