The Manufacture of Local Inventions, Utility Models or Industrial Designs Exempt from Taxes during First 5 Years from Date of First Sale

October 29, 1986 BIR RULING NO. 227-86 24 000-00 227-86 Gentlemen : This refers to your letter dated September 5, 1986 requesting reconsideration of the ruling contained in our letter to you dated May 28, 1986 to the effect that your exemption under Republic Act No. 3850, as amended by P.D. No. 1423 "does not include taxes incurred by you if the products are utilized in your construction business because, in such case, you did not sell the patented article." Hence, this Office further ruled therein that "you are subject to income tax as well as the contractor's (not sales) tax on your gross receipts which include the cost of the materials consisting of the patented products supplied by you." cd It will be recalled that under BIR Ruling No. 145-85 dated August 26, 1985, this Office ruled that your tax exemption under the aforesaid law for a period of five years starting from January 1982 "does not include taxes incurred resulting from the use of the patented products in the construction of buildings or edifices either by MCI or by other persons;" and that the said ruling was modified in our letter to you dated May 28, 1986 to the effect that "the exemption also holds even if your customers utilized the said patented products in their construction business, because in such case, the products are sold by you before they are used." However, the above ruling now under reconsideration was reiterated in our said letter dated May 28, 1986. In support of your above request for reconsideration, you contend that your patented products are different from the usual patented articles such as hollow blocks, oven or the like, which are manufactured first, sold to customers and then installed in construction; that the subject of your letters patent, are unique in the sense that after you entered into a contract to manufacture/construct with a customer, you manufacture your patented products as already the construction itself . The act of construction is in itself the process of manufacturing your patents. Thus, "To illustrate, we take first the case of our patented Concrete Bulb Footing (U.M. Pat. No. 13456). Our process of manufacturing our patents include the excavation of the ground, placing of reinforcement and pouring of concrete, all of which must be done "in sitio" as integral part of the construction of a house or building. The same is true with our patented Concrete Thin Slab on Plunger Piles Structure (U.M. Pat. No. 13449), as it is also with our Elliptically Vaulted Thin-Shell Concrete Module (U.M. Pat. No. 2436) consisting of integrated footings, continuous walls, roofs and ceiling, all of which has to be done at site as integral part of our construction. It would be impractical if not impossible for us to manufacture our patents as an article separate from the construction for this would defeat the very object of our invention." Investigation conducted by an examiner of this Office disclosed that your main business is to manufacture products covered by your patents and said products are used in your construction of buildings or edifices in accordance with a general building contract entered into by you with your customers and/or clients; that for the year 1982, you kept accounting records covering the manufacture and/or production and sale of products where you made use of your patents; that these records are separate and distinct from records covering the sale and cost of sales of materials of your construction projects which are not covered by your patents, and that on your construction projects where you did not use any of your products covered by your patents, you were subjected to income tax and to the 3% (now 4%) contractor's tax on your gross receipts. cdti In reply, I have the honor to inform you that, after a further study, this Office finds your request to be meritorious and hereby grants the same. Under the provision of Section 12 of Republic Act No. 3850, as amended by P.D. No. 1423, which provides: "Sec. 12. To promote and encourage the manufacture of local inventions, utility models or industrial designs, their manufacturers shall be exempted from taxes, license fees and permit fees, except customs duties and charges on imports during the first five years from the date of the first sale, subject to the rules and regulations of the Department of Finance. . . ." the manufacture of local inventions, utility models or industrial designs is exempted from taxes during the first five years from the date of first sale. In other words, the tax exemption holds in respect of the manufacture of the patented products and not only upon the sale thereof. Such being the case, the exemption is not confined merely to the sales tax which is incurred upon the sale of the patented products. In the instant case, it appears that the patented products are manufactured in the construction site and used as integral parts of the building and edifices under construction by you. Since in the building construction, you are a contractor whereby you furnished the labor and the materials consisting mostly of the patented products, you are subject to the contractor's tax based on the gross receipts which consist of the cost of labor and the materials. However, since the manufacture of the materials furnished by you consisting of the patented products is covered by the exemption abovementioned, the cost of said patented products shall not form part of the gross receipts subject to the contractor's tax. Moreover, your income from the patented products shall not form part of your gross income subject to income tax. The cost of the patented products shall mean all the expense incurred which are necessary for said products to come into existence in the construction site. cdt Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner