Mercury Drug Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5612. January 9, 2001.] MERCURY DRUG CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N Before Us for consideration is a Petition for Review filed on April 13, 1998, seeking for a refund of the amount of P52,103,333.00, representing overpaid corporate income tax for taxable year 1995 arising from erroneous treatment of the 20% sales discounts granted to qualified senior citizens on their purchase of medicines, as a deduction from gross income as prescribed by Revenue Regulations No. 2-94, instead of a tax credit as provided under Republic Act 7432 (Senior Citizens Act). The facts of this case giving rise to the controversy at bar are as follows: Petitioner is a domestic corporation organized and existing under and by virtue of the laws of the Philippines. It is a retailer of medicines and other pharmaceutical products and operates drug stores nationwide under the business name and style of "Mercury Drug." It is duly licensed to operate drugstores by the Bureau of Food and Drugs with proper permits and licenses from local government units and other government agencies. Petitioner alleged that in the year 1995, it granted a 20% sales discounts amounting to P80,158,974.00, on medicines sold to qualified senior citizens pursuant to Republic Act No. 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." In compliance with Section 2(i) of Revenue Regulations No. 2-94, which implements Section 4 of Republic Act No. 7432, Petitioner was allegedly constrained to treat the amount of P80,158,975.00 representing its 20% sales discounts to senior citizens as a deduction from gross income as reflected on its 1995 annual income tax return/audited financial statements filed on April 15, 1996 (Exh. C). As a result of said deduction, Petitioner paid an income tax due of P117,137,616.00 on taxable income of P334,678,902.00 (Exhs. C-2, C-6, C-7, D-1, E-1 & F-1). It is Petitioner's position that Section 2(i) of Revenue Regulations No. 2-94 is a wrongful implementation of Section 4(a) of R.A. No. 7432 since the latter clearly provides that the cost of the 20% sales discounts to senior citizens may be claimed as a tax credit instead of a deduction from gross income. Relying on the clear mandate of R.A. 7432, Petitioner filed on April 15, 1996 with the Respondent a letter protesting the erroneous treatment of the 20% sales discounts to senior citizens as deductions from gross income rather than as tax credit (Exh. G). cDICaS On December 27, 1996, Petitioner filed with the Bureau of Internal Revenue an administrative claim for refund of alleged overpaid income tax arising from the erroneous treatment of the 20% sales discounts to senior citizens as deductions from gross income instead of tax credit in the amount of P52,103,323.00 (Exhs. H to H-3, inclusive) computed as follows: Net Sales P13,895,491,950.00 Add: 20% Sales Discount to Senior Citizens 80,158,974.00 Gross Sales P13,975,650,924.00 Less: Cost of Sales P2,928,397,228.00 Merchandise inventory, beginning 12,178,833,010.00 Purchases P15,107,230,238.00 Total merchandise available for sale 3,343,961,933.00 11,763,268,305.00 Less: Merchandise inventory, end P2,212,382,619.00 Gross Profit 88,636,017.00 Add: Miscellaneous Income P2,301,018,636.00 Total Income 1,855,302,566.00 Less: Operating Expenses P445,716,070.00 Net Income before Income Tax 30,878,194.00 Less: Income subjected to final tax P414,837,876.00 Net Taxable Income ============= P145,193,257.00 Income Tax Due Less: 1.) Tax Credit P80,158,974.00 2.) Income Tax Actually Paid 117,137,616.00 197,296,590.00 Income Tax Refundable P(52,103,333.00) ============ Failing to obtain an affirmative relief from the Respondent, Petitioner filed its Petition for Review with this Court on April 15, 1998. In his Answer filed on May 28, 1998, Respondent denied Petitioner's assertions and interposed the following Special and Affirmative Defenses, to wit: "7. In an action for tax refund/credit, the burden is upon the taxpayer to show and/or prove entitlement thereof and failure to sustain said burden in fatal to its case; 8. A claim for tax refund/credit is construed strictly against the claimant since it partakes of the nature of an exemption from taxation ( Coll. Int. Rev. vs. Ledesma, G . R . No . L-17508, 31 SCRA 95, Jan . 30, 1970 ); 9. Taxes paid and collected are deemed to have been made in accordance with law and existing BIR regulations." The controversy boils down to the two-fold issues of: 1. Whether or not the 20% sale discount granted to qualified senior citizens on their purchases of medicines from the Petitioner should be treated as deduction from gross income pursuant to Revenue Regulations No. 2-94 or as a tax credit pursuant to Republic Act No. 7432. 2. Whether or not Petitioner was able to substantiate its claim for refund. A thorough and scrupulous review of the records of this case reveal that the conclusion of the Petitioner, in so far as the legal aspect of this case is concerned, is more firmly grounded on jurisprudence and amply supported by the evidence on record than that of the Respondent. Remaining undisturbed this point is the decision of this Court, in previous similar cases that the 20% sales discounts granted to qualified senior citizens should be treated as tax credit instead of mere deductions from gross income, thus: "A cursory review of the wordings of Section 4 of Republic ActNo.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 RRNo.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. In declaring that the provisions of RA7432 prevail over Revenue RegulationsNo.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 RegulationsNo.2-94 is null and void and it is Section 4(a) of RA7432 that will apply in cases of this nature." ( Del Rosario Drug Corporation vs. CIR, CTA Case No . 5357, April 6, 1998 cited in Vas Salus Drug Corporation vs. CIR, CTA Case No . 5509, Nov . 26, 1999, Baliuag Drug Corporation vs. CIR, CTA Case No . 5365, May 13, 1998, M.E. Holding Corporation vs. CIR, CTA Case No . 5314, Aug . 17, 1998, and Trinity Franchising and Management Corp. vs. CIR, CTA Case No . 5313, Aug . 18, 1998) . Confronted with the same issue, the Court of Appeals in the case entitled Commissioner of Internal Revenue vs. Elmas Drug Corporation, CA-G . R . SP No . 49946 promulgated on October 19, 1999 , agreed with this Court's aforequoted declaration that the provisions of Republic Act No. 7432 prevail over Revenue Regulations No. 2-94, and We quote, thus: "Where the law is very clear, there is no room for interpretation. Section 4 of RepublicAct7432 clearly provides that the cost of the 20% discount may be claimed by Respondent as tax credit and there is nothing more to interpret. The Court of Tax Appeals, in its decision dated August 27, 1998 correctly ruled that the direct cost or the cost of sales of the 20% discount given to senior citizens is deductible as tax credit." Anent the second issue, We find the Petitioner's cause to be replete with facts established by evidence which the Respondent failed to refute. Accordingly, We grant the claim but only in a reduced amount of P37,114,479.00. To prove the fact of overpayment of income tax, Petitioner must be able to establish the following: 1. it actually deducted the claimed amount of 20% sales discounts to senior citizens from its gross sales (income) in computing its income tax due for 1995; 2. it actually paid the corresponding amount of income tax due for 1995 as a result of the deduction of the claimed 20% sales discounts to senior citizens from its gross sales (income); and 3. the claimed amount of 20% sales discounts to senior citizens is duly supported by cash slips/cash register tape receipts. Evidence presented by the Petitioner reveals that it actually deducted from its gross sales the amount of P80,158,974.00 representing 20% sales discounts to senior citizens resulting to a net sales of P13,895,491,950.00 which latter amount is indicated in the Petitioner's 1995 audited financial statements as "Sales, Net" (Exh. B-2-a) and in Section C, Schedule 1 of the 1995 annual income tax section as "Gross Sales During the Year" (Exh. C-1-a). In his testimony, Mr. Jesus Mangrobang, Petitioner's witness, explained the matter in this wise: "ATTY. RAFAEL: Q. And, you mentioned that the petitioner granted twenty percent (20%) discounts for medicines purchased by qualified senior citizens under the SeniorCitizensLaw. In 1995, how much discounts did the petitioner grant, Mr. Witness? MR. MANGROBANG: A. We granted P80,158,974.00 discount to Senior Citizens, Sir. (TSN, July 30, 1998, page 13) Q. Mr. Witness, you earlier mentioned that the Sales and Sales Discounts of the petitioner were recorded in this Financial Statement, will you please go over this Financial Statement and point to this Honorable Court where such recording was made? MR. MANGROBANG: A. It was here recorded in the Statement of Income and Retained Earnings reflected on the Net Sales. The difference between the Gross Sales and the Sales Discounts, Sir. ATTY. RAFAEL: Q. And how much was the amount of the Net Sales as reflected in the Financial Statement, Mr. Witness? MR. MANGROBANG: A. The Net Sales here was already P13,895,491.950.00, Sir. (TSN, July 30, 1998, page 17) ATTY. RAFAEL: Q. Mr. Witness, you earlier mentioned that the Sales and Sales Discount by the petitioner were also recorded in this Annual Income Tax Return, will you please go over this return and point to this Honorable Court where such recording was made? (At this juncture, witness identifies the document.) MR. MANGROBANG: A. It was recorded here in Section C. Schedule 1, Sir. ATTY. RAFAEL: Q. And how much was recorded as representing the Sales and Sales Discounts of the petitioner for 1995, Mr. Witness? MR. MANGROBANG: A. The amount of P13,895,491,950.00, Sir. ATTY. RAFAEL: At this juncture, your Honors, may we request that page 2 of Income Tax Return under Section C which states "Gross Sales" during the year in the amount of P13,895,491.950.00 be encircled and marked as Exhibit "C-1-a" for the petitioner, your Honors. (TSN, July 30, 1998, pages 23 & 24) ATTY. RAFAEL: Q. So, Mr. Witness, you want to impress to this Honorable Court that the Net Sales for Financial Statement is the same as the Gross Sales as indicated in the Annual Income Tax Return? MR. MANGROBANG: A. Yes, after deducting sales discounts to Senior Citizen." (TSN, July 30, 1998, pages 25 & 26) Based on the taxable income of P334,678,902.00 (Exh. C to C-3, inclusive), Petitioner paid the corresponding income tax due in the amount of P117,137,616.00. Petitioner's 1995 income tax liability represents the sum of its: a) quarterly income tax payments for the first three quarters of 1995 in the amount of P53,801,860.00 (Exhs. C-2, D-1, E-1 and F-1); b) 1995 creditable withholding taxes of P501,302.94 (Exh. C-2) and c) 1995 final income tax payment of P62,834,453.06 (Exh. C-7). HTScEI Be that as it may, there are some evidence on record from which a conclusion can be reached that not all of the claimed amount of P80,158,974.00 representing 20% sales discounts to senior citizens are duly substantiated by cash slips/cash register tape receipts. In its final report dated June 1, 1999 (Exhs. M & M-1), independent auditor Vicente E. Reyes and Associates, through its partner Mr. Rene Amby Reyes who was commissioned by this Court, certified that the amount of P86,770,336.97 represents 20% sales discounts given by Petitioner to qualified senior citizens for the year 1995, broken down as follows: January P4,089,757.54 February 4,973,275.18 March 6,264,564.80 April 6,179,193.00 May 6,340,315.58 June 6,978,036.45 July 7,934,748.29 August 7,846,144.77 September 8,278,413.55 October 9,098,988.73 November 9,018,312.61 December 9,768,586.47 Total P86,770,336.97 In support of the said certification, the independent auditor attached thereto monthly summaries (Exhs. M-3 & M-4) wherein the 20% sales discounts to senior citizens were properly itemized based on the auditing firm's verification of the cash slips/cash register tape receipts issued by each of the Petitioner's branches (Exh. N, including sub-markings) and were compared against those that are reflected in Petitioner's 1995 monthly Register of Senior Citizens Sales Transactions print-outs (Exhs. M-6 to M-17). This Court finds these summaries to be in order after examining the same together with Petitioner's 1995 Register of Senior Citizens Sales Transactions and cash slips/cash register tape receipts. However, after comparing the amounts of 20% sales discounts to senior citizens as claimed by Petitioner and as audited by Mr. Rene Amby Reyes, this Court found out that there were instances when the claimed amounts exceeded the audited amounts or vice-versa. To illustrate, in the January 1995 Schedule of 20% Sales Discounts to Senior Citizens (Annex A), the amount claimed by Petitioner for Bambang Branch as recorded in its Register of Senior Citizens Sales Transactions was P17,912.96 while the corresponding audited amount was P18,576.86. Clearly, there was a discrepancy. Such being the case, only the claimed amount of P17,912.96 will be considered as basis for computing Petitioner's refundable amount since it is a rule that taxpayer cannot claim beyond what is prayed for in the petition for review. In the same breath, if the amount as audited and supported by cash slips/cash register tape receipts is lower than the amount claimed in the petition for review, the former shall be used in determining Petitioner's refundable amount as this amount is the one that is duly substantiated. For the year 1995, the lesser of the claimed vis-a-vis audited amounts on a per branch monthly basis amounted to P77,427,023.13 (see Annex B, page 5). ADHcTE Considering the aforesaid circumstances, out of the 20% sales discounts of P80,158,974.00 being claimed by the Petitioner for the year 1995, only the amount of P77,427,023.13 was properly substantiated by cash slips/cash register tape receipts which shall now serve as our basis in computing Petitioner's income tax refund. However, this amount will be further reduced since this Court's computation will be based on the cost of the 20% discount and not on the total amount of the 20% discount based on the decision of the Court of Appeals in the aforequoted case of Commissioner of Internal Revenue vs. Elmas Drug Corporation C . A . SP . No . 49946 promulgated on October 19, 1999 , where it ruled, thus: "Thus the cost of the 20% discount represents the actual amount spent by drug corporations in complying with the mandate of RA 7432. Working on this premise, it could not have been the intention of the lawmakers to grant these companies the full amount of the 20% discount as this could be extending to them more than what they actually sacrificed when they gave the 20% discount to senior citizens." Since the 20% sales discounts to senior citizens is no longer to be treated as a deduction from gross income but rather as a tax credit, it becomes ineluctable to add back to its net sales of P13,895,491.950.00 the amount of P80,158,974.00 previously deducted from its gross sales. As intimated earlier, only the direct cost of the 20% sales discounts to senior citizens may be allowed as tax credit and not the entire amount of the 20% sales discounts. Hence, only P65,170,120.00 representing the direct cost of the substantiated amount of P77,427,023.13 may be allowed as tax credit, computed as follows: Cost of Sales P11,763,268,305.00 Divided by Gross Sales P13,975,650,924.00 Percentage of Cost of Sales to Gross Sales 84.1697% Multiply by Adjusted amount of 20% Sales Discounts to Senior Citizens for the year 1995 (Annex B, page 5) P77,427,023.13 Allowable Tax Credit P65,170,120.00 ============== After making a recomputation of Petitioner's 1995 income tax liability, this Court found out that Petitioner actually made an overpayment of its 1995 income tax by P37,114,479.00, computed as follows: Net Sales P13,895,491,950.00 Add: 20% Sales Discount to Senior Citizens 80,158,974.00 Gross Sales P13,975,650,924.00 Less: Cost of Sales Merchandise inventory, beginning P2,928,397,228.00 Purchases 12,178,833,010.00 Total merchandise available for sale P15,107,230,238.00 Less: Merchandise inventory, end 3,343,961,933.00 11,763,268,305.00 Gross Profit P2,212,382,619.00 Add: Miscellaneous Income 88,636,017.00 Total Income P2,301,018,636.00 Less: Operating Expenses 1,855,302,566.00 Net Income before Income Tax P445,716,070.00 Less: Income subjected to final tax 30,878,194.00 Net Taxable Income P414,837,876.00 ============ Income Tax Due P145,193,257.00 Less: 1.) Tax Credit Cost of the 20% sales discounts to senior citizens P65,170,120.00 2.) Income Tax Actually Paid 117,137,616.00 182,307,736.00 Income Tax Refundable P(37,114,479.00) ============ WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of the Petitioner in the amount of P37,114,479.00 representing overpaid corporate income tax for taxable year 1995. SO ORDERED. (SGD.) RAMON O. DE VEYRA Associate Judge I CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge Separate Opinions With due respect to the learned opinion of the majority, I hereby express my dissent. Under Section 4(a) of Republic ActNo.7432, otherwise known as the "Senior CitizensLaw," the grant of the twenty percent (20%) sales discounts to qualified senior citizens on their purchases of goods from private establishments mentioned in said subsection have two (2) useful applications, to wit: 1. the grant of the twenty percent (20%) sales discounts on purchases by qualified senior citizens; and 2. that private establishments mentioned in said subsection (a) may claim the cost of the twenty percent (20%) sales discounts as tax credit. Also, under Section 100(d)(3) of the TaxCode of 1995, there is provided the following: "(3) Sales returns, allowances and sales discounts . xxx xxx xxx Sales discounts granted and indicated in the sales invoice at the time of sales may be excluded from gross sales within the same quarter." Proceeding from the aforequoted provisions of law, I firmly believe that the basis of the sales subject to income tax shall be the amount exclusive of the twenty percent (20%) sales discounts, a position which is in sharp conflict with the opinion of the majority. In the matter involving the computation of the cost of the twenty percent (20%) sales discounts to be used as tax credit or tax refund, no conflict of opinion among the Judges existed. Accordingly, the said cost of the twenty percent (20%) sales discounts may be computed, thus: Percentage of Cost of Sales - Cost of Sales divided by Gross Sales or P11,763,268,305 divided by P13,975,650,924 = 84.1697% Cost of Twenty Percent sales discounts: Total 20% sales discounts P80,158,974.00 Less: disallowed sales discounts after audit 2,731,950.87 Adjusted sales discounts P77,427,023.13 Multiplied by Percentage of cost of sale per above 84.1697% Cost of twenty percent sales discounts as Tax Credit or Refund P65,170,093.09 ============= However, inasmuch as the amount of Tax Credit or Tax Refund prayed for by the Petitioner in its Petition for Review is only P52,103,333.00 then only such amount shall be allowed as Tax Credit or Tax Refund. A review of Petitioner's annual income tax return filed on April 15, 1996 for calendar year ending December 31,1995 showed that the income tax due thereon in the amount of P117,137,616.00 was paid in full without such Tax Credit or Tax Refund being applied as among the mode of payments. Accordingly, the income tax due for taxable year 1995 was paid in full, thus: Net Sales P13,895,491,950.00 Less: Cost of goods sold 11,763,268,305.00 Gross profit P2,132,223,645.00 Less: Operating expenses 1,855,302,566.00 Operating income P276,921,079.00 Add: Miscellaneous income 88,636,017.00 Total income P365,557,096.00 Less: Miscellaneous income already subjected to final tax 30,878,194.00 Net taxable income P334,678,902.00 ============ Tax due thereon at 35% rate P117,137,616.00 Less: Income tax payments 1. 1st, 2nd & 3rd quarterly income paid P53,801,860.00 2. Creditable income tax paid 501,302.94 3. Final income tax paid upon the filing of the Annual Income Tax Return on April 15, 1996 62,834,453.06 Total cash payments P117,137,616.00 Balance - 0 - === Clearly, the conclusion is inescapable that the cost of the twenty percent (20%) sales discounts which should have been applied as a tax credit against the income tax due for the period constitute as an erroneously or illegally paid taxes to the government which under Sections 204(3), in relation to Section 230 of the NationalInternal RevenueCode, are refundable. WHEREFORE, in view of the foregoing and inasmuch as the claim for refund is limited to P52,103,333.00, I vote to grant the latter amount in favor of Petitioner. (SGD.) AMANCIO Q. SAGA Associate Judge ANNEX A SCHEDULE OF 20% SALES DISCOUNTS TO SENIOR CITIZENS