Implementing Rules and Regulations of Local Government Code of 1991

FOURTH DIVISION [CA-G.R. SP No. 45892. March 13, 1998.] ST. LUKE'S MEDICAL CENTER INC., petitioner , vs . COURT OF TAX APPEALS and The COMMISSIONER OF INTERNAL REVENUE , respondents . D E C I S I O N GONZAGA-REYES , J p : Petitioner is a non-stock, non-profit corporation duly organized and existing under Philippines laws, and primarily engaged in the hospital business. On August 2, 1993, petitioner was assessed by the Commissioner of Internal Revenue to pay a deficiency value added tax (VAT) on its pharmacy sales for the year 1991 in the total amount of P9,866,051.23. Petitioner protested the assessment and prayed for its cancellation. The protest was denied and petitioner appealed to the Court of Tax Appeals. Petitioner contends that pharmaceutical items that were used by hospital in-patients should not be subjected to VAT since hospital services, which are exempt from value-added tax, necessarily includes the dispensing or application of drugs and medicines to in-patients. Petitioner questioned the legal authority of the Commissioner of Internal Revenue when it provided in Revenue Regulations No. 5-87 that pharmacy sales are subject to VAT if the sales exceed P200,000.00 during a twelve-month period. On the other hand, respondent contends that Section 9(b) (12) of Revenue Regulations No. 5-87 is very clear and unequivocal that pharmacy sales exceeding P200,000.00 during a twelve-month period is subject to value-added tax; thus the question whether such drugs or pharmaceutical products are sold to in-patients or patients is immaterial. It held also that petitioner failed to present proof that would substantiate its claimed deductions. On August 22, 1997, the Court of Tax Appeals rendered its decision, the dispositive portion of which reads: "WHEREFORE, premises considered, judgment is hereby rendered DENYING the herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner of Internal Revenue the amount of P3,430,967.95 as deficiency value-added tax on its pharmacy sales covering the period January 1, 1991 to December 31, 1991, inclusive of surcharge, plus 20% interest per annum from the date prescribed for payment until fully paid, pursuant to Section 249 of the Tax Code, as amended. No pronouncement as to costs." (at p. 5, rollo) Petitioner filed a motion for reconsideration paying that pharmacy sales to in-patients be declared as not subject to VAT, that free services and discounts be taken into account, and that the amount of pharmacy sales subject to VAT, if any be multiplied by the factor 1/11. Motion for Reconsideration was denied. Hence this Petition for Review, which raises the following assignment of errors: "A THE COURT OF TAX APPEALS SERIOUSLY ERRED IN CONCLUDING THAT HOSPITAL SERVICES, A VAT EXEMPT TRANSACTION, DOES NOT INCLUDE THE SELLING/DISPENSING OF DRUGS AND OTHER PHARMACEUTICAL ITEMS TO IN-PATIENTS. B THE COURT OF TAX APPEALS SERIOUSLY ERRED IN NOT FINDING THAT SECTION 9(b)(12) OF REVENUE REGULATIONS 5-87, INSOFAR AS IT SUBJECTS TO VAT PHARMACY SALES TO IN-PATIENTS, UNDULY EXCEEDED OR EXPANDED SEC. 103(1) OF THE TAX CODE, AS AMENDED, AND IS, THUS, NULL AND VOID. C ASSUMING BUT WITHOUT ADMITTING THAT VAT IS DUE ON TOTAL PHARMACY SALES (INCLUDING SALES TO IN-PATIENTS), THE COURT OF TAX APPEALS ERRED IN MULTIPLYING THE TOTAL AMOUNT BY A FACTOR OF 10% WHEN THE APPROPRIATE FACTOR IS 1/11. D THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT PETITIONER ADDUCED SUFFICIENT AND CONVINCING EVIDENCE TO JUSTIFY ITS CLAIM OF "FREE SERVICES AND ALLOWANCES" AS DEDUCTIONS." (at pp. 6-7, rollo) Asked to Comment, respondent Commissioner of Internal Revenue defines the issues for resolution as follows: "Whether or not the selling and dispensing of drugs and other pharmaceutical items to in-patients is a VAT-exempt transaction; and 2. Whether or not Sections a(b) (12) of Revenue Regulation No. 5-87 is null and void." (at p. 160, rollo) In its Reply, petitioner reiterates its position that the dispensing or application of drugs or medicines is an essential and integral part of hospital operations. A hospital is an institution for the treatment, care of the sick, wounded, infirm and the theory that doctors and physicians necessarily dispense drugs and other pharmaceuticals in curing and alleviating illness. Moreover, Section 9(b) (12) of Revenue Regulations 5-87 which subjects to VAT the sale of drugs by the hospital or clinic pharmacy or drugstore if the sales exceed P200,000.00 during a twelve-month period contravenes Section 103(1) of the National Internal Revenue Code which exempts from VAT "medical, dental, hospital and veterinary services", and is therefore invalid. The main issue is whether the sale of drugs and other pharmaceutical items to in-patients of the hospital is a VAT exempt transaction within the meaning of Section 103(1) of the National Internal Revenue Code which reads: "Section 103. Exempt transactions . the following shall be exempt from value-added tax: xxx xxx xxx (1) medical, dental, hospital and veterinary services (w) Sales and/or services performed by persons other than those mentioned in the preceding paragraphs whose annual gross sales and/or receipts do not exceed the amount prescribed in regulations to be promulgated by the Secretary of Finance which shall not be less than P100,000.00 or higher than P500,000.00." Section 9(b) (12) of Revenue Regulations 5-87 implementing the above-quoted section of the Tax Code provides, among the transactions exempt from VAT, as follows: "Section 9. Exemptions. xxx xxx xxx (b) Exempt Transactions . . . (12) Medical, Dental, Hospital and Veterinary Services, Laboratory Services are also exempted. If the hospital or clinic operates a pharmacy or drugstore, the sale of drugs and medicine, if it exceeds P200,000.00 during a 12 month period is subject to VAT." In arguing that in-patient pharmacy sales should be exempted from VAT, petitioner contends that selling drugs and pharmacy items to in-patients of the hospital be considered "inevitably essential" to hospital operations; the use of pharmacy items in the treatment of in-patients involves not merely the selling of drugs by the administration of drugs and medicine. The respondent court, invoking the principle of strict construction of tax exemption against the taxpayer maintains that pharmacy sales, whether sold to in-patients or out-patients, should be subjected to value added tax. We find merit in the petition. The value added tax is a tax imposed on any person who in the course of trade or business, sells goods or renders services, or imports goods (Sec. 99, NIRC). The 10% value-added tax on sale of goods is imposed by Section 100, while the value-added tax on sale of services is imposed by Section 102. Section 103 enumerates the transactions exempt from the value-added tax, among others: "(1) medical, dental, hospital and veterinary services . . . and (w) sales and/or services performed by persons other than those mentioned in the preceding paragraphs whose annual, gross sales and/or receipts do not exceed the amount prescribed in regulations to be promulgated by the Secretary of Finance which shall not be less than P100,000.00 or higher than P500,000.00." cdlex We agree with petitioner that the item "hospital services" in Section 103 (1) should include sales of drugs to in-patients of the hospital. The maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients. In the legal sense, a hospital is an institution devoted primarily to the operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2(a), R.A. 4226). In its ordinary acceptation, it is a place where persons are given medical or surgical treatment. A person who resorts to the hospital for medical treatment can reasonably expect that the hospital would make available to its patients immediate and prompt access not only to the services of doctors, nurses and allied medical personnel, but also to necessary laboratory services as well as medicines, drugs and pharmaceutical items which are indispensable aids in practically any form of medical treatment and care of patients. The facility of making drugs and medicines available to in-patients of the hospital, whether for reasons of life-threatening urgency or mere convenience, cannot but be viewed as a hospital service that is covered by the broad and general exemption provided in Section 103(1) of the Tax Code for "hospital services". A contrary view would derogate from the evident laudable purpose animating the exemption of "hospital services". Rationally, no suggestion is made by petitioner that sales to non-patients or outsiders, which is indubitably a simple sale of goods, would be an exempt transaction. We accordingly opine that the sale of drugs or pharmaceutical items to in-patients of the hospital should be exempted from VAT because unlike the sale of retailing of drugs or medicines by drugstores in general, the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy amounts to the availment of service rendered or made available by the hospital for its in-patients and not simply the buying of such goods. With respect to the validity of Section 9(1) (12) of Revenue Regulations 5-87, implementing Section 103(1) of the NIRC, the same should be construed to exclude sales of drugs and medicines other than to in-patients, in view of the conclusion reached above that the sales to in-patients are tax exempt as a hospital service. Section 103(w) of the Code exempts "sales and/or services performed by persons other than those mentioned in the preceding paragraphs " whose annual gross sales and/or receipts do not exceed the amount prescribed in regulations to be promulgated by the Secretary of Finance which shall not be less than P100,000.00 or higher than P500,000.00. Since sales to in-patients are deemed included in the exemption of hospital services, the subject revenue regulations should be deemed amended accordingly. The third assignment of error is mooted by the above discussion. The fourth assignment of error is addressed to the portion of the appealed decision which reads: "The third issue in this case should be answered in the negative. The respondent did not err in not considering the petitioner's claimed deductions. "Pharmacy Out-Patient-Free Services and Discounts" (Exhibits "LL" and "MM", including its sub-markings) cannot stand support its claimed deductions. The source documents where these summaries were taken were not offered as evidence for the petitioner. As regards "Sales Returns and Allowances", no evidence were offered to prove the same. Thus, this Court has no other recourse but to ignore all the claimed deductions." (at p. 32, rollo) Petitioner contends that contrary to the above finding, petitioner claimed deductions of free services and allowances have been adequately supported by testimonial and documentary evidence, and cities the testimony of Romeo Lacanlale, Finance Manager of St. Luke's Medical Center on July 5, 1995 and of Anna Marie Redido, Asst. Manager of Billing and Accounts Services Department on May 3, 1995, identifying and explaining the documentary exhibits regarding "Free Services and Allowances" prepared monthly (Exhs. "MM" to "MM-12", inclusive) and the annual summary for the year 1991 (Exh. "JJ"). Redido testified that St. Luke's has a social services department which caters to indigent families and that discounts are given to employees (tsn, May 3, 1995, pp. 11-20) and that the free services and allowances are recorded and the entries from the register are made in the ordinary course of business, and verified from "source documents" (at pp. 137-139). The Comment filed by the respondent Commissioner of Internal Revenue failed to traverse or controvert the arguments of petitioner in respect of the disallowed claims. Since the petitioner appears to be in a position to present its records and supporting documents to substantiate its claim for the subject deductions, the matter is remanded to the Commissioner of Internal Revenue for the reception of further evidence. WHEREFORE, the judgment appealed from is SET ASIDE. The case is REMANDED to the Court below for the reception of further evidence in connection with the claimed deductions which were disallowed. cdll SO ORDERED. Barcelona and Demetria, JJ . , concur.