Adlaon Energy Development Corporation

November 5, 2008 BIR RULING [DA-(VAT-028) 393-08] DA002-06 Adlaon Energy Development Corporation 35 Espelita Street Cebu City Attention: Mr. Roberto Go Manager Gentlemen : This refers to your letter dated March 24, 2006, which was referred to this Office by Revenue Region No. 13, Cebu City, by way of its 1st Indorsement dated June 6, 2006, requesting for reconsideration that its purchase of gasoline and diesoline is exempt from value-added tax (VAT) despite the repealing clause enunciated in Republic Act (R.A.) No. 9337. It is represented that Adlaon Energy Development Corporation (Adlaon) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that on September 28, 1988, Adlaon entered into a Coal Operating Contract with the Office of Energy Affairs; that pursuant to the said Contract, the Government through the Office of Energy Affairs shall undertake by itself the active exploration, development and production of coal resources and may also execute Coal Operating Contract as provided for in the Coal Development Act of 1976; that the salient feature of the Contract is that the operator shall have the following rights: A. Exemption from all taxes except income tax; B. Exempt from payment of tariff duties and compensating tax on importation of machinery and equipment, spare parts and/or materials required for the Coal Operations . . . . And that on March 23, 2006, the Department of Energy through Mr. Emmanuel C. Daar, OIC-Director, Legal Services certified that cTAaDC "Adlaon Energy Corporation (AEC), a subsisting Coal Operating Contract Holder of the Government through the Department of Energy (DOE) under Coal Operating Contract (COC) Nos. 9 (Southern Cebu Coal Basin, Argao and Dalaguete), 55 (Naga, Cebu) and 89 (Compostela, Cebu) dated March 12, 1982 and March 28, 1988, respectively, is exempt from the payment of value-added tax (VAT)." In reply thereto, please be informed that in BIR Ruling No. DA002-06 dated January 5, 2006, this Office ruled that ". . . in Memorandum No. 041-2004 dated September 13, 2004, this Office, in answer to the request for a clarificatory ruling of the Officer-in-Charge, Large Taxpayers Service regarding the scope of term 'materials' as used in PD 972, opined in the following manner: SIaHDA The term 'materials' as used in PD 972 embraces all necessary element that may be used in furtherance of SCC's operation. Consequently, it includes fuel oils used directly in its mining operation as well as those that are being used or consumed for administrative purposes. Fuel oil is a necessary ingredient in the exploration, development and exploitation of coal lands. In the conduct of the same, necessarily it includes mobilization of some personnel which requires the use of cars and other transport facilities that eventually requires the use of fuel oils. Had the framers of the law intended to exempt those fuel oils that are being used directly in mining operation only and not to include those consumed for administration purposes, it should have clearly provided the same in PD 972." The importation by SMC of diesel fuels can be given exemption because it abides with the conditions set forth in Section 16(b)(1) of PD No. 072. This is evident in the letter dated November 28, 2002 of Mr. Ranilo P. Abando, OIC-Director, Energy Resource Development Bureau of the Department of Energy, when he stated that: "(D)iesel fuels are by-products of crude oil which our local oil companies import as well. They in turn process the crude oil and transport and sell the by-products, including diesel fuels in the Philippines at a higher price as the cost of processing and importation are imputed in the selling price for the local market." Evidently, imported diesel fuel is less expensive than local diesel fuel. aIcDCT Notwithstanding the provisions of Republic Act No. 9337 subjecting the sale or importation of petroleum products, including raw materials for their production to the value-added tax, the importation of SMC of the petroleum product which is considered a necessary ingredient in the exploration, development and exploitation of coal lands, is exempt from the value-added tax pursuant to the provisions of Section 16 of PD No. 972. Moreover, such exemption provided in PD No. 972 is recognized in Section 4.109-1(B)(k) of Revenue Regulations No. 16-2005 which provides: "Sec. 4.109-1. VAT Exempt Transactions. (B) Exempt Transactions. (k) Transactions which are exempt under international agreements to which the Philippine is a signatory or under special laws except those granted under PD No. 529 - Petroleum Exploration Concessionaires under the Petroleum Act of 1949." In view of the foregoing, this Office hereby confirms your opinion that diesel fuel oils can be imported duty and tax free by Semirara Mining Corporation (SMC)." SUCH BEING THE CASE, considering that the above-cited ruling is in all fours similar to the instant case, this Office holds that Adlaon indeed is exempt from VAT on its purchases of gasoline and diesoline. 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. ITScHa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service