Percentage Tax Case of Sun Ripe Coconut Products, Inc.

June 24, 1959 BIR RULING NO. 331-59 3rd Indorsement Returned to the Chief, Investigation Division, B.I.R., Manila, the percentage tax case of Sun Ripe Coconut Products, Inc. with clarifications on the application of the exemption under the proviso of section 189 of the Tax Code. The facts of the case are as follows: cdtech The taxpayer in a domestic Corporation engaged in the manufacture of coconut oil, desiccated coconut and copra cakes. During the period from 1953 to 1956, the taxpayer removed from its factory desiccated coconuts for export and said desiccated coconuts were placed on board foreign vessels by the taxpayer on FOR basis and were consigned directly to foreign buyers. A new issue is raised. It is strenuously argued in this case that inasmuch as the desiccated coconuts are sold to a third person (referring to the foreign buyer), there is an intervening transaction thus depriving the taxpayer the benefit of exception, for, in effect, it is contended that it is the foreign buyer who exported the desiccated coconuts and not the taxpayer. This contention is presumably based on General Circular No. V-140, publishing Republic Act No. 822, which amends the first paragraph of section 189 of the Tax Code. But before we delve into the problem, let us clarify the basis of this circular. The pertinent provisions of section 189 are quoted hereunder: "SEC. 189. Percentage tax upon proprietors or operators or rope factories , sugar centrals , rice mills , coconut oil mills , corn mills , and desiccated coconut factories , proprietors or operators of rope factories, sugar centrals, rice mills, coconut oil mills, corn mills and desiccated coconut factories shall pay a tax equivalent to two per centum of the gross valued in money of all the rope, sugar, rice, coconut oil, ground or milled corn, and desiccated coconut manufactured or milled by them, including by-products of the raw materials from which said articles are produced or manufactured, such tax to be based on the actual selling price or market value of these articles at the time they leave the factory or mill warehouse: Provided , however , That this tax shall not apply to coconut oil, and the by-products of copra from which it is produced or manufactured, and desiccated coconuts if such oil, copra by-products and desiccated coconuts shall be removed for exportation and are actually exported without returning to the Philippines, whether so exported in their original state, or as an ingredient or part of any manufactured article or product. xxx xxx xxx The law above cited clearly indicate that the tax prescribed therein is a tax on the privilege of milling certain articles into consumable goods. The law imposes a 2% tax on the proprietor or operator of the mill where the product so milled is removed for local consumption. If, however, the product milled is removed for exportation and is actually exported without returning to the Philippines, the law exempts the proprietor or operator of said mill from the 2% tax. As may be seen, the removal of the product milled in the generating force in the imposition of the tax in question. The sale is immaterial. True, that there may be a sale of the milled product, but this is only expected of a miller to sell its product. As a matter of fact, even if no sale is made, the tax will still be due on the basis of the market value of the goods removed provided that the removal is for local consumption. Under the proviso of said section, there are only two requisites mentioned in order that the benefit of exemption may be availed of. First, the product is removed from the factory for exportation and second, that it is actually exported without returning to the Philippines. Accordingly, if the intention to export the product is not evident at the time of its removal, such a removal is deemed to be a removal for local consumption. Now bearing in mind the requisites provided for in the proviso as the criteria, the question as to where the sale is consummated or when title passes consequently does not supply a decisive factor in the application of the exemption. Furthermore, the law itself does not require that the transfer of title to the product must take place outside the Philippines in order that the removal may be exempt under the proviso of section 189. To introduce the question of where the sale is consummated is to inject an element which is entirely foreign to the issue of exemption. If the tax were one of sales, we would readily agree that the sales in order to be taxable in the Philippines must be consummated here. The question now is must the exporter be the manufacturer of the product removed for exportation? If we were to consider the proviso alone, it will lead us to the conclusion that so long as the product is removed for exportation and is actually exported without returning to the Philippines, the exemption will apply, irrespective of who is the exporter. But one must not lose sight of the fact that section 189 is a tax primarily imposed on proprietors or operators of mills. Inasmuch, therefore, as the statute prescribes the liability of the proprietors or operators of mills, the proviso exempting them from liability under certain conditions must necessarily be complied by them. Furthermore, the functions of a proviso is only to limit or restrict the application of a statute. This theory is supported by General Circular No. V-140, the pertinent provisions of which are quoted hereunder: cdt ". . . Under the amendment, desiccated coconuts removed for exportation and are actually exported without returning to the Philippines, whether so exported in their original state, or as an ingredient or part of any manufactured article or product, are not subject to the percentage tax prescribed by said section 189 of the Tax Code. In order that the desiccated coconuts mentioned above may be exempted from the aforesaid tax, there must be no intervening transaction between the removal from the factory or warehouse of the desiccated coconuts and the exportation thereof . Thus , where the desiccated coconuts are removed from the factory or warehouse and sold to a third person who exports the same , the said desiccated coconuts are subject to the percentage tax prescribed by section 189 of the Tax Code. Consequently, the benefit of exemption under the amendment can be availed of only by the manufacturer of the desiccated coconuts or original owner thereof, . . ." (Emphasis supplied) Upon a careful consideration of the facts and the law, we can hardly see how the foreign buyer can be considered a "Third person". This is for the reason that when we speak of a "third person" we mean persons who have not intervened in the execution of the document. The taxpayer and the foreign buyer are the parties in this transaction and the desiccated coconuts are shipped directly to the foreign buyer. The term "third party" is aptly defined to mean thusly: "In the singular the term 'third party' and 'third person' are defined as meaning one who is neither a party nor a privy to an act, deed or record; and in the plural, as all persons who are not parties to the contract, agreement or instrument of writing by which their interest in the thing conveyed is sought to be effected . . ." (C. IS, Vol. 86, p. 781) Considering, therefore, that the taxpayer's desiccated coconut were actually removed from its factory pursuant to a contractual obligation to export the same to foreign buyers, and considering further that the taxpayer actually exported the same without returning to the Philippines, it is believed that the taxpayer should not be held liable for the miller's tax imposed by section 189 of the Tax Code, irrespective of shipping arrangements. In resume, it may be stated that the following requisites must concur in order that the benefit of exemption may be availed of: (1) There must be a removal of desiccated coconuts for exportation; (2) The desiccated coconut must actually be exported without returning to the Philippines; (3) There must be no intervening transaction between the removal from the factory or warehouse of the desiccated coconuts and the exportation thereof, thus the exporter must himself be the manufacturer or original owner of the desiccated coconuts. (SGD.) JOSE ARAAS Commissioner of Internal Revenue