Interpretation of the Phrase "And are to Form Part Thereof" in the Clause Found in Secs. 183(b) and 190 of the Tax Code

June 23, 1960 BIR RULING NO. 270-60 MEMORANDUM FOR: The Commissioner Prior to September 3, 1959 when we promulgated BIR Ruling No. 451, it was the consistent position of this Office to exempt all imported articles for use in the manufacture of articles subject to the specific tax from the advance sales or compensating tax whether or not the imported articles go into the manufacture of the finished articles or used in containers or the like of the manufactured products provided that such containers or the like are disposed of together with the manufactured products. Starting from September 3, 1959, this Office took the position that imported articles used in the manufacture of articles subject to the specific tax are exempt from the advance sales or compensating tax only when the imported articles actually go into the mixture of the finished product. This change of position brought instantaneous protests from the taxpayer's concerned. cdi This present ruling poses some difficulty in implementation. This is particularly true in the case of tobacco products. There are materials for instance that do not actually go into the mixture of manufactured cigarettes but affects the rates of tax on said products. Because of this situation we have been allowing the release from customs free from the advance sales or compensating tax of cellophane, tinfoil, cartons and tin cans because these articles affect the rate of tax on cigarettes. But other articles, such as printing paper and glue are subjected to the advance sales tax because they do not affect the rates of tax. This situation is a clear indication of the vulnerability of the present ruling. It clearly shows the weakness of the premise of the ruling. The law involved in the instant conflict is the clause found in both sections 183(b) and 190 of the Tax Code reading as follows: "The tax imposed in this section shall not apply to articles to be used by the importer himself in the manufacture or preparation of articles subject to specific tax or those for consignment abroad and are to form part thereof". The crux of the controversy consist of the interpretation of the phrase "and are to form part thereof." It is the view in the present ruling that the phrase "and are to form part thereof" means that the imported articles must physically be merged or mixed with the finished products. There is actually not much to explain in determining the purview of the phrase in question because our Supreme Court had already spoken on the subject in the case entitled "Central Azucarera Don Pedro vs. Central Bank of the Philippines, G.R. No. L-7731, promulgated on September 29, 1958. The law involved in this case is Section 3 of R.A. No. 601 which reads "The tax collected on foreign exchange used for the payment of the cost, transportation and/or other charges incident to importation into the Philippines of articles or containers used by the importer himself in the manufacture or export abroad shall likewise be refunded upon satisfactory proof under said rules and regulations that said imported articles or containers were actually used in the manufacture or preparation of such local products, forming part thereof, and that said local products have been actually exported". It is to be observed that the above-quoted provisions of law is similar in substance, purview and spirit as the clauses in question in sections 183(b) and 190 of the Tax Code, quoted elsewhere in this memorandum. In this cited case, the Supreme Court held . . . "the question to determine is whether under the provisions of section 3, Republic Act No. 601, the Hessian (Fiji) cloth, upon which a special excise tax was assessed and imposed, when converted into bags to contain centrifugal sugar exported to the United States, comes under the exception to the general intent and purpose of the law. If the imported (Fiji) cloths in question were not containers because cutting and sewing were to be done to convert them into bags, then the same could be deemed as articles used by the importer in the manufacture or preparation of the centrifugal sugar to be exported abroad, as long as said articles "formed part" of the centrifugal sugar which was actually exported. Even if the imported Hessian (Fiji) clothes were not used by the imported in the manufacture of the centrifugal sugar, yet it was used in the preparation of such sugar for consignment or export abroad. The term "forming part thereof" does not mean that the imported article should be merged into the local product by mechanical process, or physically or materially mixed, or chemically combined, so as to lose its identity. It means that the imported article is needed to accomplish the export abroad of the product locally manufactured. Until bottoms are built or space or room is provided in ocean-going ships to carry in bulk the sugar to be exported, the bags of whatever fiber used to contain the centrifugal sugar forms part of the centrifugal sugar locally manufactured to be consigned or shipped abroad." The doctrine enunciated is so clear and requires no further elucidation. On the basis of this decision, it is believed that the former ruling should be revived and the later one revoked which we are respectfully recommending. (SGD.) MOISES A. PILAR Acting Chief, Law Division APPROVED: DISAPPROVED: (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue