Bicolandia Drug Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5678. February 12, 2001.] BICOLANDIA DRUG CORPORATION (formerly known as ELMAS DRUG CORPORATION) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund/tax credit in the amount of P401,964.00 for the taxable year 1996 arising from the alleged erroneous treatment of the 20% sales discounts granted to qualified senior citizens on their purchases of medicines as a deduction from gross income as prescribed by Revenue Regulations No. 2-94 instead of as tax credit as provided for in Republic Act No. 7432, otherwise known as the Senior Citizens Act. The facts as simplified by the parties in their Joint Stipulation of Facts (see pages 45 to 46, CTA records). 1. Petitioner Bicolandia Drug Corporation is a domestic corporation organized and existing under the laws of the Philippines with principal office address at Panganiban St., corner Peafrancia, Naga City. 2. In 1996, it operated four (4) drug stores located at Iriga City; Abella, Naga City; Panganiban, Naga City and Panotes, Daet as franchisees under the business name and style of "Mercury Drug". 3. Petitioner is duly licensed to operate drug stores by the Bureau of Food and Drugs, the local government units where its drugstores are located, the Department of Trade and Industry and the Bureau of Internal Revenue. 4. Petitioner filed on April 15, 1997, is Annual Income Tax Return for tax year 1996. 5. The Annual Income Tax Return was filed by Petitioner under protest. 6. On January 16, 1998, Petitioner filed with Respondent a claim for tax credit/refund for tax year 1996 in the amount of FOUR HUNDRED ONE THOUSAND NINE HUNDRED SIXTY FOUR PESOS (P401,964.00) arising from the twenty percent sales discount granted by Petitioner to qualified senior citizens in compliance with Republic Act No. 7432. 7. To date, Respondent has not granted Petitioner's claim for tax credit and has not acted upon the same until this date. 8. The Petitioner's claim was filed within the two (2) year statutory period within which to file a judicial claim for tax refund. Petitioner alleges that on various dates during the period from January to December 1996, it granted 20% sales discounts to qualified senior citizens on their purchases of medicines in compliance with Republic Act No. 7432 and its Implementing Rules and Regulations, which discounts amounted to P618,406.00. By the mandate of Section 2(I) of Revenue Regulations No. 2-94, Petitioner then claimed said amount as deduction from its gross income for the taxable year 1996. EacHSA Petitioner now asserts that Section 4(a) of R.A. No. 7432 was wrongfully implemented by Section 2(I) of said regulation considering that the law clearly provides that "the cost of 20% sales discounts to senior citizens may be claimed as tax credit" and not a mere deduction from gross income. Thus, a refund/tax credit is in order, computed as follows: Net Sales P107,556,499.00 Add: 20% Sales Discount to Senior Citizens 618,406.00 Gross Sales P108,174,905.00 Less: Cost of Sales Merchandise inventory, beginning P11,620,255.00 Purchases 109,454,698.00 Total merchandise available for sale P121,074,953.00 Less: Merchandise inventory, end 22,823,882.00 98,251,071.00 Gross Profit P9,923,834.00 Add: Miscellaneous Income 123,985.00 Total Income P10,047,819.00 Less: Operating Expenses 9,342,474.00 Net Income before Income Tax P705,345.00 Less: Income subjected to final tax 81,386.00 Net Taxable Income P623,959.00 ============ Income Tax Due P218,386.00 Less: 1.) Tax Credit P618,406.00 2.) Income Tax Actually Paid 1,944.00 620,350.00 Income Tax Refundable P401,964.00 ============ Petitioner presented documentary and testimonial evidence to support its claim. Respondent, on the other hand, submitted the case based on the pleadings without any intention of filing a memorandum (CTA rec., p. 194). The issues submitted for resolution are: 1. Whether or not the 20% sales discount granted to senior citizens on their purchases of medicines should be treated as a tax credit deductible from the tax due as provided under R.A. No. 7432 or merely as a deduction from gross income as provided under Revenue Regulations No. 2-94. 2. Whether or not Petitioner actually granted a total amount of SIX HUNDRED EIGHTEEN THOUSAND FOUR HUNDRED SIX PESOS (P618,406.00) sales discounts to senior citizens on their purchases of medicines in the year 1996; and 3. Whether or not Petitioner is entitled to a tax credit/refund in the amount of FOUR HUNDRED ONE THOUSAND NINE HUNDRED SIXTY FOUR PESOS (P401,964.00). Anent to the first issue, We already ruled in several cases that the 20% sales discounts granted to senior citizens should be treated as a tax credit and not as a mere deduction from gross income ( Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No . 5367, February 13, 1998; Baliuag Drug Corporation vs. CIR, CTA Case No . 5365, dated May 13, 1998; and Trinity Franchising and Management Corporation vs. CIR, CTA Case No . 5313, dated August 18, 1998 ). For easy comprehension, the particular provisions of the law and regulation relied upon by the parties are hereunder reproduced: Republic ActNo . 7432 "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 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". Section 2(i) of Revenue RegulationsNo.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 and other percentage tax purposes. " (emphasis supplied) In the case of Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No . 5357, April 6, 1998 , we further elucidated, viz: "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 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 RA7432 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 RegulationsNo.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. RosarioDrug vs.Commissioner of Internal Revenue, CTA Case No. 5367, dated February 16, 1998. EaCSHI 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." Furthermore, the Court of Appeals affirmed the said ruling but held that the amount to be deducted as tax credit should be the direct cost or cost of sales of the 20% discount and not the full amount of the discount ( Commissioner of Internal Revenue vs. Elmas Drug Corporation, CA-G . R SP No . 49946, October 19, 1999 ). Having settled the legal issue, We now proceed to the factual issues. Based on the evidence on record, Petitioner was able to substantiate only the amount of P612,291.96 out of the 1996 total claimed 20% discounts of P618,406.00 (Exhs. O, N and sub-markings). Finally, in order to determine the issue of whether or not Petitioner is entitled to the claim sought, it is necessary that Petitioner prove the following: 1. that it actually deducted the claimed amount of 20% sales discounts from its gross sales (income) in computing its income tax due for 1996; 2. that it actually paid the corresponding amount of income tax due for 1996 as a result of the deduction of the claimed 20% sales discounts to senior citizens from its gross sales (income); and 3. that the claimed amount of 20% sales discounts to senior citizens is duly supported by cash slips or by copies of official receipts. Petitioner was able to establish the fact that it actually deducted the amount of P577,521.50 representing 20% sales discounts to senior citizens from its 1996 gross sales of P108,135,442.82 resulting to a net sales of P107,556,499.11 for all of its four branches, detailed as follows: Deductions 20% Disc. to Senior Branch Exhibits Gross Sales Citizens Others Net Sales Panotes, Daet E to E-2-a P33,087,985.08 P168,682.32 P199.81 P32,919,102.95 Panganiban, Naga F to F-2-a 30,252,467.56 201,229.82 1,222.41 30,050,015.33 Abella, Naga City G to G-2-a 26,212,482.77 174,612.52 26,037,870.25 Iriga City H to H-2-a 18,582,507.42 32,996.84 18,549,510.58 Total: P108,135,442.83 P577,521.50 P1,422.22 P107,556,499.11 ============== ========== ======== ============== The above 1996 net sales amount of P107,556,499.00 is reflected in Petitioner's audited financial statements and 1996 annual income tax return as "SALES, net" (Exh. I-1-a) and "GROSS SALES DURING THE YEAR (Exh. J-3), respectively. Hence, out of the 1996 claimed amount of sales discounts of P618,406.00, only the amount of P577,521.50 was actually deducted from Petitioner's gross sales (income) in computing its 1996 income tax liability of P1,944.00 (Exh. J). And Petitioner paid the said income tax liability out of its total tax credits of P104,971.00 (Exh. J). It is worth reiterating that Petitioner was able to substantiate the amount of P612,291.96 as 20% sales discounts granted to senior citizens. However, this amount is inclusive of VAT, therefore, it is but proper to exclude the 10% VAT or the amount of P55,662.91. Accordingly, only the amount of P556,629.05 shall be the basis for computing Petitioner's allowable tax credit. In other words, in computing Petitioner's 1996 overpaid income tax, the total 20% sales discounts granted to senior citizens in the amount of P577,521.50 previously deducted by Petitioner from its gross sales shall be added back to its net sales of P107,556,499.00. The reason being that the 20% sales discount is no longer treated as a deduction from gross income but rather as a tax credit. Nevertheless, only the direct cost of the 20% sales discounts shall be allowed as tax credit and not the entire amount of the 20% sales discounts. cCAIDS In sum, only the direct cost of the substantiated amount of 20% sales discounts of P556,629.05 shall be allowed as tax credit which is P505,755.73, computed below: Net Sales P107,556,499.00 Add: 20% Sales Discounts to Senior Citizens 577,521.50 Gross Sales P108,134,020.50 ============ Cost of Sales P98,251,071.00 Divided by Gross Sales P108,134,020.50 Percentage of Cost of Sales to Gross Sales 90.860462% Multiply by amount of 20% Sales Discounts to Senior Citizens for 1996 duly substantiated by cash slips P556,629.05 Allowable Tax Credit P505,755.73 =========== Consequently, a re-computation of Petitioner's 1996 income tax liability using the above figure of P505,755.73 as allowable tax credit will result to an overpaid income tax of P303,623.66, as follows: Net Sales P107,556,499.00 Add: 20% Sales Discount to Senior Citizens 557,521.50 Gross Sales P108,134,020.50 Less: Cost of Sales Merchandise inventory, beginning P11,620,255.00 Purchases 109,454,698.00 Total merchandise available for sale P121,074,953.00 Less: Merchandise inventory, end 22,823,882.00 98,251,071.00 Gross Profit P9,882,949.50 Add: Miscellaneous Income 123,985.00 Total Income P10,006,934.50 Less: Operating Expenses 9,342,474.00 Net Income before Income Tax P664,460.50 Less: Income subjected to final tax 81,386.00 Net Taxable Income P583,074.50 Income Tax Due P204,076.08 Less: Tax Credits 1.) Cost of 20% Sales Discounts to Senior Citizens P505,755.73 2.) Total Tax Credits per 1996 ITR P104,971.00 Less: Tax Credits to be applied to next year 103,027.00 1,944.00 507,699.73 Income Tax Refundable P(303,623.66) =========== WHEREFORE, in view of all the foregoing, Petitioner's claim for refund/tax credit is hereby GRANTED but in a reduced amount of P303,623.66. Respondent Commissioner of Internal Revenue is ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of herein Petitioner in the amount of P303,623.66 representing 1996 overpaid income tax for the year 1996. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge I CONCUR: (SGD.) RAMON O. DE VEYRA Associate Judge Separate Opinions The majority granted the refund/tax credit in favor of the Petitioner in the amount of P303,623.66. I humbly disagree with the learned opinion of the majority and submit that the Petition for Review should be denied. Under Section 4(a) of Republic ActNo.7432, otherwise known as the "SeniorCitizensLaw," 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 TaxCodeof 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 P98,251,071.00 divided by P108,134,020.50 90.860462% Cost of 20% Sales Discounts: Total 20% Sales Discounts P618,406.00 Less: Disallowed 20% Sales Discounts after audit 61,776.95 Adjusted 20% Sales Discounts P556,629.05 Multiplied by Percentage of Cost of Sales per above 90.860462% Cost of 20% Sales Discounts as Tax Credit or Refund P505,755.73 ========= A review of Petitioner's annual income tax return filed on April 15, 1997 for calendar year ending December 31, 1996 showed that Petitioner incurred an income tax liability of P1,944.00 which was offset against the reported total tax credits of P104,971.00 as follows: Net Sales per ITR filed P107,556,499.00 Less: Cost of Goods Sold 98,251,071.00 Gross Profit P9,305,428.00 Less: Operating Expenses 9,342,474.00 Net Operating Loss P(37,046.00) Add: Miscellaneous Income 123,985.00 Total Income P86,939.00 Less: Miscellaneous Income already subjected to final tax 81,386.00 Net Taxable Income P5,553.00 ============ Tax due thereon at 35% P1,944.00 Less: Tax Credits Total Tax Credits per 1996 ITR P104,971.00 Less: Tax Credits to be applied to next year 103,027.00 P1,944.00 Balance P-0- ============ Since Petitioner's 1996 income tax liability of P1,944.00 had been fully absorbed by the tax credits of P104,971.00 indicated in its ITR for the same period, there remains no amount of income tax due from which the cost of the 20% sales discounts amounting to P505,755.73 could have been credited or applied. WHEREFORE, in view of the foregoing, I vote to deny the entire amount claimed by Petitioner. (SGD.) AMANCIO Q. SAGA Associate Judge