Whether, Under a Contract with a Foreign Principal Who Provides the Blending Leaf Tobacco as One of the Production Materials Which Will be Processed into Finished Cigarettes and Shipped Abroad to Said Foreign Principal, Sterling Tobacco Corporation is Liable to the Inspection and Monitoring Fee of P5.00 Per Kilo Imposed under Executive Order No. 109

November 10, 1995 BIR RULING NO. 178-95 E.O. 109 000-00 178-95 Sterling Tobacco Corporation 305-207 Jose Rizal Street City of Mandaluyong Metro Manila Attention: Mr . Manolito B . Dagatan Vice-President-Finance Gentlemen : This refers to your letter dated August 11, 1994 requesting for a ruling as to whether or not under your contract with a foreign principal who provides the blending leaf tobacco as one of the production materials which you will process into finished cigarettes and shipped abroad to said foreign principal you are liable to the inspection and monitoring fee of P5.00 per kilo imposed under Executive Order No. 109. It appears that you are a domestic corporation established in October 1986 and engaged in the manufacture of cigarettes for only 1.7% of your total sales; that you will enter into a contract manufacturing agreement with Batavia Trading Corporation (Batavia) with principal office at P.O. Box 146, Trident Chambers, Wickhams Cay, Road Town, Tortola, British Virgin Islands, wherein you have agreed to process, package and deliver BATAVIA's designated requirements of JET in accordance with BATAVIA's supplied by BATAVIA or its contracted party; that you will send to BATAVIA from time to time, at BATAVIA's request and expenses, for quality control and analytical purposes, a representative sample of 10 cartons of product processed by you during the previous month; that BATAVIA will submit to the contractor every month its confirmed requirements for manufactured JET cigarettes for the next three (3) months and estimated requirements for the subsequent nine (9) months; that based on the estimated BATAVIA requirements and the agreed cigarette manufacturing yields, you and Batavia have agreed in a schedule of processing to process JET cigarettes in the upcoming year in accordance with BATAVIA formulae and specifications; that BATAVIA will pay you a processing fee for each case of JET processed, subject to review annually: 1st 20,000 cases per month US$ 15.00 2nd 20,000 cases per month 13.50 Over 40,000 cases per month 12.00 It is understood that you will strictly observe the Formula of Conversion dated September 28, 1995 issued by the Industrial Technology Development Institute as to the quantity of raw materials vis-a-vis the quantity of finished products. In reply, please be informed that based on the pertinent provisions of Executive Order No. 109 stating: Whereas, it is important to keep strict and constant control over importations of these blending tobaccos not only because they affect the quality and price of cigarettes, manufactured locally but also because such importations are easily the subject of manipulation and misdeclaration; xxx xxx xxx (e) The Commissioner of Internal Revenue is hereby authorized to collect from every importer to tobacco, an additional imported blending tobacco, inspection and monitoring fee of P5.00 per kilo. Section 2. This Executive Order shall cover all blending tobacco importations beginning July 1, 1986. cdpr it is our opinion that the rationale in conducting inspection and monitoring of imported leaf tobacco is to accurately determine the price of the raw materials used in the manufactured cigarettes for purposes of applying the ad valorem tax. This is particularly true if the cigarettes are sold in the domestic market. But if the finished cigarettes are shipped abroad, or is manufactured for and in behalf of a foreign principal, and more so if the imported leaf tobacco is supplied by the foreign principal as in this case, the conclusion is justified that the inspection and monitoring fee of P5.00 per kilo will not apply because the export sale of finished cigarettes is exempt from ad valorem tax pursuant to Section 127(d) of the Tax Code. However, in order to avail of the exemption from the inspection and monitoring fee of P5.00 per kilo, it is understood that you will comply with the following requirements: 1. You will post a bond in such amount as may determined by the Commissioner from time to time which shall be liquidated upon presentation of Commercial Invoice, Bills of Lading and Packing List; 2. Upon arrival of the consigned leaf tobacco at the Bureau of Customs Port Premises, it shall be moved to the Customs Bonded Warehouses within your premises; 3. All imported leaf tobacco brought into the Customs Bonded Warehouse within your premises shall be recorded as credits in the BIR-Official Register Books. Similarly, withdrawals shall be covered by GUIA to be recorded as debits in the BIR Official Register Book; 4. Every six (6) months; the BIR shall conduct a physical inventory of the imported leaf tobacco covered by the adverted agreement; 5. Every removal of leaf tobacco from the Customs Bonded Warehouse for processing should be covered by a written request to the Customs Bonded Warehouseman who shall maintain a record of all imported leaf tobacco brought in and removed outside of the Customs Bonded Warehouse; 6. The total quantity of the finished product produced and re-exported under your Contract should correspond to the quantity of leaf tobacco removed from the Customs Bonded Warehouse for processing under direct supervision by an Internal Revenue Officer; 7. All shipments of imported leaf tobacco shall be covered by a prior authorization to import to be issued by the Bureau of Internal Revenue and National Tobacco Administration; 8. Every removal of the manufactured cigarettes for re-export to your foreign principal abroad, shall be covered by a BIR permit to re-export; and 9. Before removal of the manufactured tobacco from your premises, there must be a physical inspection by the Internal Revenue Officers concerned. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue