Cost of Raw Materials, When Deductible

October 12, 1971 BIR RULING NO. 022-71 Cost of raw materials, when deductible . FACTS: Taxpayer is an association of manufacturers in the air conditioning and electronics industries. QUERY: What are the requisites for the deductibility of the cost of raw materials under Sections 195, 185-A, and 185-B of the Tax Code? RULING: As a general rule, the cost of raw materials is deductible only when they have been previously taxed under the same section to which the manufactured articles belong. Under sub-sections (g), (h), (i), (o), (p) and (r) of Section 185 of the Tax Code, the following articles: (g) phonograph records; (h) firearms and cartridges and other forms of ammunition; (i) electric fans and air circulators; electric, gas or oil appliances of the type used for cooking, warming, or keeping warm food or beverage for consumption on the premises; (o) upholstered furnitures, tables, desks, chairs, showcases, bookcases, lockers and cabinets of which wood, rattan or bamboo is not the component material of chief value; (p) textiles, wholly or in chief value of silk, wool, linen or nylon or other synthetic and/or chemical fabrics; and (r) toys and playthings of all sorts. Are subject to 40% tax when imported or merely assembled and to 7% tax when manufactured by a manufacturer who qualifies as manufacturer of "locally manufactured articles" under Revenue Regulations No. 3-70 and 1-71. Considering that locally manufactured parts and accessories to be used in the manufacture of the above-mentioned articles are subject only to the 7% sales tax, pursuant to the second paragraph of Section 2, Revenue Regulations No. 3-70, and that the finished products mentioned above are subject to the 40% or 7% sales tax, and following the general rule stated above, it is believed that the cost of locally manufactured component parts whether used by a manufacturer subject to 40% or 7% sales tax is deductible from the gross selling price of the finished articles. Locally manufactured component parts of articles enumerated under Section 185-A of the Tax Code are subject to three rates: 7% sales tax on component parts manufactured by a manufacturer of integrated products; 15% sales tax on component parts manufactured by a manufacturer of non-integrated products; and 40% sales tax on component parts manufactured by a manufacturer who does not come under the classification of either integrated or non-integrated manufactured products. Considering that the locally manufactured component parts are taxed under the same section to which the finished products belong, the cost of such locally manufactured component parts is deductible from the gross selling price of the finished product irrespective of the rate of sales tax to which the finished product is subject to. There are also two (2) rates of tax prescribed in Section 185-B of the Tax Code: 40% when the articles mentioned therein are imported or are merely assembled; and 7% when the finished articles are "locally manufactured articles" are defined therein. However, under paragraph 2(e), Features of the Amendment, Revenue Memorandum Circular No. 34-65 which implements the provisions of RA 4122 (Section 185-B of the Tax Code), parts and accessories locally manufactured are subject only to the 7% sales tax, and considering that the finished products enumerated in Section 185-B are subject to the 40% or 7% sales tax, the cost of the locally manufactured parts used by a manufactured subject 40% or 7% sales tax is deductible from the gross selling price of the finished articles. In the case of materials such as metal, magnet wires, aluminum, paints, insulation materials, motors and copper tubes which are subject to the 7% sales tax under Section 186 of the Tax Code, the cost thereof may be deducted from the gross selling price of the articles sold and manufactured by integrated and non-integrated manufacturers under Section 185-A, and manufacturers of "locally manufactured articles" under Section 185 and 185-B, all of the Tax Code. aisa dc