BIR Ruling

May 30, 1967 The Vice President Victorias Milling Co., Inc. P.O. Box 762, Manila S i r : This refers to your letter dated January 4, 1967 requesting reconsideration of BIR Ruling No. 63-025, dated March 25, 1963 holding among others the following: "In the case of Tan Chiu (G.R. No. L-15008, January 28, 1961, the Supreme Court held that the value of cotton knitting materials manufactured by a tax-exempt industry and sold to and used by undershirt manufacturers is not deductible, for sales tax purposes, from the gross selling price of the manufactured undershirts prior to the effectivity of Section 186-A of the Tax Code. LexLib "Considering the theory embodied in this decision, it is the considered opinion of this Office that since cooperative associations organized under Act 3425, as amended, are exempt from the 2% miller's tax on its raw sugar, the cost thereof when used as materials by a refined sugar factory is not deductible, for purposes of the 2% miller's tax, from the selling price or market value of the refined sugar." In your aforesaid letter you contended that Section 186-A of the Tax Code is a general provision which is applicable not only to Section 186 but also to Section 189 of the Tax Code considering the purpose of the amendment, which is to preserve exemption of the various industries which the government is interested in promoting; that this includes industries run by cooperative; and that the philosophy behind this liberal construction is well stated in the ruling of this Office dated June 15, 1960 wherein it was held that "the total cost of raw sugar belonging to a cooperative association shall nevertheless remain deductible even if it is exempt from tax because if deduction is not allowed, the exemption granted a cooperative association under Section 48 of Act 3425, amended by Republic Act No. 702, would in effect be rendered nugatory." In reply, I have the honor to inform you that contrary to your belief, Section 186-A of the Tax Code applies only to tax free products utilized in the manufacture or production of articles subject to the sales tax. The third paragraph of Section 189 of the Tax Code, provides that a proprietor or operator of a refined sugar factory shall be subject to tax imposed by this section but shall be permitted to deduct from the actual selling price or market value of the refined sugar the total cost, as duly established, of the raw sugar upon which the tax under this section has previously paid on the raw sugar belonging to members of cooperative associations as they are exempt under Act No. 3425, as amended, it necessarily follows that the cost of such raw sugar cannot be deducted by the manufacturers of refined sugar following the philosophy of the decision of the Supreme Court in the case of Tan Chiu mentioned above. cdtech In view thereof, your request has to be, as it is hereby denied. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue