BIR Ruling [DA-320-03]

September 29, 2003 BIR RULING [DA-320-03] 109 (c) 361-58 Perlas, De Guzman, Antonio & Herbosa Law Firm Unit 2603, 26/F Antel Global Corporate Center Doa Julia Vargas Avenue near corner Meralco Avenue Ortigas Centre, Pasig City Attention: Atty. Rodolfo P. De Guzman, Jr. Counsel This refers to your letter dated July 30, 2003 requesting for confirmation of your opinion that the sale of pasteurized fresh milk by your client BATANGAS AGRI-BUSINESS CENTER, INC. is exempt from value-added tax under Section 109(c) of the National Internal Revenue Code of 1997. Batangas Agri-Business Center, Inc. is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. It is engaged in the sale of pasteurized fresh milk to help develop the local dairy industry. It is represented that pasteurized fresh milk is an agricultural food product in its original state despite the fact that it undergoes the process of pasteurization. Pasteurization is a simple process undertaken to preserve fresh milk for the market without altering its exterior texture or form or inner substance for a special use to which it could not have been put in its original form or condition. In pasteurization, the milk is simply heated up to 72 degrees for fifteen (15) seconds and cooled to 4 degrees to retard the growth of the bacteria. The bacteria is not removed from the milk. No chemical or additive is mixed with the milk. The exterior texture or form or inner substance of the milk is not altered for a special purpose for which the milk could not have been used in its original form or condition. With or without pasteurization, the milk is fit for consumption. The milk is pasteurized for the sole reason of extending its shelf-life from four (4) to seven (7) days so that it can be viably marketed. Without pasteurization, the milk would most probably be stale by the time it reaches the retailers. It is your position that the sale of pasteurized fresh milk, being a sale of an agricultural food product in its original state, is exempt from value-added tax under Section 109(c) of the National Internal Revenue Code of 1997. In reply, please be informed that after consideration of the facts as represented and the law applicable thereto, this Office finds your position meritorious. In BIR Ruling No. 361-58 dated July 15, 1958, this Office ruled that pasteurization does not change the chemical composition and nature of milk, to wit: "Pasteurization" is defined by Webster as the partial sterilization of a fluid at a temperature (1310 158F) which does not greatly change its chemical composition. It is of common knowledge that milk left alone as it is, will spoil easily. The taxpayer has to pasteurize the milk to prevent it from spoiling before it is delivered to his customers. Pasteurization does not, however, alter the nature of milk as a drink. It only makes it safer to drink. In view of the foregoing, it is the opinion of this Office that the sale of pasteurized milk in bottles is exempt from the percentage tax under the provisions of Section 188(b) of the National Internal Revenue Code as amended by Republic Act 1612, as well as under our present law." In a Ruling dated January 25, 1978, this Office reiterated the above-quoted opinion that pasteurized milk is still milk in its original. state, viz. : "The pasteurization and bottling of raw carabao fresh milk is a requirement of the Bureau of Health, to make it safe for human consumption. The pasteurization process consists of heating the milk to pasteurization temperature of around 140F for 20 to 30 minutes. Bacteria and all other contaminations are destroyed, while the natural vitamins present in the fresh milk are preserved. Nothing is added to or subtracted from the milk. It keeps intact the properties of natural fresh milk. The milk is still perishable and requires refrigeration to keep it. No extra vitamins are added and no chemicals are introduced to preserve it. It is not recombined milk. It remains as natural fresh carabao milk." In reply, I have the honor to inform you that under the abovementioned facts, the pasteurized milk remains exempt from the sales tax imposed by Section 201 (formerly Section 186-B), even if bottled, since it is still milk in its original state, pursuant to Section 202(b) [formerly Section 188(b)] of the Tax Code of 1977. Under Section 109 of the National Internal Revenue Code of 1997, the sale of agricultural food product in its original state is exempt from value-added tax, to wit: TSacAE "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (c) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore. Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have undergone the simple process of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall be considered in their original state." It is clear from the foregoing rulings that pasteurization is a simple process of preparation or preservation of milk for the market. No chemical or additive is mixed with the milk. The exterior texture or form or inner substance of the milk is not altered for a special purpose for which the milk could not have been used in its original form or condition. With or without pasteurization, the milk is fit for consumption. The milk is pasteurized for the sole reason of extending its shelf-life so that it can be viably marketed. Therefore, pasteurized fresh milk is an agricultural food product in its original state despite the fact that it undergoes the process of pasteurization. Accordingly, the sale of fresh milk is exempt from value-added tax under section 109(c) of the National Internal Revenue code of 1997. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it is disclosed that the facts are different, this Ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group