Follosco Morallos & Herce

November 12, 2008 BIR RULING [DA-(EXT-M-002) 422-08] DA 467-98 Follosco Morallos & Herce Suite 2500, 25th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City Attention: Atty. Rachel P. Follosco Gentlemen : This refers to your letter dated July 24, 2008 stating that your client, Mars Philippines, Inc. (Mars), is a domestic corporation organized and existing under and by virtue of the laws of the Philippines; that it imports into the Philippines Catsan, a brand of coated clumping litter made of sodium bentonite, which absorbs moisture from cat feces and urine and reduces foul odors such as ammonia; and that Catsan is manufactured through the following production process: HcACST 1. Sodium bentonite is mined and dried under the sun to reduce the moisture level; 2. The bentonite clay is steam-heated using a rotary drum drier to further reduce moisture; 3. The dried bentonite clay is ground into 200 micro size dust powder; 4. The dust powder is blended in a vertical drum blender with other well-researched components to attain the desired viscosity, clumping, and odor-controlling properties of the bentonite clay; 5. The material undergoes extrusion using a screw extruder and steam-heated again to reduce the moisture level; 6. The material is again ground into 100 micro and 200 micro size particles. The 100 micro size particles are for the center particles and the 200 micro size particles are to be coated on the center particles; 7. The 200 micro size dust particles are checked and analyzed for quality requirements on size, moisture, colloid value, expansion volume, water absorption, and density; 8. Round, coated litters are created through a continuous rotary coating and drying system; 9. The litters are then mixed, packed and sealed. Based on the foregoing representations, you now request for confirmation of your opinion that 1. Catsan is not a mineral product as defined in Section 151 (B) (3) of the Tax Code of 1997 since its main ingredient, sodium bentonite, has undergone chemical change, process and manufacturing; 2. Since Catsan is not a mineral product, it is not subject to excise tax imposed in Section 129, in relation to Section 151 of the Tax Code of 1997. In reply thereto, please be informed that Section 151 of the Tax Code of 1997 provides that "(B) For purposes of this Section, the term xxx xxx xxx (3) 'Mineral products' shall mean things produced and prepared in a marketable state by simple treatment processes such as washing or drying, but without undergoing any chemical change or process or manufacturing by the lessee, concessionaire or owner of mineral lands. xxx xxx xxx" Section 129, supra provides that "SEC. 129. Goods Subject to Excise Taxes. Excise taxes apply to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported. The excise tax imposed herein shall be in addition to the value-added tax imposed under Title IV. TESDcA For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other physical unit of measurement shall be referred to as 'specific tax' and an excise tax herein imposed and based on selling price or other specified value of the good shall be referred to as 'ad valorem tax'. A careful scrutiny of the above-mentioned provisions disclosed that indeed Catsan does not qualify as a mineral since its main ingredient, sodium bentonite, is no longer in its naturally occurring state upon importation into the Philippines; this is so because it has already undergone chemical change, process, and manufacturing to be transformed into coated clumping litter. This is fortified from the Catsan production process as well as the WIPO publication of the coated clumping litter invention that the main ingredient of sodium bentonite undergoes the following technical and complex processes which alter its chemical composition: 1. Intensive steam-heating to reduce moisture to less than 5%; 2. Grinding to micro size particles to achieve the required particle size and specific quality requirements on moisture, colloid value, expansion volume, water absorption, and density; 3. Extrusion, which is a process used to create objects of a fixed cross-sectional profile by pushing the material through a die of the desired cross-section. This is the process of choice for very complex cross-sections and work materials that are brittle, because the material only encounters compressive and shear stresses; 4. Blending with other components to enhance viscosity, clumping, absorbency, and deodorizing qualities; 5. Coating of an outer surface of a 100 micro size particle with dust particles, with water as binder, in a continual process at a specified speed. Based on the above-circumstances, it is undisputed that the foregoing processes cannot be considered as simple treatment processes to prepare the sodium bentonite into marketable state. On the contrary, it is a complex manufacturing processes that alter the chemical composition of the sodium bentonite to enhance its clumping, absorbency, and deodorizing qualities. Moreover, the invention description in the WIPO publication shows that the process for the manufacture of coated clumping litter involves highly technical and complicated processes and the result of intensive research and analysis. In the same manner, this Office in BIR Ruling No. DA 427-05 dated October 14, 2005, ruled that "The above process runs counter to the definition of a mineral product as defined in the Section 151(B)(3) of the Tax Code of 1997 where mineral products shall mean things produced and prepared in a marketable state by simple treatment processes such as washing or drying, but without undergoing any chemical change or process or manufacturing by the lessee, concessionaire or owner of mineral lands. The hydrogel-form of drilling-grade sodium bentonite is a formation wherein certain additives like polymers and sodium ash are mixed to improve swelling and other desirable properties. In this case, the said product may be considered a manufactured product because its chemical process are someway altered." xxx xxx xxx In view of the foregoing, H.P.S.D. Syn Hydrogel is not classified as a mineral product hence, not subject to excise tax." WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. Catsan is not a mineral product as defined in Section 151 (B) (3) of the Tax Code of 1997 since its main ingredient, sodium bentonite, has undergone chemical change, process and manufacturing; 2. Since Catsan is not a mineral product, it is not subject to excise tax imposed in Section 129, in relation to Section 151 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. CADSHI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service