Sqpublic of the Lulippinss Court of Tax Appeals Ori City Usiphil, Inc. vs. | Commissioner of Internal Revenue

DECISION

These are two (2) petitions for review (CTA if Cases Nos. 3054 and 3084) filed by petitioner, Usiphil, Inc., against respondent Commissioner of Internal Revenue seeking the refund of the amounts of B44,451.48 and B913,067.38 as 7% manufacturer's sales. taxes it paid for the last quarter of 1977, and for the years 1978 and 1979, reaiworiueny.

The facts and issues being the same, these cases were jointly heard by the Court.

3¢I- A

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DECISION -

CTA CASES NOSe

3054 ·& 3U84

- 2 - Petitioner is a domestic corporation org,aniz.ed and existing under. and by v irtue of. the: l aws of the Republic ox. the~ Philippi nes . It has i ts prin- cipal place of business at Buendia Avenue , Makati , Metro Manila .

According t o the records (pp . 58- 59 , CTA r ec .) _of. these cases , the facts as shown therein are as f ollows:

"The petiti oner , f or the l as ~ quarter. of 1977 and for the years 1978 and 1979, had f.iled on a quarterly basis, Business {Percentage ) Tax Returns. In- cluded in these business tax r e t urns are the manufacturer • s percen tag;e t axes.

XXX

XXX

XXX t he petitioner paid t he amounts due thereunder , i ncluding manufacturer ' s percen tage taxes . "The manufacturer ' s taxes that. the petitioner. paid for the last. quartex: of 1977 and. for the years 1978 and 1979 pertain to the sales of the r econditioned component. assemblies of tractors under its Parts Exchange Service Program . The petitioner's Parts Exchange Service Program {PES Program) is a program supporti ng) the sales of cater.pillar t .ractors , mach ineries and heavy equipment which are being i mported from the u . s. and J apan i n pursuit of its trading business.

Similarly, brand new replacement parts for these tractors, heavy machi neries and equipment are being i mported from the u.s.A . and Sing.apore. Aside from making available brand new r eplacement parts, peti tioner pursu i ng and implementing its PES Progr am , also sells reconditi9ned component assemblies which it. had repaired. "

On account of the above stated activi t ies , petitioner paid the amount of ~4 4,4 8 1. 48 as 3<6"1-13

DECISION -

CTA CASES NOS~

3054 "& 3084 - 3 - manufacturer's sales tax for the last quarter of 1977 as evidenced by Revenue Tax Receipt No . 173863 53 i ssued by the Central Bank of the Philippine s dated January 12, 1978.

However , at a l ater date, upon adv ice of its ext ernal audi t.or, it filed with the Commissioner of I nternal Revenue a cla i m for r efund or tax credit f or said amount paid as manufacturer' s sales tax on the ground that pe titioner is not a manu f acturer and, therefore, is not subject. or liable to the manufacturer 's s ales tax for the s aid period.

Subsequently, it filed another claim for refund or tax c red i t with re spondent Commissionex of I nternal Revenue in the amount of P913,067.38 , r epresenting manufacturer 's sales t ax for the years 1978 and 1979 on the s i milar ground that petitioner is not a manufacturer and is no t subject to manu- facturer's sales t ax.

However, inasmuch as no action was t aken by respondent on both claims, petitioner filed the aforesaid pe titions for review . The only i ssue involved in both cases is whether or not under t he f acts of these cases petitioner is a manufacturer, in contemplat ion of Section 187 (x) of. the National Internal Revenue Code, when it r epair s, rebuilds, and/or assembles component

I

DECISION -

CTA CASES NOS .

305·4 ' & 3084 - 4 - as-semblies of ti:1ractors and heavy equipment. acquire~d unde r its PES Program and se~lls the s.ame to its. customers~ In the affirmative , peti tione·r is legally liable for the manufacturer's s.ales ta~ it. had paid dur.ing the periods in question.

If

not, pe~ t.i tioner i s not l iable there~to and i t .s claim for the tax refund or credit of the manu- facturer's sales tax paid is legally in order. In respondent. Commissioner 's answers. to the: petitions for. review in these two (2) _cases., he~ had strongly anchored his position on the: pro'$isions of said Section 18 7 (x) .of the Tax CoQ.e, which he asserted, placed pe ~ ti tioner in the: position of a manufac-turer subject. to manufacturer • s. sale·s, tax.. So that, therefore, as such manufacturer, it is 1 iable to the manu fac tur e·r' s sales taxes which it paid to the gover.:nment .

Section ;J-87 (x.) of the National Internal Revenue Code prov ides as follows: "Manufacturer include:s every pe·rson who by physical or chemical process alters. the exterior texture or form or inner substance of any raw material or. manu- factur ed or. partially manufactured pro- duct in such a manner. as to prepare it for a special u~e or uses to wh ich it could not h a ve~ be:en put in its or ig,inal condition, or w.ho by such process alters. the qualit.y of any such raw mate:rial , or manufactured or partially manufactured product as to reduce it to marketable 3?t ~ D

I

DECISION -

CTA CASES NOS.

3054 ·& 308 4 - 5 - shape or pr.epa.re it. for any uses of i ndustry, or who by a ny such process combines any such lt':aw material or manufactur ed. ox:: partially manufac- tured, products. with other materials or products of the~ same or of dif- ferent kinds and such manner that the finished product. of such proces.s Olt' manufacture: can be put to a spe- cial use or use:s to which such raw material or manufactured or partially manufactured products in the:i:r original condition could not have been put, and who in add,ition alters. such raw material o E manufactured oE partially manufac.tu red products, or combine s the same to produce such finished products for the: purpose of their sale or distribution to others and not f o r his own use or consumption ... During the pendency of these cases be~ folt'e this Court, respondent Commiss ioner of Internal Re:venue olt':dered, under h i s Memorandum Order date:d July 16, 1980 (p. 23, BIR rec.) ~ and also under his ist Imlorseme·nt of Septembe:r 4, 1980, (p. 56, BIR rec.) '· Revenue E.xamine:rs. Celso P. Razal and Apolonio G. Santos to investig1ate the feasibility or nonfe:as- ibility of the claim of Usiphil for the refund or ta~ credit of the amounts. representing manufacturer 1 s: sales ta~es . paid by it for the periods in que~s . tion . Said revenue examiners, upon receipt of the order , firs.t and f oremost, proceeded to, examined and inve:stigated pe·ti1doner 1 s Parts Exchange Serv.ice Program (PES 6 for short)~ documents , shop facilities ,

3~1- E

I

I

I

I

DECISION -

CTA CASES NOS .

3054 & 3084 6 - tools and other equipmentr.s, machineries , demons.- tratio n cut- o uts and the undercarriag1e :re·pair section f ound in the premises of petitioner . After a tho rough adminis.t.r ative investi9ation of these two ( 2 ) .cases (which took them all of the seven (7) ~onths from July to November , 19 80 ) ~ said examiners submitted to the Commissioner of Inte r nal Revenue a thorough and deta i led report dated November 21, 1980 (pp. 18-21, BIR rec .) .the pertinent, relevant a nd mos t i mportant portions of which are quoted below:

"1.

That while the attached Amended Articles of Incorpor ation (Annex "A") appears to au tho r i ze the· taxpayer to engage in several lawfu l activ i ties, it is in fact primarily engaged i n tradins, as sole d is t ribu tor in the Philippines of "Ca terp illar" brand of heavy machine- ries and equipment: it <>Hstr ibutes . On both impor. ta t:ions., xxx xx.x xxx it pays the corresponding advance sales tax.

"It also provides. repa i r serv i ce of the machiner y and equipmen t of their cus- tomers and also acts as broker be twee n f o reign suppl ier s and Philippine customers. xxx xxx xxx it. pays the cor r espond- i ng contractor's tax of 3% and the 6% com- mercial broker ' s tax. xxx xxx .

"2 .

It renders repair. service of the machinery a~d equipment purchased from i t, and also for damaged port i ons thereof , when par t s are brought i n by their c us t omers in their shops . The y also send t echnicians to cond•Jc t .rep a i rs

3 ~~-- F

DECISION -

CTA CASES NOS .

3054 & 3084 - 7 - o f mach i nery and equipment in the field .

Taxpayer supplies the labor and t he replacement parts at the expense oft t he ir cu s tomers . xxx xxx xxx Taxpayer d oes not acquire· ownership of the parts repaired . xxx xxx xxx They p ay t he contractor's t ax of 3% on their. gross receipts therefrom .

"3.

That taxpayer was fou nd to have been paying the manutactu~er ' s sales t ax during the per i od above- mentioned on its sales of r epaired replacement parts it ha~ previously acquired throug,h trade-ins. from i ts customers.

The trade - in of parts and the· r e pai r thereof is part of their PART EXCHANGE SERVICE PROGRAM under the ~ management and c ontrol of the PES De pa rtment of their Product Support Division .

XXX

XXX

XXX

t he r ecords ot thi s Division and from in te-rviews had with Mr . Ernesto Hernandez., the head of said Department, The Program's operation is described as follows: 'Whe n a customer brings in a damaged par t of a heavy machiner y or equipment, the t echnical experts in the re - pair shop examine the extent of the damage.

If it wil l e nta i l extensive repa i rs and r eplacemen t of maJor par t s, the custome r is a l ways advised to either s c rap am:l1 part or have it repaired a t the cus- tomer ' s expense .

The r eason for this is because the com- pany as a .matte r of busine ss policy, does not accep t

QS

trade-in e xtensi vely damag e d parts.

Business experience had taught t hem that such de:als. are not always a paying1

DECISION -

CTA CASES NOS .

3054 & 308 4 - 8 - proposi tion .

It will only accept trade-in parts with mino~ damage that would re- quire slight repairs and replacement parts such as seals, gaskets, bussings , etc.

In exchange of the traded-in parts, the cus.- tomer i s offered a brand new part or a second hand repaired pa~t .

Accordingly, the t.raded,-in parts are re- pai~ed in their shop and carried again in their inven- tories.

As a result , they mainta in inventories of t.wo categor1es, namely, tne brand ne~w pa~ts and the second hand repaired par t s. It was also observed that the brand new parts carry values substan- tially higher than the second hand parts.

"To ve·rify the extent of the· repairs made on traded- in parts and the nature of the r.e:pair s, we worked on their shop records, par ticularly their f1les on "COMPLETED JOB REPORTS".

It clearly show t he CORE VALUE lor traae- 1n value ), THE NEW PARTS CONSUMED , the .

LABOR COST COLUMNS and the

TOTAL COST COLUMNS which are:

selt - explanatory as t he i r t .1 tle s indicate.

We have , ~hexefore, picked a t r andom Lrom their yearly files the enclosea "COMPLETED JOB Rt:P01{TS " marked as Annexe s "F " and "F-1" t o "F-14 " , inclus i ve, to obtain a clear pictur:e of the acqui- sitlon, tieatment, and dis- posltion ot all t he elemen t s involved i n t he operat i on .

"Very clearly, we ascer- t.ained that there is no manu - facturing. activTty 1nvolved .

3<('!--H uEClSION - CTA CASES NOS .

3054 & 3084 - 9 - "4 .

Tha tr. i n the t our of the pre:- mises of t h e taxpayer, we s aw no manu - facturing. faci l it1es exc~t t o r the usual t ools, such as welding equ1pment , plumbi ng t ools , chain bloc ks, various ~anica l and electrical g adge ts c;;.nd severa l hand t ools.

We s a w on deck f o .r r.epairs- at t.he time of our ins - pect ion t urbo chargers, idler compo- nents, torque c-onver teTs, c arr i e r roller. compone.n ts , engine:s a nd he'aViy machinery, transmissions, tr ack frames, cylinder heads as identified by their re-spective "PES" tag.s ."

"As a result, we have come to the conclusion that sub~ct taxpayer. is no t a manufacturer as defined unde:r Se:ction 1 87 (x) of t he Tax Code·.

We butt.ress.

this statement with t he following o bservatio n as summa r iz-ed below : ·a.

The parts accepted as- trade- ins a re· the sl igh t .l y damaged ones and were even usable before i t wa s dis-- mantled except for the reduced mecha- nical efficien~ ;

'b.

The repairs done do not result in a new product. because the part pre.s e nte.d is a finished product by itself ;

'c.

The repairs done do not alter the original form and substance of the parts repaired and do not consign the same part for a sp ecial use other us.es. different from the original one; and 'd.

That they could not have been engaged in manufacturing because they are not. equipped with manufacturing f acilities except for a repair shop as desc-ri bed aoove.

Moreover , quoted hereunder is a ruling of this office ide·n tified as "BIR Ruling, No . 2, Series of 1959" wherein the facts cited wh ich was the basis of the promul- gation of said .ruling fit snugly into the case at bar:

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DECISION -

CTA CASES NOS .

3054 & 3084 - 10 - 'Persons who purchase second hand automobi les which are fairly in running condit i on but who, prior to the resale the·reof, make minor repairs thereon, such as changing minor spare parts with new ones~ repairing minor damages on the body, such as scratches, general cleaning and polishing, which do not affect such changes in the vehicle as to practically remove al l traces of their original appearance are essen- tially dealers subject to graduated annual fixed tax .

We reiterate, therefore, that subject taxpayer~ has never been a manufacturer as contemplated under Section 187 (x) . of the Tax Code.

XXX

XXX

XXX

Premises. c:onsidered, it is 1 the~re­ fore·, recommended that the t0tal ameunt of P95,7 , 518.86 be~ refunded to the tax- payer pursuant to Section 292 in relation to Sect~on 295(3) of the Tax Code, it being an erroneous paymen t."

(Under-

lining ours.)

For his part, and at this juncture, respondent Commissioner of Internal Revenue . seemed to find no merit, not only in the asse rtions of taxpayer , but also in the very findings of his revenue examiners, which strongly and singularly prove and upheld the claims of taxpayer that it is not a manufacturer subjec t to manufacturer's sales tax in these two (2) cases in que:st i on .

Al thoug,h the most recent. on- the - spot investig,at.ion of the premises of peti - tioner USIPHIL , Inc. yield ed negat ive £csult s to !.

DECISION -

CTA CASES NOS .

3054 & 3084 - 11 - the effect that petitione~ was no t found to be a manufacturer by Revenue examiners Celso P . Raza l and Apolonio G. Santos, confirmed i n their ~eport to respondent (supra ) .when they s ta ted that " (taxpayer) .could not have eng)ag.ed in manufacturing facilities except for a repair shop as described above (see also letter "d", p. 19 , BIR rec . , p. 7, thi s Deii:::ision ) '· re~spondent Commis.sioner of Int:.e·rn a l Revenue had pursued or taken a runabout, nay a diamet..r ically opposed, position from that of his· e·xaminers. by s.tating, in effect:" xxx.. that:. Us i phil has. always considered itself as a manufac:turer and has thus bee n paying, the 7% tax on its. tax..able s a les. of completely rebuilt compone nts, assembl ies, machin- eries, engines, and other equipments. xxx.." a nd assumecl that t:.his status and activity of petitioner coulcd· have been" xxx. made· possible only with the use of hig,hly specialized and sophistic:ated equip- ments and by followin g, rigid factory specifications and technology by highly trained personnel." (pp .

103-104, BIR rec . )

It is important to note, in this connection , that in the arguments of the parties in su ppo r t of the i r

r. espect. ive~ claims, r e'spon ci c:',.~ i:..;

u L: t h l2'

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DECISION -

CTA CASffi NOS.

3054 & 3084 - 12 - belie·f that Sectio n 187 (x) _of the National Internal Revenue Code applies to pet i tioner as a manufacturer , while petitioner, on the other hand, says it is not.

The respondent Commis- sioner of Internal Revenue and pet:.it:ioner have· therefol'e drawn tw.o (2) _divergent in t erpretations of said provision to bolster their respective positions.

The Court, at this point, now pauses and view the respective claims of respondent and petitioner from a very ideal vantage point. Counteravailing testimonial evidence however has proven that petitioner sells reconditioned component assemblies or parts which it had pre- viously r epaired.

(pp. 12-17, t.s.n ., Feb. 6, 1981.) The custome r acqu ires through sell the reconditioned component assembly by paying an amount wh ich is equal to the net: of the trade-in value of his worn out: assembly.

The wo rn out assembly shall be acqu ired in return by petitioner which will be repaired on its own account and at its expense; and when fully repa~red or reconditioned, it will be carried in petitioner • s inventory of recondi- tioned component assemblies ready for sale to its next customer having a worn out component (ibid,

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DECISION -

CTA CASES NOS .

3054 & 3084 - 13 - t.s.n.; ibid .. ) . The worn out componen t assembly e :Kehang.ed must be identical to t he one delive'red by petitioner and must be within repairable damage . (pp . 13, 34 , i bid .)

The c omponen t assemblies or parts , referred to above, consist of. c harg,er, t .ruc k r oller s , torque converters, torque dividers, e ng,i ne s , tr-ans- missions , cyl inder heads , track frames, front i dler s, t .rack car .t.ier r ollers, a nd fuel pumps. (p. 1 5 , t. s . n ., i bid) •.

No new products are turne d out after these compnent assemblies have bee n comple te ly repaired and their efficiency r-es tored t o t he maximum.

In the repair of the component assemblies or parts, the usua l ord inary t ools needed for. their repairs are employed and• these t ools and equipment.s used are usually f ound in other r epair shops.

(p. 16 , t.s.n., ibid. ) .

Cont~ari l y , we find no evidence to show the truth of respondent's conclusion that. the component asse:rnblie·s wer-e rebuilt with hig,hly spec:ializ.e'd e:quipments and under rigid factor y spec i fic:ations. and te:chnologly, which to us is merely based upon assumptions.

I n analy~ing Section 187 (x) o f t he Nat ional I nter.na l Revenue Cocle in question , l1 cT e t ofo r e

3~1-M

DECISION -

CTA CASES NOS .

3054 & 3084 - 14 - quoted , we ar e in ful l agreement with petitioner that s aid Section clear l y prov i des f or: four:· (4) . different modes of manuf ac t ur ing and t ha t t he r esult- ing procedures o r modes of manufacture br i ng.s out products which are entirely different f rom t he r aw materials manufactured or parti ally manu f actur ed products used i n o r composing the mQnu[Qcturcd pr oduct.

In other words , the manufactured produc t was. broug.ht about. by t.he proc.ess of ( 1 ) _al te:r ing by chemical or physical process, e:xter i or texture, form or inner substance, quantity of the raw material or manufacture or par t ially manufac t ured product; and/or the (2 ) combination of t he raw mate:rials o r manufactured or partially manufactured products with other materials or products of the same or differen t kind , either to (a ) put the f inished product for special uses which i t .cannot be put in its oJrig;inal condition ; (b ) _or r educe it to market- able shape f or any uses of indus t ry ; (c ) or for the purpose of their sale o r distribu t1on to o the r s and not f o r t he manufacturer's own us e or consump- tion .

( I ta 1 i c s our s •. )

As fa r as t he e vidence in t hese case s s how, none of the fou r ( 4) _modes of manufact uring was performed by petit i one r:, wh i ch t o us is t he simple 3<61- f\1

DECISION -

CTA CASES N OS ~

305 4 & 3084 - 15 - act of making minor repairs of the component parts which i s not one o f the manufacturing processes. It neither altered by chemical or physical process, the component assemblies or parts nor c ombined these component assemblies or par.ts with other mater ials to form an entirely new manufactured product for sale or d is tribution to others .

After

re·pair, i t is the same component u.ssembly formerly dtamag,ed.

It is, therefore, obvious tha t pe:titioner , in the repai r of the component assemblies or parts, did not perform acts of manufactur i ng a s de·fined under Section 187 (x ) of the Nati onal Internal Revenue Code.

Hence, it is not liable as a manu- facturer. for manufacturer's s .ale~s tax p urposes • .

Mor eover , to bolster this conclusion , a cur- sory incurs i on into the lexical meaning of the word "manufacture" was made by this Court. The word "manufacture" , a term found in Section 187 (x) of the National Internal Revenue, t he provision of law here in question , means the operation of making wares or any produc t by hand, by machiner y, or by othe:r agencies ; or anything, made from r aw materials , by the hands , by machinery, or by art, as clothes, iron, ute:ns i ls, shoes , machinery , saddlery , e tc . Any useful product made directly by human labor, 3~1-0

DECISION -

CTA CASES NOS .

3054 & 3084:

- 16 - . or by the aid of machinery directe:dl or controlled by human power , and either from raw materials or from materials worked up i nto a new form.

Also

the ptroces.s by which such products are made or fashioned .

To make or f abricate tr aw ma te:r ials. by handt or machinery or by art. wor.ked out i n to f orms. convenient for use.

(Federico B. Moreno , Philippine Law Dictionary, 1972 Ed., p. 292; underlini ng ours. ) . The We:bst.er ' s Thi.rd New International Dictionary , 76th Ed,., defines "manufact-urer" as "one who chang,es the f orm of a commodity or who creates new commodity ." ( p • 13 7 8 ; I ta 1 i cs our s • ) Ag,ain, the case of Manila Trading & Supply Co . vs. City of Manila, e~ al ., 105 Phil . 581, 586-587 , brought into focus a case: cited therein, which is. the City of Louisville vs. Louisville Tin & Stov.e Co ., 186 s.w. 124, 125, in which latter case , it was aptly stated thus - "We do not uncilerstand that in order for a business enterprise to be a manu- factory it i s necessary for: it to be engaged in the business of making com- pleted articles from mat erials which are· altogether raw.

It is nonetheless a manufactory if~ as in this case, it c ombine s sepalfate parts manufactured and completed by others with new mate- rials which it i t.self cuts and fa shions into proper shape , and thus produces an entirely new article suitable for use . xxx" (Underscoring ours .) .

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DECISION -

CTA CASES NOS.

3054 & 3084 - 17 - What t hen is the difference between manufac- turing, and x-.epair in9-?

In the case of Vicente Uy Chao vs. Aguilar, 103 Phil . 219, 222 , it was pointed out that, "xxx.

Repair is restoration to a sound or good state after decay , dilapidation, in jury or partial destruction.

It is essentially a process of reconstruction, or of broken or damaged parts of a structural whole.

xxx. "

In its ordinary accept- ation, there:f:ore, the term repair must be under - s.tood to apply to the restoration of thing,s. after injury or partial destruction without there being a complei:e loss of identity of the t:hing being re.paired .

Another case in point is Alburo vs. Villanueva , 7 Phil. 277, wherein it was stated that "xxx .

A

repair implies the putting of something back into the c ondi~ion in which it was originally and not an improve:men t in the condition thereof by adding, something~ new thereto, unless the new thing. be in substitution of something formerly in existence and is added to preserve the or i ginal status of t he subject matter of the repairs~ xxx" (Unde rlining ~ -) .

Under the new Internat iona l Webster's Dictionary, "recondition" is restoring to a goo d c ond i t ion (~-~----~-y_ repairi ng, replacing £E_£tS.)

3~1- [\

DECISION -

CTA CASES NOS .

3054 & 3084 - 18 - By virtue of the foreg,oing under lying pronounce- ments and interpretations of the above terms , one can safely conclude t hat in repair or in recondition- ing j obs , which petitioner actually did to the com- ponent assemblies or parts in this case, decidedly no new product was t urned out by pe·ti tioner unlike in the c<.:se of actual manufacturing. Indeed , this brin~us to the penaltiate conclusion that peti - tioner can be anything but not a manufacturer . Consequently, we are of the opinion, and so hold, that petitioner is not liable for the payment of 7% manufacturer's taxes in the sum of El4 4 , 451.48 for the last quarter of 1977, and El913,067.38 f o r the years 1978 and 1979.

WHEREFORE, respondent Commissioner of Interna l Revenue is hereby ordered to refund or extend a tax credit to petitioner Usiphil, Inc., in the sums of El44,451.48 (CTA Case No. 3054) .and El913 , 067~8 (CTA Case No. 3084) ~ which the latter had erroneously paid as 7% manufacture·r 's sales taxes for the last quarter of 1977, and for the year s 1978 and 1979, respectively, or a total sum o f El957, 518. 86'.

3)(1-P-

DECISION -

CTA CASES NOS.

3054. & 3084 - 19 - No pronouncement as to costs.

Quezon City, Metro Manila, September 22, 1982,

™N

e ROAQUIN ssociate Judge

I CONCUR:

AMANTE FYLLER

Presiding Judg

=.

REYE

Associate Judge

3g1-S