Income Tax Liability on the Proceeds of the Sales of Consigned Goods

May 4, 1959 BIR RULING NO. 254-59 Allied Manufacturing & Trading Co., Inc. Bonifacio Drive cor. 20th Street (Ground Floor) Port Area, Manila Attention : Mr . George Schulze Gentlemen : Reference is made to your letter dated April 15, 1959 requesting a ruling as to the liability of your principals, Messrs. Farbenfabriken Bayer, A.C., Leverkusen-Bayerwerk, West Germany, for income tax on the proceeds of the sales of consigned goods. You elaborated on your mode of operations as follows: "Prior to our requesting our principals to consign the goods to us for storage in such a Bonded Warehouse in Manila, we would naturally have in our possession purchase orders from each individual factory or farm management in the Philippines doing business with us, covering such part of their material requirements for say a period of six months as we are in a position to bring in for them. Naturally, such purchase orders between our firm and the corresponding management will bond them to pay for these goods, subject only to the actual import allocations that will be granted to them by the Central Bank." xxx xxx xxx "In accordance with the present import and exchange control regulations a letter of credit in favor of the foreign supplier can not be opened by the manufacturing or agricultural firm concerned until after the corresponding recurrent or non-recurrent dollar allocation has been granted and released by the Central Bank. This regulation will be fully complied with under our Bonded Warehouse plan. "But instead of having to wait 60 to 90 days for the industrial; or agricultural materials to arrive in the Philippines, the firm that opened the letter of credit can draw within a few days those materials from our Bonded Warehouse, upon presentation to us of a copy of the letter of credit duly authenticated by the authorized Agent bank of the Central Bank and after our receipt of confirmation and acceptance of that letter of credit from the foreign supplier." In reply thereto, I have the honor to inform you as follows: In your projected transaction, it appears that the German corporation will consign to you its products in advance, which you will store in a bonded warehouse. You will sell the goods thus consigned to designated local buyers. These buyers, as stated, need not have the required dollar allocations from the Central Bank in the meantime. It is enough that a purchase order be made. Upon arrival of these goods in the Philippines, the withdrawal of the same will have to be preceded by the following transactions: (1) Actual import allocations that will be granted to the buyer by the Central Bank, and (2) Confirmation and acceptance of the letter of credit by the foreign supplier. lexlib Under the foregoing circumstances, it is obvious that no perfected sale between the German Corporation and the local customers has yet been made when the goods are exported to the Philippines. All the transactions which will lead to the perfection of sale and the eventual transfer of title will have to transpire in Philippine territory. In other words, the transaction with respect to said products is a sale in the Philippines of products already in the Philippines. This is not a case of ordinary importation by the buyer. The term importer does not include a person who purchases goods from an importer after they have been brought within the boundaries and jurisdiction of this country. C.J.S. Vol. 42, p. 408). The importer is the primary consignee to whom the goods are sent, and who himself presents the invoice, makes the entry, receives the bill of lading and gets the goods (Ibid). In your case, the goods are consigned to you, not to the buyer which negates proof of importation by the latter. And considering that the goods are imported by you and not by the buyer, the logical conclusion is that the sale is to be consummated in the Philippines. The fact that the goods are consigned to you for sale, also has a bearing in determining when and where the title to the goods passes from the seller to the buyer. The word "consigned" carries an implication that title to the goods is retained by the consignor; it implies an agency where the property consigned is merely intrusted or committed for sale. This is so in your case where, as stated, you accept the goods to be stored, the intention being that you, as the consignee, shall sell the same when so instructed by the consignor and the right to control the goods is, at all time, with the consignor. It is only when payment and its subsequent delivery are made shall title to the goods pass to the buyer. Inasmuch as both payment and delivery are to be made in the Philippines, title thereto will therefore be vested in the buyer in the Philippines. Further proof of the fact that title to the goods is retained by your principal, the consignor, even after importation thereof into the Philippines is your own admission that in the event the designated buyer cannot secure the necessary dollar allocation from the Central Bank, the goods allotted to that buyer will be sent back at the expense of your principal. In view of all the foregoing, it is our opinion that the income derived by your principals from the sale of consigned goods in the Philippines is subject to Philippine income tax pursuant to section 37(e) of the National Internal Revenue Code. casia Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue