Dooc Cuñada Miranda & Ebbah

November 3, 2003 SEC OPINION NO. 49-03 Dooc Cuada Miranda & Ebbah Law Offices 4th Floor Philamlife Building United Nations Avenue Ermita, Manila City Attention: Atty. Basilio O. Visaya, Jr. Gentlemen : This relates to your letter dated July 4, 2003 requesting the opinion of this Commission on whether the bundling and sale of pre-paid phone airtime with personal accident and health insurance products constitute "retail trade" within the purview of Republic Act (R.A.) No. 8762, otherwise known as the "Retail Trade Liberalization Act" (hereafter referred to as "Act"). You represented that your client, the Philippine American Life and General Insurance Company ("Philamlife"), is a domestic foreign-owned company with a paid-up capital of One Billion Seven Hundred Twenty Five Million Pesos (1,725,000.000.00). As part of its marketing strategy, Philamlife intends to offer to the general public personal accident and health insurance products bundled with Smart Communications, Inc. ("SMART") pre-paid airtime known as E*Smart Load. Under the scheme, interested parties will be required to fill up company information cards and pay an amount equivalent to the insurance premium plus the price of the E*Smart Load. It is your position that the proposed sale and bundling of E*Smart Load with your insurance products will not constitute "retail trade" because: 1) the E*Smart Load is an intangible property, dissimilar to other tangible products the utilization of which would result in its "immediate destruction, gradual decay or deterioration or transformation into other goods"; and 2) the sale of the E*Smart is incidental to Philamlife's business activity. aIAHcE Your request was endorsed to the Office of the Insurance Commission (OIC) for comment. In its letter (2nd Endorsement, September 26, 2004) to this Commission, the OIC advised that the proposed "product offering of Philamlife might violate Section 299 of the Insurance Code in that it may permit persons to solicit insurance business without the proper license from this office." Sec. 3(1) of the Act defines "retail trade" as "any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption . . . ." Rule I, Sec. 1(b) of the Implementing Rules and Regulations (IRR) of the Act defines "consumption" as the "utilization of economic goods in the satisfaction of want resulting in immediate destruction, gradual decay or deterioration or transformation into other goods." While the airtime sold as E*Smart is an intangible property, the same constitutes a merchandise, commodity or good for consumption. Note that under the Act, there is no distinction made between intangible and tangible goods. Cellular airtime derived from E*Smart Load is an economic good the consumption of which results in a satisfaction of a want resulting in the product's immediate depletion (of the load) or destruction. In Balmaceda vs. Union Carbide Philippines, Inc. (124 SCRA 893), the Supreme Court reiterated that "the goods for consumption mentioned in the Republic Act 1180 1 should be construed to refer to the final end (user) of a product which directly satisfy human wants and desires and are needed for home and daily life." As you represented, the sale of the E*Smart Load is intended for the general public who will be the end-users of the product. The sale of the E*Smart load is not any different from the retail by third party retailers of pre-paid cellular phone cards. Thus, E*Smart Load is a merchandise, commodity or good for consumption covered by the Act. TSacCH Neither does the sale or bundling of E*Smart Load constitute an exception to the Act and its IRR, specifically Rule I, Sec. 2 (c). 2 You claim that the sale of the E*Smart load is merely incidental to your client's main business and that it is allowed under the company's secondary purposes. The Commission in several opinions has held that the act of a corporation engaging in the sale of merchandise as an incident to its primary purpose does not constitute retail trade . In one case, the Commission held that the operation of a pharmacy by a hospital to cater to its patients does not constitute "retail trade" under the Act. This rule is based on the exception granted under R.A. 1180 which excluded the operation of a restaurant by a hotel owner or keeper from the term "retail business". This exception in R.A. 1180 is reiterated in Sec. 3 (1) of the Act ( see SEC Opinion dated November 13, 2002, Attys. Fider and Gacutan ). Thus, in another case, the Commission applied the same principle when it decided that the sale by SMART of cellular phone units and related devices and accessories to the public was not considered "retail trade" because such sale is incidental to the primary purpose of a telecommunications operator and is not itself pursued by the telecommunications operator as an independent business ( Ibid., p. 2 ). The principle of the above exceptions, as liberally applied by the Commission in similar cases, does not find application in your case. The sale of E*Smart load is not even remotely related or usually associated to the insurance product being offered by your client. In fact, the price of the E*Smart load is not integrated with the price of the insurance product; customers will have to pay the price of the E*Smart Load in addition to the price of the insurance product. Neither is the sale of the E*Smart Load incidental or related to your client's primary line of business, which is insurance. Thus, we rule that the sale by your client of the E*Smart Load with its insurance products is covered by the term "retail trade" under the Act. Lastly, to reiterate the comment of the OIC, should the company proceed with the sale of the above product, compliance with the requirement of Sec. 299 of the Insurance Code must be strictly observed. Very truly yours, (SGD.) RUSSELL I. ILDESA OIC, Office of the General Counsel Footnotes 1. Retail Trade Nationalization Law. 2. SECTION 2. Sales Not Considered As Retail . The following sales are not considered as retail: (a) Sales by a manufacturer, processor, laborer, or worker, to the general public of products manufactured, processed or produced by him whose capital does not exceed One hundred thousand pesos (P100,000.00); (b) Sales by a farmer or agriculturist selling the products of his farm, regardless of capital; (c) Sales arising from restaurant operations by a hotel owner or inn-keeper irrespective of the amount of capital, provided, that the restaurant is incidental to the hotel business; (d) Sales to the general public, through a single outlet owned by a manufacturer of products manufactured, processed or assembled in the Philippines, irrespective of capitalization; (e) Sales to industrial and commercial users or consumers who use the products bought by them to render service to the general public and/or produce or manufacture of goods which are in turn sold by them; or (f) Sales to the government and/or its agencies and government-owned and controlled corporations. (Emphasis ours.)