Tropical Hut Food Market, Inc. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5312. May 28, 1999.] TROPICAL HUT FOOD MARKET, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N Before Us for consideration is petitioner's claim for refund of alleged overpaid income tax arising from its interpretation that the 20% sales discount granted to senior citizens under Republic Act (R.A.) 7432 should be treated as tax credit instead of a deduction from gross income as declared by the respondent in Revenue Regulations No. 2-94 and BIR Ruling No. 67-95, in the total amount of P377,167.00 for the years 1993 and 1994. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines. It is engaged in the business of retailing pharmaceutical products and selling of hamburger, beverages and other food items under the business style "TROPICAL HUT" (Exh. A). It is duly licensed by the Bureau of Food and Drugs to operate a drugstore and a fast food chain with proper permits and licenses from the local government units of the places where the drugstores and the fast food chain are located, and other government agencies (Exh. B to F, inclusive of submarkings). For the years 1993 and 1994, petitioner granted 20% sales discounts to qualified senior citizens on their purchases of medicines, and beverages and foods for dine-in pursuant to R.A. 7432, otherwise known as " An Act To Maximize The Contribution Of Senior Citizens To Nation Building, Grant Benefits And Special Privileges And For Other Purposes ". Petitioner treated these discounts as a deduction from its gross income in compliance with Revenue Regulations No. 2-94 issued by the respondent which implemented the aforesaid law. Unconvinced with the interpretation of the respondent regarding R.A. 7432, particularly Section 4(a) thereof, petitioner filed two separate claims for refund or credit. The first letter was filed on June 26, 1995, in the amount of P27,801.00 covering the year 1993 while the second letter was filed on December 20, 1995, in the amount of P349,366.00 for the year 1994 (Exhs. S and T, inclusive of sub-markings). Both claims represent alleged overpaid income tax arising from respondent's erroneous interpretation that the 20% sales discounts given to senior citizens on their purchases of medicines and food items should be treated by petitioner as a deduction from its gross income for income tax purposes or from gross sales for value-added tax or other percentage tax purposes rather than as a tax credit. In the said letter-requests for refund, petitioner treated the 20% sales discounts in complete disagreement with respondent's view, that is, as a tax credit rather than as a mere deduction. On December 29, 1995, petitioner lodged its appeal with this Court in order to toll the running of the two-year prescriptive period to file a claim for refund pursuant to Section 230 of the Tax Code. In its petition for review, petitioner argues that the 20% sales discount granted to senior citizens should be treated as tax credit because Section 4 of R.A. 7432 provides in clear and unequivocal language that discounts granted to senior citizens may be claimed as TAX CREDIT. It further asseverates that Section 2(i) of Revenue Regulations No. 2-94 which is a mere administrative regulation, cannot modify or alter the clear mandate of said law. Petitioner believes that Section 2(i) of Revenue Regulations No. 2-94 is illegal, void and without effect for being inconsistent with the statute it seeks to implement. On July 25, 1997, upon written motion of petitioner, respondent was declared in default due to his failure to file the answer on time despite being given a second chance to do so of (see Minutes of the Session, p. 152, CTA records). A corresponding confirming resolution was then issued on August 4, 1997. Thereafter this case was heard ex-parte . The issues to be resolved by the Court are as follows: 1. The proper interpretation of Section 4(a) of Republic Act No. 7432, insofar as the treatment of the 20% sales discount on purchase of medicines and food items afforded to senior citizens is concerned; 2. The validity of Revenue Regulations No. 2-94 implementing the aforesaid law which treats the 20% sales discounts as deduction from gross income for income tax purposes and from gross sales for value-added tax or other percentage, tax purposes; and 3. Whether or not petitioner was able to prove with substantial evidence its claim for refund. We find all the legal issues in favor of petitioner. In fact, We have already ruled on these similar issues in a number of cases (Elmas Drug Corporation vs. Commissioner of Internal Revenue, CTA Case NO. 5311, August 27, 1998; Trinity Franchising & Management Corporation vs. The Commissioner of Internal Revenue, CTA Case No. 5313, August 18, 1998; M.E. Holding Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5314, August 17, 1998; Baliuag Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5365, May 13, 1998, Del Rosario Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, April 6, 1998; and Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5367, February 16, 1998) wherein it was field: After a painstaking scrutiny of the attending facts, the issues involved, the respective argumentation of the parties and the applicable jurisprudence, laws and regulations in point, this Court hereby rules in favor of the petitioner. For easy reference, the pertinent provisions of law and regulations in question are hereby reproduced, to wit: A) Section 4 of the Republic Act No. 7432: "SECTION 4. Privileges for the Senior Citizens . The Senior citizens shall be entitled to the following: a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit. . . ."(emphasis supplied) B) Section 2 (i) of RR No. 2-94 i. Tax Credit-refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes." (emphasis supplied) A cursory review of the wordings of Section 4 of Republic Act No. 7432 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credit by private establishments. We could not see any plausible reason for the respondent to interpret the phrase in a different way. The discount being available for tax credit as stated in the law cannot be made incoherent to mean that such discount be utilized instead as a deduction from gross income and from gross sales what is provided in RR No. 2-94. To be valid, in administrative regulation must not be in contravention but should conform to the standards that the law prescribes. (Tayug Rural Bank vs. Central Bank, 146 SCRA 120) Its promulgation must be authorized by the legislature. (Philippine Administrative Law, Cruz, 1994 ed., p. 32) PR No. 2-94 which engraved a new meaning to the phrase "tax credit" as referring to the 20% discount which is deductible from gross sales is patently incongruous and a deviation from the plain intendment of the law. It is even repugnant to the common dictionary acceptation of said phrase. Black's Law Dictionary, 6th ed., defines tax credit in this wise: An amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer's liability dollar for dollar, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed. (Emphasis supplied) Under RR No. 2-94, respondent has interpreted tax credit as synonymous to tax deduction in glaring contradiction to the above definition. Undoubtedly, there is a clear distinction, nay, difference between the two terms. Under these circumstances, the law should reign supreme over subordinate rules and regulations where the provisions of the latter are not in accord with the former. It is clearly provided in Section 4(a) of RA 7432 that the cost of the 20% discount granted by private establishments may be cleared by the latter is tax credit and not as a deduction contrary to what has been declared in Revenue Regulations No. 2-94. In case of conflict between a statute and an administrative order, the former must prevail. (Kilusang Mayo Uno vs. Garcia, Jr., 239 SCRA 386) Furthermore, the legal issue in this petition has already been settled in the case entitled Sto. Rosario Drug vs. Commissioner of Internal Revenue, CTA Case No. 5357, dated February 16, 1998. In declaring that the provisions of RA 7432 prevail over Revenue Regulations No. 2-94, it is important to point out that the cost of the 20% discount shall not be treated as deduction from the gross income of the petitioner nor deducted from its gross sales for VAT or other percentage tax purposes. The benefit that can be derived by taxpayers is the privilege of claiming these discounts as tax credit and no longer as deductions as what other taxpayers have done. They cannot avail of tax credit and claim said discounts as deductions at the same time because this would be tantamount to granting them benefits that are already disproportionate to the obligations imposed upon them by virtue of said law. This is to make clear for both the taxpayers and respondent that the tax credit privilege takes the place of claiming these discounts as deductions pursuant to this Court's stand that Section 2(1) of Revenue Regulations No. 2-94 is null and void and it is Section 4(a) of RA 7432 that will apply in cases of this nature (Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 5357, dated April 6, 1998, supra ). We also find the conclusion in the aforequoted decision to be applicable to the petitioner's act of extending 20% sales discounts to dine-in qualified senior citizens on their purchases of food and beverage items from Tropical Hut food stores. Having settled the legal issues involved in the case at bar, We are now tasked to resolve the factual issue of whether or not petitioner is entitled to the claim for refund of overpaid income taxes for the years 1993 and 1994 based on the evidence submitted during trial. The records clearly show that the claim for refund was seasonably filed within the reglementary period of two years from the date of payment of the tax pursuant to Section 230 of the Tax Code. Petitioner also presented in evidence the cash slips showing the 20% sales discounts given to qualified senior citizens. However, out of the total sales discounts for the years 1993 and 1994 in the total amount of P573,133.82 as claimed by petitioner in its "Summary of Sales and Discounts Given to Senior Citizens", only the amount of P564,090.01(for taxable years 1993 and 1994) was verified by the independent CPA to have been supported by valid documents, to wit: (Exhs. Y, Y-1 and Y-2) 1993 1994 DRUGSTORE Petitioner CPA Petitioner CPA Panay P238.87 P238.87 P61,141.41 P61,141.41 Taytay 970.56 970.56 11,796.92 11,796.92 BF Home 2,599.56 2,599.56 235,570.14 235,570.14 Novaliches 2,065.03 2,065.03 10,875.59 10,875.59 Broadway 6.069.41 Q. Plaza 2,643.26 20,773.63 20,773.63 Malabon 1,516.93 1,516.93 42,310.21 42,310.21 Cavite 243.86 243.86 3,401.38 3,401.38 Shaw Blvd. 5,792.68 5,792.68 19,664.35 19,664.35 Sta. Quiteria 458.31 458.31 3,118.13 3,118.13 Sucat 51.70 51.70 963.15 963.15 Bagong Ilog 8,372.60 8,372.60 19,092.02 19,092.02 Bagbag 4,604.23 JRC 7,435.05 7,435.05 5,626.23 5,626.23 Sub Total P38,457.82 P32,388.41 P438,937.39 P434,333.16 1993 1994 COFFEE SHOP Petitioner CPA Petitioner CPA EDSA Central P P P2,378.70 P2,378.70 Kalentong 101.39 101.39 1,932.42 1,932.42 Cubao Romulo 692.70 692.70 7,744.65 7,744.65 Farmer's Plaza 26.80 26.80 5,355.57 5,355.57 Robinson 28.01 1,282.66 1,282.66 Broadway 491.45 491.45 Shoppesville 5,827.37 5,827.37 Panay 8,868.03 8,868.03 Marikina 43.48 43.48 3,801.86 3,801.86 Alabang 114.45 114.45 916.50 916.50 BF Homes 139.06 139.06 7,135.33 7,135.33 Buendia 558.73 558.73 4,466.18 4,466.18 Sucat 663.28 663.28 4,665.96 4,665.96 Ermita 18.04 18.04 583.24 583.24 Escolta 91.06 2,116.55 2,116.55 Carriedo 223.54 223.54 3,559.70 3,559.70 Cavite 117.48 117.48 5,105.67 5,105.67 Greenbelt 9.05 1,198.78 1,198.78 Taytay 92.74 92.74 1,444.66 1,444.66 Circle 107.01 107.01 4,802.71 4,802.71 Congressional 102.72 102.72 2,891.59 2,891.59 Monumento 92.84 92.84 2,191.10 2,191.10 Gotesco 54.73 54.73 3,481.70 3,481.70 Novaliches 7.31 7.31 1,511.86 1,511.86 Sta Quiteria 49.07 49.07 483.58 483.58 Gotesco Mall I 1,017.80 1,017.80 Gotesco Mall II 787.10 787.10 Cainta I 486.37 486.37 4,209.71 4,209.71 Cainta II 1,666.32 1,666.32 Shaw Blvd BNT 325.50 Buendia BNT 1,330.50 Pasig BNT 101.95 Sub Total P4,311.31 4,183.19 P91,427.30 P93,185.25 Total P42,769.13 P36,571.60 P530,364.69 P527,518.41 ======== ======== ========= ========= Aside from the disallowances made by the independent CPA, We deemed it appropriate to exclude the following 20% sales discounts, for the following reasons: 1. The supporting cash slips were denied admission by the Court per Resolution, dated January 16, 1998 (see pp. 326 to 354, CTA records); 2. No supporting cash slips were presented but included in the "Summary of Sales and Discounts Given to Senior Citizen" (see Exhs. Y-1 and Y-2); 3. Erroneously entered twice in the summary; and 4. Overstated sales discounts. These exclusions further reduced the 20% sales discounts to P415,923.56 for the taxable years 1993 and 1994. Since the amount of the total sales discount given to qualified senior citizens was further reduced from P564,090.01 to P415,923.56 as a result of this Court's own examination of the evidence presented, the total sum to be granted to petitioner has also been reduced to P270,351.41, computed as follows: For 1993: Net Sale P1,225,715,359.00 Add: 20% Discount to Senior Citizens (see Annex A) 5,628.60 Gross Sales P1,225,720,987.60 Less: Cost of Sales Merchandise Inventory, beg. P165,916,181.00 Add Purchases 988,518,017.00 Total Goods Available for Sales P1,154,434,198.00 Less: Merchandise Inventory, End 150,919,458.00 1,003,514,740.00 Gross Income P222,206,247.60 Less: Operating Expenses 261,678,430.00 Net Operating Loss P39,472,182.40 Add: Miscellaneous Income 43,466,526.00 Net Taxable income P3,994,343.60 =========== Tax Due (3,994,343.60 x 35%) P1,398,020.26 Less: 1) Tax Credit P5,628.60 2) Income Tax Payment for the Year 1,396,051.00 1,401,679.60 AMOUNT REFUNDABLE P3,659.34 ========== For 1994: Net Sale P1,601,304,516.00 Add: 20% Discount to Senior Citizens (see Annex B) 410,294.96 Gross Sales P1,601,714,810.96 Less: Cost of Sales Merchandise Inventory, beg. P150,919,458.00 Add Purchases 1,322,395,753.00 Total Goods Available for Sales P1,473,315,211.00 Less: Merchandise Inventory, End 177,107,269.00 1,296,207,942.00 Gross Income P305,506,868.96 Less: Operating Expenses 327,011,536.00 Net Operating Loss P21,504,667.04 Add: Miscellaneous Income 59,142,901.00 Net Taxable Income P37,638,233.96 ============ Tax Due (37,638,233.96 x 35%) P13,173,381.89 Less: 1) Tax Credit P410,294.96 2) Income Tax Payment for the Year 13,029,779.00 13,440,073.96 AMOUNT REFUNDABLE P266,692.07 TOTAL AMOUNT REFUNDABLE P270,351.41 ========== WHEREFORE, in view of the foregoing, the petition for review is partially granted. Respondent is hereby ORDERED to REFUND in favor of petitioner the amount of P270,351.41, representing overpaid income tax for the years 1993 and 1994. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge WE CONCUR: (On leave) RAMON O. DE VEYRA Associate Judge (SGD.) AMANCIO Q. SAGA Associate Judge ANNEX A ANNEX B