VAT Ruling No. 009-06

August 2, 2006 VAT RULING NO. 009-06 Sorosoro Ibaba Development Cooperative Sorosoro Ibaba Batangas City Attention: Mr. Rico B. Geron General Manager Gentlemen : This refers to your letter dated May 25, 2006 requesting for exemption from the Value-Added Tax on Sorosoro Ibaba Development Cooperative's (hereinafter "the cooperative") importation of two (2) units of generator sets to be used for the construction of a biogas digester. It is represented that the cooperative is an agricultural multi-purpose cooperative organized and existing under Philippine laws; that it presently has 9,000 members who are mostly engaged in livestock production that affects the environment; and that it transacts business with members only. It is further represented that the cooperative is now currently focusing on addressing and preserving the environment through the proper disposition of animal wastes: that one of its perceived solutions is through the construction of a biogas digester, and because of which, it imported two (2) generator sets from the United States, which arrived last April 8, 2006: and that the Revenue Region Office of Manila denied the cooperative's application for Authority to Release Imported Goods (ATRIG) due to its failure/refusal to pay the VAT, despite its "tax exemption certificate". Based on the foregoing, you are, in effect, requesting for a ruling on the status of the cooperative's importation of the two (2) generator sets under our present VAT and other internal revenue laws. In reply, please be informed that Section 7 (L) of Republic Act No. 9337, which reiterated in toto Section 109 (r) of the Tax Code of 1997, states: Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows: "Section 109. Exempt Transactions (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the Value-Added Tax: AHaDSI xxx xxx xxx (L) Sales by Agricultural Cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce (emphasis ours). xxx xxx xxx It is clear in the aforecited provision that in order for importation by agricultural cooperatives of farm inputs, machineries and equipments to be exempted, it must be used or proposed to be used, directly and exclusively in production and/or processing of their produce. Since the importation of the two (2) generator sets is intended to be used as components of a biogas digester, a machinery designed for the processing and "environment-friendly" disposition of animal wastes, said importation does not meet the stringent requirements set by Section 109 (L) for VAT-exempt importation. While Section 109 (L) speaks of machinery and equipment directly used for production and processing, the cooperative's imported machine is to be used as component in another machine designed for disposition of animal wastes. The disposition of animal wastes cannot, by any stretch of imagination qualify as "production or processing" of the cooperative's produce. It bears to stress that the law categorically states that the machinery or equipment must be "directly and exclusively used" in the "production and/or processing" of the cooperative's produce. It appearing that the biogas digester is not for processing of livestock, or any of the cooperative's produce, or that the said digester will even produce anything, the machine cannot qualify as a VAT-exempt importation. Fax exemptions are construed in strictissimi juris against the persons claiming such exemption. Failure to measure with the conditions for exemption must necessarily result to the denial of the claim for exemption. In view of the foregoing, your request for ruling declaring that the cooperative's importation of two (2) generator units is exempt for VAT is hereby DENIED. Consequently said imported goods should not be issued an ATRIG without the payment of VAT on said importation. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner