VAT Ruling No. 036-92

March 17, 1992 VAT RULING NO. 036-92 NIRC Sec. 103 (a) Precedent Ruling BIR Ruling 127-88 Northern Cotton Corporation 1172 Pasong Tamo Street Makati, Metro Manila Attention: Ms. Emerlinda Cabusao Gentlemen : This refers to your letter dated May 11, 1990 requesting confirmation of your opinion that you are a primary producer of cotton and that your sale thereof is not subject to value-added tax. It is ascertained during the VAT Review Committee meeting on December 10, 1990 that you are a domestic corporation engaged in the production of cotton; that your method of production, involves identifying a suitable land and entering into a cotton growing agreement with each contiguous landowner-farmer whereby you provide the farm inputs like fertilizers, seeds, pesticides, and operational costs in land preparation, planting, irrigation, and harvesting; that whenever necessary you provide the pump, fuel, maintenance cost and sprayers to the farmers; that you also hire field technicians who supervise the farmers in all aspects of cotton production from land preparation to harvesting; that the average cost for all of the above inputs is between P7,000 to P10,000 per hectare; that under your contract growing agreement for every 1,000 kilos of cotton, the farmers-landowner receives the amount of P7,000.00 which is referred to as the consideration for the use of the land. Moreover, it was orally represented during the deliberations that in case of damage to your cotton crop, you shoulder all the loss. Field verification report disclosed that the schedule of purchases for the calendar years 1988 and 1989 duly signed by the company's bookkeeper show the detailed breakdown of purchases covering such items as rental, insecticides, fertilizers, and costs for land preparation. In reply, please be informed that under Section 103(a) of the Tax Code sale of nonfood agricultural, marine and forest products in their original state by the primary producer or the owner of the land where the same is produced is exempt from value-added tax. Primary producer is one who, pursuant to a joint undertaking to produce an agricultural product, contributes one or more items of production. He may be the landowner, tiller-landowner, investor/contributor of the essential items of production like seeds, fertilizers, pesticides, technical expertise, land preparation and harvesting. Since field verification report has confirmed that the account for "Purchases" indicated in your income tax return cover outlays of such items as rentals, insecticides, fertilizers, and costs for land preparation, your contract growing agreement with the farmer-landowner is indicative of a co-production arrangement with the latter which makes you a co-producer of cotton raised by the farmer-landowner. Accordingly, we hereby confirm your opinion that you are a primary producer of cotton; hence, your sale thereof is exempt from value-added tax pursuant to Section 103(a) of the Tax Code. Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue