BIR Ruling

February 21, 1997 Atty. Miguel Q. Baron Tax and Investment Counsellor 2560 Sunset Village, Seaside Drive (MIA Road) Cor. Roxas Blvd., Tambo, Paraaque Metro Manila S i r : This refers to the protested tax case of your client, CENTRAL TEXTILE MILLS, INC. (CTMI for brevity), of A. Bonifacio Avenue, Corner EDSA, Balintawak, Quezon City, involving the amount of P2,958,910.20 as alleged deficiency value-added tax for the first quarter of 1988 inclusive of surcharge and interest under Assessment Notice No. FAS-4-89-002139 dated October 16, 1989, details of which are shown below: LLjur Presumptive input tax claimed per VAT return P2,060,193.27 LESS: Allowable presumptive input tax per pre-audit 263,027.51 Unallowable presumptive input tax P1,797,165.76 Add: 25% surcharge P449,291.44 20% interest 711,453.00 Compromise penalty 1,000.00 1,161,744.44 Total Amount Due & Collectible P2,958,910.20 =========== It is represented that CTMI is a domestic corporation duly registered with the Securities and Exchange Commission to engage in the manufacture of textiles-clothing materials; that it is VAT-registered with Registration No. 003567; that when the Old VAT Law under Executive Order No. 273 was implemented effective January 1, 1988, CTMI availed of the 8% transitional input tax credit on its supplies and spare parts inventory accounts, as shown herein-below: Supplies Inventory P 3,515,110.48 Spare parts Inventory 22,464,572.10 P25,979,682.58 X rate of presumptive input tax 8% Presumptive input tax P 2,060,193.27 claimed per VAT return that said claim of 8% transitional/presumptive input tax credit was reduced when the spare parts inventory was disallowed in whole and when the bunker oil inventory which is not subject to VAT was excluded from the supplies inventory in the amount of P227,266.57 and consequently, CTMI was assessed of deficiency value-added tax; that you now request for the reconsideration of Assessment Notice No. FAS-4-89-002139. LLphil In reply, please be informed that after a careful review of the facts of the case as well as the law and jurisprudence involved, this Office has finally ascertained that CTMI is liable for the deficiency value-added tax. Re: Supplies Inventory Account Less the value of bunker oil inventory Investigation conducted by examiners EDNA F. CUARTERO and PROSPERO S. SUNGA disclosed that the supplies inventory included the value of the bunker oil inventory which should not be included or treated as supplies because the sale of petroleum products is not subject to VAT (Sec. 9 (b) (4) Revenue Regulations No. 5-87); hence, supplies inventory account should be reduced by P227,266.57. (see pp. 157-158) You did not oppose the above findings, so it is left undisputed and will no longer be disturbed. Re: Spare parts no ending inventory is of December 31, 1987; no beginning inventory as of January 1, 1988. You vehemently contest the disallowance of this account on the ground that CTMI's claim of 8% presumptive input tax on the alleged spare parts inventory is perfectly valid and legal, premised on CTMI's faithful compliance with all the requirements imposed by Section 105 of the Tax Code as well as your representation that said account was not among the inventory accounts so detailed in the list submitted because it was lump with the machineries and equipment account. We believe your contention will not lie. In accordance with the provisions of Section 25 of Executive Order No. 273, as implemented by Section 26 of Revenue Regulations No. 5-87, manufacturers are entitled to claim 8% presumptive input tax, in addition to the balance of deferred sales tax credit account, in an amount limited to the inventory value of spare parts and supplies provided the following requisites must concur: 1. The inventory value of spare parts and supplies were previously subjected to sales tax prior to the implementation of the value-added tax law; 2. THAT THEY WERE ON HAND AS OF DECEMBER 31, 1987; 3. That such goods were not for sale but purchased for use in the business in their present condition and not intended for further processing; and 4. That the taxes thereon had not been taken up or claimed as part of the deferred sales tax credit. CTMI was able to comply with conditions one, three and four but not condition No. two . Upon verification of CTMI's records, it was ascertained that no spare parts inventory was on hand as of December 31, 1987 nor was the same mentioned in the auditor's audit certificate as part of any asset account in the audited Balance Sheet as of December 31, 1987. Hence, your representation that the spare parts inventory was allegedly presented in the financial statements as part of the machineries and equipment account, which is clearly self-serving, must yield to our examiner's recommendation/findings (pp. 221-222). In your previous correspondence dated September 23, 1988, you represented that all spare parts used during the taxable year were debited directly to expense neither depreciated nor capitalized, then later, in your letter dated December 4, 1989, you said/wrote about the spare parts inventory's inclusion in the machineries and equipment account. These declarations cannot be given credence considering the substantial amount involved and the fact that, if so believe, an illogical scenario will ensue. In view of all the foregoing, your request for reconsideration is hereby DENIED. Consequently, you are hereby requested to advise your client to pay the amount of P2,958,910.20 as deficiency value-added tax for the quarter ending March 31, 1988, plus 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. LLpr This constitutes the final decision of this Office on the matter. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue