Denatured Alcohol Withdrawn from a Registered Distillery or Bonded Warehouse Free from Tax

August 11, 1958 BIR RULING NO. 438-58 3rd Indorsement Respectfully returned, thru the Revenue Operations Executive (Assessment) to the Chief, Alcohol and Prohibited Drugs Division, B.I.R., Manila, the within papers relative to the request of Mr. Primitivo A. Cuenca, Purchasing Agent of E. R. Squibb & Sons Philippine Corporation as to whether or not ethyl alcohol denatured under the formula of "To every 100 gauge liters of ethyl alcohol of not less than 180 proof, there shall be added five (5) liters of methyl Alcohol" to be used exclusively for cleansing equipment and as a binding agent in the granulation of tablets, is subject to specific tax in the light of the recent decision of the Court of Tax Appeals in the La Tondea case. cdll In accordance with Section 128 of the Tax Code, denatured alcohol may be withdrawn from a registered distillery or bonded warehouse free from tax for the purpose of being used, among others, generally in the industries. In the La Tondena case, the Court of Tax Appeals held that the exemption refers to denatured alcohol used in the operation of industries and not to denatured alcohol to be used merely as an ingredient in the manufacture of another product. The resolution of the question raised in this case hinges therefore on the question of whether or not denatured alcohol used in the cleansing of the equipment and machinery of the taxpayer and as the so-called binding agent in its manufacture of medicinal tablets is considered used in the operation of its industry. In his memorandum dated June 8, 1958, the Chief of the Laboratory Section stated that "in the manufacture of either multi-vitamins or antibiotic tablets, the process begins with the starting material being moistened with the special denatured alcohol in order that the ethyl cellulose in the material will act as a binding agent during granulations." Finally, he stated further, "the tablets are glazed or coated with a shellac preparation containing special denatured alcohol which acts as the solvent". Obviously, the special denatured alcohol is mixed with other materials in the manufacture of the medicinal tablets and, therefore, formed part thereof. The fact that the alcohol evaporates totally in the process of manufacture will not alter its status as an ingredient in the manufacture of the medicinal tablets. The special denatured alcohol thus used cannot, therefore, be exempted from tax. The phrase "used in the operation of industries" is difficult to define. The word "operation" is defined as an "act of operating or putting into or maintaining in, action, as the operation of a machine, railroad, etc" (Webster's International Dictionary). Applying the meaning of the word, the phrase "used in the operation of industries" may be considered to mean such use as is necessary to keep the industry in motion or in action. The cleansing of the machinery or equipment of an industry is essentially an act necessary to maintain the machinery or equipment in working condition. This act of cleansing, therefore, necessarily constitutes one of the several factors to keep an industry in motion because if the machinery refuses to operate, the industry likewise cannot operate. We hold, therefore, that the special denatured alcohol used in cleansing the machinery and equipment of the taxpayer is deemed used in the operation of its industry and, therefore, except from the specific tax. LLphil (SGD.) MELECIO R. DOMINGO Acting Commissioner of Internal Revenue