Trinity Franchising and Management Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5313. August 18, 1998.] TRINITY FRANCHISING AND MANAGEMENT CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N The legal issue which is presented for our consideration is whether or not the cost of 20% discount granted by the petitioner pursuant to Republic Act No. 7432 (a.k.a. Senior Citizens Law) to qualified senior citizens on their medicine purchases be treated as a deduction from the annual tax due (tax credit), as claimed by the petitioner or as a deduction from gross income (sales), as claimed by the herein respondent. Petitioner is a corporation organized and existing under the laws of the Philippines. It is a retailer of pharmaceutical products, and operates a drug store in Daet, Camarines Norte under the name and business style of "Mercury Drug" and is duly licensed by the Bureau of Food and Drugs, the Bureau of Internal Revenue and the Municipality of Daet. For the years 1993 and 1994, petitioner granted to qualified senior citizens a 20% discount on their medicine purchases pursuant to Republic Act 7432 and its Implementing Rules and Regulations. It totalled P31,787.00 for 1993 and P129,142.00 for 1994. The said amounts (sales discounts) were treated by petitioner as a deduction from its gross sales for the said years (see pages 3 & 4, pet. memo). As such, petitioner paid to respondent the amounts of P57,334 and P91,289 as its taxes due for the years 1993 and 1994, respectively (Exhibits L & M). Petitioner pointed out that the total cost of discount it granted to senior citizens should be deducted from its taxes due for the years in question as provided for by RA 7432 and should not be considered as a mere deduction from its gross sales, as it did in said years, thus, it stressed that there was an overpayment of income taxes for the said period. Accordingly, on June 26, 1995 and December 15, 1995, petitioner filed with the respondent claims for refund of the excess corporate income taxes paid for the years 1993 & 1994 in the amounts of P20,662.00 and P83,942.00, respectively, (Exhibits O & P). Both claims were not acted upon by respondent, hence, on December 29, 1995, petitioner filed with this Court the instant petition for review. Petitioner repleads its stance a quo in the instant petition for review. On the other hand, respondent raised in the usual token of a defense that (1) in an action for refund, the taxpayer has the burden of proof to show that the taxes paid were erroneously or illegally collected . . . and (2) laws are strictly construed against the taxpayer. . . . As earlier adverted to at the onset, the issue which is presented for our consideration is whether or not the cost of 20% discount granted by petitioner to qualified senior citizens of the Republic on their medicine purchases pursuant to Section 4(a) of RA No. 7432, which states to wit: "Sec. 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 establishment relative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicine anywhere in the country: Provided , that private establishment may claim the cost of tax credit . . . ." (Emphasis supplied) be treated as a deduction from the annual tax due (tax credit), as claimed by the petitioner, or as a deduction from gross income/sales, as claimed by respondent in its Sec. 2(i), Revenue Regulations No. 2-94, quoted hereunder: 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 sales for value-added tax or other percentage tax purposes ." (emphasis supplied) This is not the first time that this Court has been confronted with such an issue at hand. We have already resolved the same issue in Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5367, February 16, 1998, and Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, April 6, 1998, anchored on factual circumstances on all fours with the instant petition. In the latter case, this Court ruled and we quote: "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 as what is provided in RR No. 2-94. To be valid, an 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) RR 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 claimed by the latter as 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 are 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. 5367, 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(i) 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." We do not think any different conclusion ought to be reached in the case at bar. Settled is the rule that the first and fundamental duty of the Court is to apply the law. Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without them. This Court cannot deem itself authorized to depart from the plain meaning of the statute so explicit in terms and so searching in extent. Thus, the cost of the 20% discount given to senior citizens should be treated as a deduction from the annual income tax due. llcd With regard to the factual issues, records clearly show that petitioner has sufficiently adduced evidence to prove its claim and that the claim for refund was seasonably filed within the reglementary period of two (2) years from the date of payment of the tax pursuant to Sec. 230 of the Tax Code. Thus, the Court has no other recourse but to grant the amount sought to be refunded, less the amounts mentioned in denied exhibits. The computation of which are as follows: For 1993 : Net Sales P30,329,613.00 Add: 20% Discount to Senior Citizens 31,787.00 Gross Sales P30,361,400.00 Less: Cost of Sales Merchandise Inventory, beg. P5,813,959.00 Add purchases 25,883,890.00 Total Goods Available for Sales P31,697,849.00 Less: Merchandise Inventory, end. 3,971,811.00 27,726,038.00 Gross Income P2,635,362.00 Less: Operating Expenses 2,461,733.00 Net Operating Income P173,629.00 Add: Miscellaneous Income 37,326.00 Net Taxable Income P210,955.00 =========== Tax Due [210,955.00 x 35%] P68,459.00 Less: 1) Tax Credit (Cost of 20% Discount) P25,039.70* 2) Income Tax Payment for the Year 57,334.00 82,373.70 AMOUNT REFUNDABLE P13,914.70 =========== *The following denied exhibits were excluded in arriving at allowable 20% sales discounts as tax credit. Cash Slip Gross Exh. Date Invoice No. Sales Discount T-95913 07-23-93 95913 P267.00 P53.40 T-96321 08-23-93 96321 290.70 58.14 T-96337 09-03-93 96337 448.75 89.75 T-96338 09-03-93 96338 252.00 50.40 T-96339 09-04-93 96339 2,930.80 586.16 T-96340 09-04-93 96340 1,422.60 284.52 T-96341 09-06-93 96341 1,881.50 376.30 T-96342 09-06-93 96342 1,168.00 233.60 T-96343 09-06-93 96343 1,028.00 205.60 T-96344 09-06-93 96344 228.40 45.68 T-96345 09-06-93 96345 713.20 142.64 T-96346 09-06-93 96346 979.20 195.84 T-96347 09-06-93 96347 138.75 27.75 T-96348 09-07-93 96348 2,091.60 418.32 T-96349 09-07-93 96349 657.60 131.52 T-96350 09-07-93 96350 1,650.40 330.08 T-96351 09-08-93 96351 676.00 135.20 T-96352 09-08-93 96352 832.00 166.40 T-96353 09-09-93 96353 85.40 17.08 T-96354 09-09-93 96354 369.20 73.84 T-96355 09-09-93 96355 171.50 34.30 T-96356 09-11-93 96356 1,465.40 293.08 T-96357 09-12-93 96357 219.15 43.83 T-96358 09-12-93 96358 36.30 7.26 T-96359 09-13-93 96359 315.75 63.15 T-96360 09-13-93 96360 557.80 111.56 T-96361 09-13-93 96361 182.00 36.40 T-96362 09-13-93 96362 260.00 52.00 T-96363 09-13-93 96363 571.20 114.24 T-96364 09-14-93 96364 73.98 14.80 T-96365 09-14-93 96365 326.40 65.28 T-96366 09-14-93 96366 400.40 80.08 T-96367 09-14-93 96367 122.25 24.45 T-96368 09-14-93 96368 119.70 23.94 T-96369 09-14-93 96369 440.01 88.00 T-96371 09-14-93 96371 69.40 13.88 T-96375 09-16-93 96375 83.52 16.70 T-96378 09-19-93 96378 538.00 107.60 T-96380 09-19-93 96380 244.80 48.96 T-96382 09-19-93 96382 2,668.90 533.78 T-101201 12-15-93 101201 82.25 16.45 T-101253 12-26-93 101253 410.86 82.17 T-101254 12-27-93 101254 324.73 64.95 T-101255 12-27-93 101255 984.60 196.92 T-101256 12-27-93 101256 260.00 52.00 T-101257 12-27-93 101257 395.25 79.05 T-101258 12-28-93 101258 484.80 96.96 T-101259 12-28-93 101259 144.30 28.86 T-101260 12-28-93 101260 144.30 28.86 T-101261 12-29-93 101261 137.20 27.44 T-101262 12-29-93 101262 286.50 57.30 T-101263 12-29-93 101263 373.70 74.74 T-101264 12-30-93 101264 81.02 16.20 T-101265 12-30-93 101265 206.05 41.21 T-101266 12-30-93 101266 71.04 14.21 T-101267 12-30-93 101267 311.95 62.39 T-101268 12-30-93 101268 198.00 39.60 T-101269 12-30-93 101269 121.10 24.22 T-101270 12-31-93 101270 75.60 15.12 T-101271 12-31-93 101271 520.60 104.12 T-101272 12-31-93 101272 23.10 4.62 T-101273 12-31-93 101273 604.50 120.90 T-101274-12-31-93 101274 122.25 24.45 T-101275 12-31-93 101275 395.25 79.05 Total denied exhibits P33,736.51 P6,747.30 ========= Less discounts claimed 31,787.00 Allowable discount for tax credit P25,039.70 ========= For 1994: Net Sales P29,453,993.00 Add: 20% Discount to Senior Citizens 129,142.00 Gross Sales P29,583,135.00 Less: Cost of Sales Merchandise Inventory, beg. P3,971,811.00 Add Purchases 27,100,269.00 Total Goods Available for Sales P31,072,080.00 Less: Merchandise Inventory, end 4,158,791.00 26,913,289.00 Gross Income P2,669,846.00 Less: Operating Expenses 2,491,467.00 Net Operating Income P178,379.00 Add: Miscellaneous Income 223,953.00 Net Taxable Income 402,332.00 =========== Tax Due [402,332.00 x 35%] P136,489.00 Less: 1) Tax Credit (Cost of 20% Discount) P123,555.43** 2) Income Tax Payment for the Year 91,289.00 P214,844.43 AMOUNT REFUNDABLE P78,355.43 =========== **The following denied exhibits were excluded in arriving at allowable 20% sales discounts as tax credit. Cash Slip Gross Exh. Date Invoice No. Sales Discount T-101602 01-06-94 101602 P472.60 P94.52 T-101603 01-06-94 101603 114.20 22.84 T-101604 01-06-94 101604 75.60 15.12 T-101605 01-06-94 101605 248.15 49.63 T-102401 01-25-94 102401 819.00 163.80 T-102402 01-25-94 102402 202.50 40.50 T-102403 01-25-94 102403 232.00 46.40 T-106901 07-08-94 106901 429.59 85.92 T-106902 07-08-94 106902 233.10 46.62 T-106903 07-08-94 106903 126.18 25.24 T-106904 07-08-94 106904 234.40 46.88 T-106905 07-08-94 106905 167.30 33.46 T-106906 07-08-94 106906 200.55 40.11 T-106907 07-09-94 106907 247.50 49.50 T-106908 07-09-94 106908 605.64 121.13 T-106909 07-09-94 106909 104.09 20.82 T-106910 07-09-94 106910 373.94 74.79 T-106911 07-10-94 106911 97.44 19.49 T-106912 07-11-94 106912 253.45 50.69 T-106913 07-11-94 106913 169.05 33.81 T-106914 07-11-94 106914 207.60 41.52 T-106915 07-11-94 106915 310.75 62.15 T-106916 07-11-94 106916 123.34 24.67 T-106917 07-11-94 106917 136.55 27.31 T-106918 07-11-94 106918 652.00 130.40 T-106919 07-11-94 106919 287.20 57.44 T-106920 07-11-94 106920 487.55 97.51 T-106921 07-12-94 106921 177.56 35.51 T-106922 07-12-94 106922 328.40 65.68 T-106923 07-12-94 106923 69.90 13.98 T-106924 07-12-94 106924 54.00 10.80 T-106925 07-12-94 106925 250.87 50.17 T-106926 07-12-94 106926 176.54 35.31 T-106927 07-12-94 106927 65.28 13.06 T-106928 07-12-94 106928 53.95 10.79 T-106929 07-12-94 106929 301.96 60.39 T-106930 07-12-94 106930 35.35 7.07 T-106931 07-13-94 106931 572.60 114.52 T-106932 07-13-94 106932 136.55 27.31 T-106933 07-13-94 106933 418.50 83.70 T-106934 07-13-94 106934 185.55 37.11 T-106935 07-13-94 106935 63.00 12.60 T-106936 07-13-94 106936 301.15 60.23 T-106937 07-13-94 106937 433.16 86.63 T-106938 07-14-94 106938 156.89 31.38 T-106939 07-14-94 106939 128.24 25.65 T-106940 07-14-94 106940 114.80 22.96 T-106941 07-14-94 106941 257.10 51.42 T-106942 07-14-94 106942 172.29 34.46 T-106943 07-15-94 106943 43.40 8.68 T-106944 07-15-94 106944 424.69 84.94 T-106945 07-15-94 106945 123.11 24.62 T-106946 07-16-94 106946 258.20 51.64 T-106947 07-16-94 106947 372.63 74.53 T-106948 07-16-94 106948 1,219.20 243.84 T-106949 07-16-94 106949 192.99 38.60 T-106950 07-16-94 106950 289.48 57.90 T-106951 07-17-94 106951 97.44 19.49 T-106952 07-17-94 106952 132.30 26.46 T-106953 07-17-94 106953 69.90 13.98 T-106954 07-17-94 106954 65.80 13.16 T-106955 07-17-94 106955 307.80 61.56 T-106956 07-18-94 106956 42.00 8.40 T-106957 07-18-94 106957 301.15 60.23 T-106958 07-18-94 106958 365.47 73.09 T-106959 07-18-94 106959 173.30 34.66 T-106960 07-18-94 106960 251.30 50.26 T-106961 07-18-94 106961 133.46 26.69 T-106962 07-18-94 106962 424.50 84.90 T-106963 07-18-94 106963 252.63 50.53 T-106964 07-18-94 106964 107.80 21.56 T-106965 07-19-94 106965 572.60 114.52 T-106966 07-19-94 106966 453.45 90.69 T-106967 07-19-94 106967 88.20 17.64 T-106968 07-19-94 106968 160.20 32.04 T-106969 07-19-94 106969 184.70 36.94 T-106970 07-19-94 106970 35.35 7.07 T-106971 07-20-94 106971 200.07 40.01 T-106972 07-20-94 106972 282.94 56.59 T-106973 07-20-94 106973 704.90 140.98 T-106974 07-20-94 106974 162.61 32.52 T-106975 07-20-94 106975 183.92 36.78 T-106976 07-21-94 106976 200.55 40.11 T-106977 07-21-94 106977 210.00 42.00 T-106978 07-21-94 106978 125.65 25.13 T-106979 07-21-94 106979 182.48 36.50 T-106980 07-22-94 106980 84.42 16.88 T-106981 07-22-94 106981 208.00 41.60 T-106982 07-22-94 106982 172.29 34.46 T-106983 07-22-94 106983 80.60 16.16 T-106984 07-22-94 106984 167.44 33.49 T-106985 07-23-94 106985 83.86 16.77 T-106986 07-23-94 106986 298.92 59.78 T-106987 07-23-94 106987 235.34 47.07 T-106988 07-23-94 106988 288.75 57.75 T-106989 07-24-94 106989 97.44 19.49 T-106990 07-24-94 106990 269.05 53.81 T-106991 07-24-94 106991 433.16 86.63 T-106992 07-24-94 106992 414.63 82.93 T-106993 07-24-94 106993 113.35 22.67 T-106994 07-24-94 106994 164.50 32.90 T-106995 07-25-94 106995 114.80 22.96 T-106996 07-25-94 106996 126.70 25.34 T-106997 07-25-94 106997 30.30 6.06 T-106998 07-25-94 106998 127.22 25.44 T-106999 07-25-94 106999 164.29 32.86 T-107000 07-25-94 107000 239.50 47.90 T-113012 01-02-95 113012 200.55 40.11 T-113013 01-02-95 113013 1,250.25 250.05 T-113014 01-02-95 113014 826.74 155.35 T-113015 01-02-95 113015 279.35 55.67 Total denied exhibits P27,932.73 P5,586.57 Less discounts claimed 129,142.00 Allowable discount for tax credit P123,555.43 ========= IN THE LIGHT OF ALL THE FOREGOING, respondent is hereby ORDERED to ISSUE a TAX CREDIT CERTIFICATE to herein petitioner in the total amount of P92,270.13, representing the latter's overpaid income tax payments for the years 1993 and 1994. No pronouncement as to costs. cdll SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge WE CONCUR: (SGD.) RAMON O. DE VEYRA Associate Judge Separate Opinions I beg to disagree with the learned opinion of the majority which granted the total amount of P92,270.13 representing the cost of the 20% discount granted by petitioner to senior citizens during the taxable years 1993 and 1994. I do not seek to question the legal basis of the tax refund claimed by petitioner as this has already been well-settled in the cases of Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5367 and Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357 both of which ruled that the cost of the 20% discount given to senior citizens shall be treated as tax credit and not as a deduction from the gross income of the drug company. My dissent centers on the application of the aforementioned legal principle in cases where the taxpayer has no tax liability for a particular taxable period or where the tax liability is lesser than the cost of the 20% discount granted by the drug companies. I am of the opinion that in the latter case, the refund or tax credit to be granted to petitioner should be limited to the taxes actually paid by it for this particular period and not the entire amount of the cost of the 20% discount granted to senior citizens. In cases where the taxpayer/petitioner has no tax liability or is in a loss position for a particular taxable year, no refund should be granted. This theory is consistent with Section 204(3) of the old Tax Code taken in relation to Section 204(c) of the Tax Reform Act of 1997 and Republic Act No. 7432 (Senior Citizens Law). Section 204 of the old Tax Code is quoted hereunder: Section 204. Authority of the Commissioner to compromise , abate , and refund/credit taxes . The Commissioner may (1) . . . (2) . . . (3) Credit or refund taxes erroneously or illegally received, or penalties imposed without authority. . . . Aforesaid Section 204(3) is the same Section 204(c) under the Tax Reform Act of 1997, otherwise known as the Comprehensive Tax Reform Program or CTRP. Accordingly, said subsection (c) thereof provides as follows: "Credit or refund taxes erroneously or illegally received or penalties imposed without authority. . . . Provided, further, that in no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made ." (Emphasis supplied) The Senior Citizens Law or Republic Act No. 7432 provides in its Section 4(a), thus: ". . . 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 medicine anywhere in the country; Provided, that private establishments may claim the cost as tax credit." Apparently, both sections 204 of the Old and the New Internal Revenue Code (CTRP) prohibit the grant of cash refund/tax credit certificate in the absence of an erroneously or illegally received taxes actually paid, as in the case of the cost of the 20% sales discount being claimed by herein petitioner as tax credit against its current year's income tax liability. Thus, if the current year's operation is a net loss operation, or, if the tax due per return is minimal, any unapplied cost of the 20% sales discount may not be refunded or carried forward to the next succeeding taxable year by way of a tax credit certificate. IN VIEW OF THE FOREGOING, with all due respect to the opinion of the majority, I hereby express by dissent. dctai (SGD.) AMANCIO Q. SAGA Associate Judge