Tax on the Articles Imported for Resale in "as is" Condition or to be Used in the Manufacture of Articles Subject

March 18, 1958 BIR RULING NO. 191-58 Chua Te & Co. (Bee Hua Trad. & Co.) 567-569 Hormiga St. Manila Gentlemen : Reference is made to your letter dated March 15, 1958, stating the following: cdll "For your information and guidance, we are not only engage in the wholesale and retail business of general merchandise with a graduated fixed tax C-13 license but also as an importer of general merchandise and textile and as a manufacturer of shirts, etc. subject to 7% sales tax, having two (2) privilege tax receipts one as an importer and the other as a manufacturer, and the aforementioned privilege tax receipts are all in the name of CHUA TE & CO., a duly registered partnership with place of business located at 567-569 Hormiga St., Manila, and that we are enjoying two (2) quota allocations one as an importer and the other as a producer. "For Example we import merchandise or commodities such as textiles, remnants or threads under our quota as an importer and upon arrival of the said commodities instead of selling the same "as is" we used or utilized the said merchandise in our shirt factory. The question now is that, is this allowable? If so, is a sales invoice necessary to legalized the said transfer of merchandise to the shirt factory? Can we deduct the cost of the said merchandise (landed cost including bank chartes, special import tax, duties paid, marine insurance, consular fees, wharfage dues and other importation expenses) for purposes of computation of 7% sales tax on the manufactured products? llcd "In cases wherein we import raw materials under our quota as a producer and the said raw materials is not intended for re-sale but instead it is to be used in our shirt factory. Upon arrival of the said raw materials we manufacture a portion of the said raw materials and upon completion into finished products the same cannot be sold. The question is that is it allowable to sell the remaining portion of the said raw material "as is"? If so, what is the acceptable and legal way of transferring the said raw materials in our import trading department? "As above you have noted that we have also a C-13 (Graduated Fixed Tax) license. For example we bought raw materials locally and the same is to be used in our shirt factory and instead of using the said raw materials we sell the same "as is", is this allowable? "Furthermore, in our inventory valuation we use "cost or market whichever is lower". For example during the taxable year we bought raw materials such as cotton piece goods at P1.50 per yard, and at the end of the said taxable year the value of the said raw material (market price) is only P1.00 per yard, hence the unit price as per inventory list should be P1.00 and not P1.50. The question now is that which unit price shall we follow for purposes of determining the cost of raw materials in the computation of the 7% sales tax due on the finished products? Is it correct to follow the unit price of P1.50 per yard in as much as the 7% advance sales tax paid on the said raw materials was based on the P1.50 and not on the P1.00? "We are planning to transfer our factory site from 567-569 Hormiga St., Manila, to Quezon City and in the said factory no sales or transaction will be made. Is it necessary for us to secure two (2) privilege tax receipts one for the factory located at Quezon City and the other at Manila where the finished product is being sold? Which of the two establishments will pay the 7% sales tax on the manufactured product? Are we required to keep separate invoices and books of accounts for the shirt factory? From the view point of investigation and verification of our books of accounts and other records, which has jurisdiction the regional office at Quezon City or at Manila." LibLex xxx xxx xxx In reply thereto, I have the honor to inform you as follows: Articles imported for resale in "as is" condition or to be used in the manufacture of articles subject to the sales tax and are to form part thereof are subject to the advance sales tax, the payment of which is final. For purposes of internal revenue, therefore, articles originally imported for resale may be utilized by the importer in his manufacture or vice versa without effect on his tax status. Accordingly, a person, like yourselves, who is engaged in business both as an importer and manufacturer may utilize a part or all of his importation undertaken in his capacity as importer in his manufacturing business and vice versa. And in the event that the articles imported by him which were originally intended to be resold are used in his manufacturing business and formed part of the manufactured articles, the total cost thereof, which for purposes of the sales tax is the landed cost plus mark-up, is deductible from the gross selling price of the manufactured articles. Being engaged, however, in two different lines of business, that is, as importer and manufacturer, the dispositions of all such importations must be duly recorded and accounted for in your books of accounts, in accordance with duly accepted accounting practices. The diversion of such articles from one line of your business to another need not be invoiced by one to the other because the importer of such articles and the same person who is subject to the sales tax in either capacity, and by his payment of the advance sales tax on such imported articles, which is final, he may thereafter use the same in either line of his business without effect on his tax status. In case raw materials are locally purchased, the deductible cost for purposes of the sales tax is the actual purchase price thereof as established by the corresponding purchase invoices and receipts. Accordingly, if you utilize in your manufacturing business a portion of the locally purchase articles in which you deal under your C-13 privilege tax-receipt, the actual purchased price of such articles is deductible from the gross selling price of the manufactured articles provided they formed part thereof. For purposes of inventory valuation of locally purchased articles, the actual purchase price should likewise be used and not the market value at the time of the preparation of the inventory. Your system of inventory valuation as stated in paragraph 6 of your letter is wrong and should be rectified. If you are to transfer your factory to Quezon City, the factory, if no sales are effected therein, is not required to be provided with distinct and separate privilege tax receipt; but every sales establishment maintained by you, if any, should be provided with distinct and separate privilege tax-receipt. Accordingly, the payment by the main office at Manila of the privilege tax is sufficient. Since, to all intents and purposes, the principal place of business is in Manila, the Manila Regional Office has jurisdiction over you. The factory in such case need not also be provided with separate set of books of accounts. LLphil Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue