BIR Ruling

April 12, 1977 Mr. Conrado M. Alabastro Certified Public Accountant 173 Kanlaon, Quezon City S i r : This refers to your letters dated November 4, 1976 and February 14, 1977 requesting a ruling on whether the receipts derived by your client, Lemery Electric Power Co., Inc., an electric franchise holder, from the sale of electric distributing and conducting system consisting of poles, wires, watt-hours, transformers, etc., to the National Electrification Administration (NEA) for the electric cooperatives is considered as part of its gross receipts subject to the 2% franchise tax; hence, the net income derived from said sale is exempt from corporate income tax, in accordance with Presidential Decree No. 551, as amended by Presidential Decree No. 648, Section 1 of which provides: "SEC. 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchise to generate, distribute and sell electric current for light, heat and power and for the manufacture, distribution and sale of city gas shall be two per cent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current and of manufactured city gas. "Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earning, receipt, income and privilege of generation, distribution and sale of electric current and of manufactured city gas." Investigation conducted by this Office disclosed that your client's distribution and conducting system through a deed of sale finalized on June 5, 1975 were transferred to the Batangas Electric Cooperative, Inc., (BATELCO) through the negotiation of the National Electrification Administration in line with the government's policy of providing electricity to the remotest regions, and that your client stopped its electric operation after said transfer; that your client did not engage in any other kind of business of manufacture and sale of electrical supplies and equipment before and after the transfer of the system to BATELCO. In view thereof, I have the honor to inform you that the sale of electric distribution and conducting system does not constitutes separate business of your client; therefore, the receipts derived from said sales are earnings incidental and necessarily connected with the operation of your client's franchise, hence, includible in its taxable gross earnings for purpose of the 2% franchise tax due from it. "The interest income on petitioner's savings account is subject to franchise tax for the reason that it represents profit made in the course of regular transactions in connection with petitioner's franchise (Philippine Long Distance Telephone Co. vs. Collector, 90 Phil. 674). Similarly, the other contested items, consisting of earning of employees' retirement fund, profits in the sale of fixed assets , interest in the sale of cars, and proceeds of sales of materials and supplies, are earnings or profit incidental to and necessarily connected with the operation of its franchises, hence, includible in its taxable gross earnings ." (Philippine Power & Development Co., Inc., vs. Commissioner of Internal Revenue, CTA Case No. 1152, October 31, 1965). (Emphasis ours). Pursuant to the above-quoted provisions of P.D. 551, as amended, said payment of franchise tax is in lieu of all taxes and, therefore, the income or profits derived from said sales are not subject to income tax. cd Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue (Legal)