BIR Ruling No. 039-64

May 25, 1964 BIR RULING NO. 039-64 G. M. Cansipit, Inc. 206 Wilson Bldg. Juan Luna, Manila Attention : Mr . Anselmo Claudio, Jr . Vice-Pres . & Treasurer Gentlemen : Reference is made to your letter dated March 16, 1964 requesting information as to the tax consequences of a transaction you presented as follows: cdpr "A Manila hospital imported a complete X-ray apparatus from the United States. Upon its arrival, the proper compensating tax, duties and other charges were paid at the customs house before its release. Months later the X-ray apparatus broke down. As it could not be repaired locally, it was returned to its manufacturer in the United States for repair. Upon its arrival again in the Philippines, the cost of repairs were shown to be $200.00, broken down as follows: "For Spare parts $50.00 "For Services $150.00 $200.00" In reply, I have the honor to inform you that the spare parts used in the repair are deemed imported by the hospital for its use which is subject to the compensating tax prescribed by Section 190 of the Tax Code in relation to Section 186 of the same Code. The tax is equivalent to 7% of the imported invoice value of the spare parts, which is represented at $50.00, plus an amount which bears the same ratio to the total expenses incurred in bringing the repaired article to this country, such as freight, insurance, commission and all similar charges, as the value of the spare parts bear to the total cost of repair which is represented at $200.00. The cost of the services rendered in the repair are not subject to tax. prcd In order to avail of this rule, however, the identity of the incoming machine as the machine originally sent out for repair should be duly established. Very truly yours, (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue March 19, 1964 MEMORANDUM FOR The Commissioner This has reference to the inquiry of G. M. Cansipit, Inc. relative to the tax due on an X-ray apparatus which was sent to the manufacturer in the United States for repair. This memorandum is prepared to explain the ruling contained in the accompanying proposed reply to the inquiry. In the proposed ruling, it is held that the spare parts used in the repaired article is subject to the compensating tax based on the import invoice value thereof plus an amount which bears the same ratio to the total expenses incurred in bringing the repaired article to this country, such as freight, insurance, commission and all similar charges, as the value of the spare parts bears to the total cost of repair. LLpr REASONS FOR THE PROPOSED RULING The compensating tax is a device for supplementing or complementing sales tax and resorted to as a means of placing persons purchasing goods from dealers doing business in the Philippines on an equal footing, for tax purposes, with those who purchase goods directly from without the Philippines. (Report of the Tax Commission, Vol. I. 75) The tax is clearly a tax on tangible personal property and predicated on the sale or purchase thereof. When a property is sent abroad for repair what was purchased is services. However, if parts were also supplied for the repair and for which the owner is charged, the owner is naturally considered to have purchased the same and when brought into this country already attached to the repaired article, the compensating tax will naturally also have to be collected thereon, being articles purchased from abroad. But certainly, also, the services applied in the repair cannot be considered an article purchased from abroad subject to the compensating tax. Services are also taxed but the treatment thereof is totally different from the sales or compensating tax. If the services for repair were performed in the Philippines, the tax that would have been collected is the 3% tax prescribed by Section 191 of the Tax Code. Therefore, if services for repair are performed outside the country, the proper tax to be collected, if due, is the 3% tax; but the 3% tax cannot possibly be collected because of lack of territorial jurisdiction. If we are to subject the services performed abroad to the compensating tax, I fear that we might be stretching the law to the extent of altering the nature of the tax which certainly would be improper. prll The proposed basis of the tax is also believed well founded as it is predicated on an apportionment of the total cost in bringing the repaired article to this country in the ratio of cost to cost. In the light of the foregoing considerations, it is respectfully recommended that the accompanying proposed action be given due course. Respectfully submitted: SIMEON B. PRUDENCIO Chief, Law Division