BIR Ruling No. 176-84

November 7, 1984 BIR RULING NO. 176-84 192 (2)-000-00-176-84 Gentlemen : This refers to your letter dated June 4, 1984 requesting a ruling on whether your client, Singer Sewing Machine Company, Philippine Branch, a corporation engaged in trading general merchandise and paying graduated fixed tax as such, is liable to pay fixed and percentage taxes imposed by the Tax Code on finance companies by reason of its purchase of installment receivables from dependent and exclusive dealers of Singer products. Documentary evidence submitted show that Singer Sewing Machine Company (SSMCO, for short) is a corporation organized under the laws of the State of New Jersey, U.S.A., the primary purpose of which is the sale of sewing machines, parts and accessories thereof. It established a branch in the Philippines, the Singer Sewing Machine Company, on October 24, 1910. Since then, it has been doing business in this country as a general merchant, mainly the marketing of Singer Sewing machines, accessories and parts, and other home appliances. However, near the mid-1970's, doubts were cast on the legality of Singer Sewing Machine Company's continuing to engage in the retail business upon the expiration of the Laurel-Langley agreement. SSMCO then decided to close all its branches and invited persons who might be interested in becoming dealers of its products. Most of those who responded were retired SSMCO employees knowledgeable with SSMCO product lines. SSMCO then entered into a "Dealership Agreement" with each of these dealers, wherein the terms and conditions by which the dealer is authorized to purchase and sell SINGER products in his particular area are defined. Thus, after the mid-1970's and until the present time, SSMCO sold its products at wholesale to a network of independent and exclusive dealers. These dealers sell SINGER products to the general public either in cash or through the installment plan. Since most of these products are high-priced appliances, sales are usually made through installment. In view of the limited financial resources of the independent dealers in carrying installment receivables over a period of time, SSMCO (having the better resources) conceived of the "Installment Financing Agreement" as an adjunct to the "Dealership Agreement". The "Installment Financing Agreement" contains the terms and conditions under which SSMCO may purchase the installment contracts entered into by the dealer with buyers of SINGER products. This arrangement is made available to authorized dealers only by reason of the "Dealership Agreement" and covers sales of SSMCO products exclusively. That is, the "Installment Financing Agreement" is entirely dependent upon and may exist only by virtue of the "Dealership Agreement", such that the financing agreement also terminates upon the termination of the dealership agreement, and not vice-versa. The Ministry of Finance, where the same issue was squarely raised has ruled, in its letter dated March 23, 1984, that SSMCO is not a financing company under Section 3(a) of Republic Act No. 5980. In reply, please be informed that this Office shares your opinion that the business activity of your client, Singer Sewing Machine Company, is that of a general trading merchant and not a financing company. Its purchase of installment contracts arises only by virtue of and is entirely dependent upon the dealership agreement, i.e. confined only to Singer Sewing Machine Company's dealers and sales of SSMCO products. Where something is done as a mere incident to, or as a necessary consequence of, the principal business, it is not ordinarily taxed as an independent business in itself; and that what is usually taken as essential is the main activity in which the taxpayer is engaged. All various transactions tending to better accomplish the principal end in view must be treated as merely incident to the principal purpose of the business, in the absence of circumstances evidencing a different intent. (Dela Rama Steamship Co., Inc. vs. CIR, CTA Case No. 1499, March 24, 1957). Such being the case, it is our opinion, as we hereby rule that your client, Singer Sewing Machine Company, Philippine Branch, is not subject to the fixed and percentage taxes imposed by Section 192(1) and 261, both of the National Internal Revenue Code on finance companies. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner