Assessment for Deficiency Contractor's Tax Against the Mindanao Motors Corporation, Cagayan de Oro City

May 11, 1959 BIR RULING NO. 266-59 MEMORANDUM FOR: The Commissioner: This refers to a proposed assessment for deficiency contractor's tax in the sum of P12,770.00 against the Mindanao Motors Corporation, Cagayan de Oro City. cdll The issue submitted for resolution in this case is whether or not the cost of spare parts is includible in the taxable gross receipts of the corporation. The established facts of this case are as follows: The corporation maintains a repair shop for motor vehicles. It also maintains an independent spare parts department which sells to the general public indiscriminately and which is provided with C-13 privilege tax-receipt. Job orders received by the corporation cover both labor and materials. It requisitions materials for use in repairs from its spare parts department. The spare parts department issues the corresponding receipt for such requisition. For every job order accomplished, the corporation issues a single invoice billing the customer separately for labor and materials. The corporation has been declaring only the costs of labor for the 3% tax. The facts of this case fall squarely within the purview of the time-honored ruling of the Bureau which is quoted below: "If an owner of a vehicle, independently of the contract for the repair thereof purchased from the Spare Parts Department of the same company the spare parts needed in the repair; that the spare parts in stock in the Spare Parts Department are offered for sale indiscriminately to the public and not for exclusively use or requisition by the Repair Shop Department; that the advance sales tax prescribed in section 183(b) of the National Internal Revenue Code, as amended by Republic Act No. 594, had been paid thereon; and that the service job invoice issued by the Repair Shop Department to the owner of the vehicle covers only the amount charged for the service rendered in the repair, the gross receipts of the company, for purposes of the contractor's percentage tax prescribed in section 191 of the National Internal Revenue Code, as amended, shall be the amount charged for labor, exclusive of the value of the spare parts directly purchased by the owner of the vehicle from the Spare Parts Department." (BIR Ruling 105.802, Aug. 2, 1951). To our mind, while the customer did not personally purchase the spare parts from the spare parts department, nevertheless, the requisition made by the corporation is essentially made for the customer, provided that the customer is made to understand that he is billed separately for the actual cost of the materials to be acquired from the spare parts department and separately for labor. There is no doubt that a customer could be made to purchase the materials himself, but certainly, for convenience and expediency, the corporation may do it for him. Moreover, the corporation is engaged in two lines of businesses, for which it is separately subject to tax, pursuant to section 178 of the Tax Code. It is but proper, therefore, that the transaction of the spare parts department should be separately effected. prcd In view of the foregoing, it is our opinion that the proposed assessment based on cost of materials is not proper. It is, therefore, recommended that this case be considered closed and terminated. Respectfully submitted, PRISCILLA R. GONZALES Acting Chief , Law Division Recommendation, Approved: Disapproved: JOSE ARAAS Commissioner of Internal Revenue