Mercury Drug Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5773. March 19, 2002.] MERCURY DRUG CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund of overpaid income tax arising from the alleged erroneous treatment of Respondent of the 20% sales discounts granted to qualified senior citizens on their purchase of medicines giving rise to the refundable amount of P85,917,619.00 for the year ended December 31, 1996. The facts of the case are simple. Petitioner Mercury Drug Corporation is a corporation organized and existing under the laws of the Philippines with principal office address at No. 7 Mercury Avenue, Bagumbayan, Quezon City (Exhibit A). It is a retailer of medicines and other pharmaceutical products and operates a chain of drugstores nationwide under the business name and style of "Mercury Drug". It is duly licensed by the Bureau of Food and Drugs to operate drugstores with proper permits and licenses from the Department of Trade and Industry and the local government units where the drugstores are located. For the taxable year 1996, Petitioner was constrained to grant 20% sales discounts in the total amount of P132,180,952.00 to qualified senior citizens on their purchases of medicines pursuant to Section 4 of 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," to quote: 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 recreational centers and purchase of medicines anywhere in the country: Provided, that private establishments may claim the cost as tax credit . (Emphasis supplied). The cost of the 20% discount was treated by Petitioner in its books of accounts as a deduction from gross income for purposes of computing the income tax in compliance with the provisions of Sections 2(i) and 4 of Revenue Regulations No. 2-94 which implemented the aforesaid law, thus: SEC. 2. Definitions . For purposes of these regulations: xxx xxx xxx 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 . SEC. 4. Recording/Bookkeeping Requirements for Private Establishments . . . . The amount of 20% discount shall be deducted from the gross income for income tax purposes and from gross sales of the business enterprise concerned for purposes of the VAT and other percentage taxes . (Emphasis supplied). On April 15, 1997, Petitioner filed its 1996 Corporation Annual Income Tax Return reflecting, among others, the income tax due in the sum of P107,268,536.00 on taxable income of P306,481,531.00 (Exhibits C and C-5). The taxable income of P306,481,531.00 was arrived at after Petitioner merely claimed the cost of the 20% discount as a deduction from gross sales (Exhibits B-1, C, C-1 and C-1-a) pursuant to the aforequoted Section 2(i) of Revenue Regulations No. 2-94. The 1996 final adjustment return was filed under protest (Exhibit G). Based on its theory that the 20% sales discounts granted to senior citizens should be treated as tax credit in accordance with the provisions of RA 7432, Petitioner on January 16, 1998, filed its administrative claim for refund in the amount of P85,917,619.00, computed as follows: (Exhibits H to H-4) SALES, Net P15,708,658,968.00 Add: Cost of 20% Discount to Senior Citizens 132,180,952.00 SALES, Gross P15,840,839,920.00 LESS COST OF SALES Merchandise inventory, beg. P3,343,961,933.00 Purchases 13,427,938,143.00 Merchandise inventory, end (3,374,706,213.00) 13,397,193,863.00 GROSS PROFIT P2,443,646,057.00 Miscellaneous income 121,597,989.00 TOTAL INCOME P2,565,244,046.00 Less: Operating expenses 2,080,218,031.00 NET INCOME BEFORE INCOME TAX P485,026,015.00 ============= INCOME TAX DUE (35%) P153,531,869.00 Less: TAX CREDIT (Cost of 20% Discount to Senior Citizens) 13,180,952.00 INCOME TAX PAYABLE P21,350,917.00 INCOME TAX ACTUALLY PAID 107,268,536.00 TAX REFUNDABLE/OVERPAID INCOME TAX P85,917,619.00 ============= Expecting no favorable response from the Respondent, Petitioner eventually lodged its appeal with this Court on April 7, 1999, in order to seek judicial interpretation and to toll the running of the two-year period under the law. In his Answer, Respondent raised the following Special and Affirmative Defenses: 4. In an action for refund, the taxpayer has the burden to show that the taxes paid were erroneously or illegally collected and failure to do so is fatal to the action; 5. Claims for tax refund are strictly construed against the taxpayer. Petitioner has no cause of action. The sole issue presented by both parties for our consideration is whether or not the 20% sales discounts given to qualified senior citizens on their purchases of medicines from the Petitioner should be treated as tax credit deductible from the tax due pursuant to RA No. 7432 or merely as a deduction from gross income for income tax purposes under Revenue Regulations No. 2-94. We find for the Petitioner. IEAacT The legal issue has already been settled by this Court in several analogous cases elevated before it, and hereunder is a detailed list of their titles and dates of promulgation, to wit: Case Title CTA Case Date No. Promulgated Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue 5367 February 16, 1998 Del Rosario Drug Corporation vs. Commissioner of Internal Revenue 5357 April 6, 1998 Baliuag Drug Corporation vs. Commissioner of Internal Revenue 5365 May 13, 1998 M.E. Holding Corporation vs. Commissioner of Internal Revenue 5314 August 17, 1998 Trinity Franchising & Management Corporation vs. Commissioner of Internal Revenue 5313 August 18, 1998 Elmas Drug Corporation vs. Commissioner of Internal Revenue 5311 August 27, 1998 Tropical Hut Food Market, Inc. vs. Commissioner of Internal Revenue 5312 May 28, 1999 Vas Salus Drug Corporation vs. Commissioner of Internal Revenue 5509 November 26, 1999 Central Luzon Drug Corporation vs. Commissioner of Internal Revenue 5582 April 24, 2000 Southern Luzon Drug Corporation (formerly known as Laguna Drug Corporation) vs. Commissioner of Internal Revenue 5583 April 24, 2000 ME Holding Corporation vs. Commissioner of Internal Revenue 5604 April 25, 2000 Cagayan Valley Drug Corporation (formerly known as Vas Salus Drug Corporation) vs. Commissioner of Internal Revenue 5581 April 26, 2000 Trinity Franchising & Management Corporation vs. Commissioner of Internal Revenue 5605 May 30, 2000 Mercury Drug Corporation vs. Commissioner of Internal Revenue 5583 April 24, 2000 Bicolandia Drug Corporation (formerly known as Elmas Drug Corporation) vs. Commissioner of Internal Revenue 5599 October 10, 2000 Mercury Drug Corporation vs. Commissioner of Internal Revenue 5612 January 9, 2001 Tropical Hut Food Market, Inc. vs. Commissioner of Internal Revenue 5600 February 8, 2001 Cagayan Valley Drug Corporation (formerly known as Vas Salus Drug Corporation) vs. Commissioner of Internal Revenue 5769 February 8, 2001 Bicolandia Drug Corporation (formerly known as Elmas Drug Corporation) vs. Commissioner of Internal Revenue 5768 February 12, 2001 Central Luzon Drug Corporation vs. Commissioner of Internal Revenue 5767 February 12, 2001 M.E. Holding Corporation vs. Commissioner of Internal Revenue 5772 February 12, 2001 In the aforementioned cases, the Court ruled that the 20% sales discounts granted to qualified senior citizens should be treated as tax credit instead of merely as a deduction from gross income, to 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, administrative regulations must not be in contravention but should conform to the standards that the law prescribes ( Tayug Rural Bank vs. Central Bank, 146 SCRA 12 ). 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 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 deduction 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. (Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, dated April 6, 1998, supra ) The Court of Appeals affirmed the preceding declaration in several cases appealed before it, the latest of which is the case entitled Commissioner of Internal Revenue vs. Bicolandia Drug Corporation (formerly known as Elmas Drug Corporation), CA-G.R. SP No. 63446, promulgated on September 20, 2001 . Pertinent portions of the said decision read as follows: (T)he law is clear in this case. As stated earlier, the granting by private establishments of 20% discount to senior citizens entitles them to " claim the cost as tax credit ." Any interpretation substituting the phrase "tax credit" to "deduction from gross income tax" is unwarranted. Tax deduction and tax credit have different connotations and application. In the former, the taxes are deducted from the gross income in computing the taxable income, while in the latter, the taxes are deducted from the income tax itself. In other words, a tax credit entitles a corporation or establishment to deduct directly from the income tax due the cost of the 20% sales discount given to senior citizens; while a deduction from "gross income" merely entitles the establishment or corporation to deduct the cost of the 20% sales discount given to senior citizens after arriving at the "gross sales less returns, discounts and allowances and costs of goods sold". The construction given by petitioner in Revenue Regulation No. 2-94 issued to implement section 4(a) of R.A. No. 7432 which provides that the 20% discount granted to senior citizens by private establishments shall be "deducted from their gross income" is clearly beyond the meaning of the phrase "tax credit". Hence, there being an obvious dichotomy between the two phrases, sections 2(i) and 4 of Revenue Regulation No. 2-94 cannot be given effect. (see also: Commissioner of Internal Revenue vs. Elmas Drug Corporation, CA-G.R. SP No. 49946, dated October 19, 1999; Trinity Franchising and Management Corporation vs. Commissioner of Internal Revenue, CA-G.R. SP No. 60269, April 4, 2001; The Commissioner of Internal Revenue vs. Bicolandia Drug Corporation, CA-G.R. SP No. 62824, May 3, 2001; Central Luzon Corporation vs. Commissioner of Internal Revenue, CA-G.R. SP No. 60057; May 31, 2001) . The legal issue having been settled, we shall now proceed to the amount to be granted to Petitioner on the basis of the evidence presented. In the case of Mercury Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5612, promulgated on January 9, 2001, supra , the Court laid down certain requirements in order to prove the fact of overpayment: 1. That 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. That 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. That the claimed amount of 20% sales discounts to senior citizens are duly supported by cash slips/cash register tape receipts. Applying the aforesaid standards in the present case reveals that Petitioner deducted from its gross sales the amount of P132,180,952.00 representing the 20% sales discounts granted to qualified senior citizens as evidenced by the Statement of Income and Retained Earnings for the year 1996 wherein the discounts were already deducted from the gross sales resulting to a net sales in the amount of P15,708,658,968.00 (Exhibit B-1). Petitioner also declared the same amount of net sales in Schedule 1 of Section C of the 1996 annual income tax return (Exhibits C, C-1, and. C-1-a). Records also show that the 1996 income tax due in the sum of P107,268,536.00 on taxable net income of P306,481,331.00 was paid by Petitioner in the following manner: (Exhibit C-5) Period Exh. Date Paid Amount 1st Qtr. 1996 D, D-1 05-28-96 P19,412,336.00 2nd Qtr. 1996 E, E-1 08-29-96 21,020,474.00 3rd Qtr. 1996 F, F-1 11-29-96 22,535,750.00 4th Qtr. 1996 C, C-6 04-15-97 43,424,419.07 Subtotal P106,392,979.07 Add Creditable Tax Withheld (Exh. C-2) 875,556.93 Total P107,268,536.00 ============= Although Petitioner satisfactorily proved compliance with the aforementioned first and second requirements, it nevertheless failed to substantiate the total claimed 20% sales discounts in the amount of P132,180,952.00. A careful scrutiny of the evidence presented uncovered some discrepancies between the amounts of discounts reflected in the Register of Senior Citizens Sales Transactions (Exhibits M to M-11) and that of the audit report submitted by the commissioned independent CPA, Mr. Amby Reyes (Exhibits L to L-2). There were instances where the amounts of the discount claimed in the register exceeded the audited amounts supported by cash slips or cash register tape receipts and vice-versa. Therefore, the Court deemed it proper to consider only the lesser of the two amounts with proper supporting documents. Thus, out of the claimed 20% sales discounts of P132,180,952.00 for the year 1996, only the sum of P127,634,064.61 was properly substantiated by cash slips or cash register tape receipts (see Annex A for details). Below is a re-computation of overpaid income tax of Petitioner for the year 1996: Net Sales P15,708,658,968.00 Add: Cost of 20% Discount to Senior Citizens 132,180,952.00 SALES, Gross P15,840,839,920.00 Less Cost of Sales: Merchandise inventory, beg. P3,343,961,933.00 Add Purchases 13,427,938,143.00 Total merchandise available for sale P16,771,900,076.00 Merchandise inventory, end (3,374,706,213.00) 13,397,193,863.00 Gross Profit P2,443,646,057.00 Add Miscellaneous Income 121,597,989.00 Total Income P2,565,244,046.00 Less Operating expenses 2,080,218,031.00 Net Income Before Income Tax P485,026,015.00 Less Income Subject to Final Tax 46,363,532.00 Net Taxable Income P 438,662,483.00 ============= Income Tax Due (35%) P153,531,869.00 Less Tax Credits: a) Cost of 20% Discount to Senior Citizens P127,634,064.61 b) Income Tax Actually Paid 107,268,536.00 234,902,600.61 Income Tax Refundable P81,370,731.61 ============= WHEREFORE, in view of the foregoing, the instant petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of P81,370,731.61 for taxable year 1996. SO ORDERED. cESDCa (SGD.) ERNESTO D. ACOSTA Associate Judge I CONCUR: (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge ANNEX A Recomputation of Allowable Discount to Qualified Senior Citizen For the Year Ended December 31, 1996 Separate Opinions DISSENTING OPINION I have always maintained that the formula adopted by the majority contravenes the provisions of Republic Act No. 7432. The amount of P81,370,731.61 granted to Petitioner was the result of adding back the cost of the 20% discount to the net sales resulting to a gross sales of P15,840,839,920.00. Under Section 4 of Republic Act No. 7432, the senior citizens are 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 ; (b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement; xxx xxx xxx The provisions of the aforequoted Section 4(a) of RA 7432 particularly refer to private establishments which are engaged in businesses requiring the use of inventories and purchases of goods as a necessary requirement in order to determine clearly the income of any such taxpayers (Section 35 of the Tax Code as amended by P.D. No. 1994). Under subsection (a) of Section 4, the private establishments granting the 20% sales discounts to senior citizens can directly deduct the 20% sales discount from the gross sales. However, in order to countervail the effect in the reduction of sales income, the same Section 4(a) allows the private establishments to use the cost of the 20% sales discounts as tax credit. To put it simply, RA 7432 grants two kinds of benefits to the drug companies, one is to allow them to deduct the 20% sales discount from their gross sales and second, to use the cost of the 20% sales discounts as tax credit. The said cost of the 20% sales discounts can be determined by the following formula, thus: Cost of Goods sold divided by Sales net of 20% sales discount equals the percentage rate of the Cost of Goods Sold multiplied by 20% sales discounts net of disallowed amounts by the Court's technical staff. However, for private establishments granting the 20% sales discounts to senior citizens classified under Section 4(b), the same are directly deductible on the gross sales made to senior citizens as is done under Section 4(a). The only difference is that the private establishments referred to in subsection (b) are not allowed to tax credit the cost of the 20% sales discounts. Section 100(d)(3) of the 1995 Tax Code further bolsters my position when it declares, thus: Sales Return, allowances and sales discounts the value of goods sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discounts granted and indicated in the invoice at the time of sale may be excluded from the gross sales within the same quarter . (Italics for emphasis). Based on the foregoing legal provisions, the correct formula to be adopted is one where the full amount of the 20% discount is deducted from the gross sales resulting in a lower income tax liability. Another error worth observing from the computation of the majority is that the full amount of the 20% discount was considered in computing the refundable sum contrary to the express provision of Section 4 of RA 7432 which speaks of the cost of the 20% discount that may be claimed as tax credit. My contention has been affirmed by 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, thus: "Where the law is very clear, there is no room for interpretation. Section 4 of Republic Act 7432 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. xxx xxx xxx Petitioner further argued that Section 4(a) of R.A. 7432 provides that private establishments may claim the cost of the 20% discount as tax credit. However, if the "real intention" of our legislators was to treat the full amount of the 20% discount as tax credit, it could have done so. Sadly, the final wordings of R.A. 7432 still mention the term "cost" as tax credit. Thus, the cost of the 20% discount represents the actual amount spent by drug corporations in complying with the mandate of R.A. 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 would be extending to them more than what they actually sacrificed when they gave the 20% discount to senior citizens. In this regard, WE AGREE with the petitioner. As pointed out by Associate Judge Amancio Saga in his dissenting opinion in the Resolution dated December 7, 1998, when a law speaks in clear and categorical language, there is no room for interpretation as ruled by the Supreme Court in the case of Land Bank of the Philippines vs. Court of Appeals (258 SCRA 404). Extrinsic aids such as legislative deliberations are resorted to only WHEN THE LAW IS AMBIGUOUS and not when the provisions are clear as to admit of no further interpretations." The principle enunciated by the Elmas Drug decision was reiterated in the recently decided case entitled Commissioner of Internal Revenue vs. Vas Salus Drug Corporation, CA-G.R. SP No. 59873 promulgated on January 31, 2002 . Based on the foregoing, the correct formula should have been as follows: SALES, Gross P15,840,839,920.00 Less 20% Sales Discount to Senior Citizens 132,180,952.00 Net Sales P15,708,658,968.00 Less Cost of Sales: Merchandise inventory, beg. P3,343,961,933.00 Add Purchases 13,427,938,143.00 Total merchandise available for sale P16,771,900,076.00 Merchandise inventory, end (3,374,706,213.00) 13,397,193,863.00 Gross Profit P2,311,465,105.00 Add Miscellaneous Income 121,597,989.00 Total Income P2,433,063,094.00 Less Operating expenses 2,080,218,031.00 Net Income Before Income Tax P352,845,063.00 Less Income Subjected to Final Tax 46,363,532.00 Net Taxable Income P306,481,531.00 ============= Income Tax Due (35%) P107,268,536.00 Less Tax Credits: a) Cost of 20% Discount to Senior Citizens P132,180,952.00 x P13,397,193,863.00 P15,708,658,968.00 P112,737,133.96 b) Income Tax Actually Paid 107,268,536.00 220,005,669.96 Should Be Excess Income Tax Payment P112,737,133.96 Less: Income Tax Payment That Cannot Be Refunded 5,468,597.96 Refundable Income Tax Payment P107,268,536.00 ============= As can be seen from the above computation, Petitioner is actually entitled to the amount of P112,737,133.96 as this represents the excess income tax payments after deducting the 20% sales discount from the gross sales, but since the refund or tax credit should be limited to the amount of income tax actually paid for the taxable year involved, which is P107,268,536.00 then only the latter amount should be allowed. Unfortunately, Petitioner adopted the formula of the majority in computing its claim and only asked for P85,917,619.00 when it is clear from the provisions of RA 7432 that it is entitled to the larger sum of P107,268,536.00. Restricted by the provisions of Section 229 of the Tax Code (formerly Section 230), that the grant of the refund or tax credit should not exceed that which was claimed in the administrative level, I vote to grant the amount of P85,917,619.00 by way of a tax credit certificate issued in favor of Petitioner. (SGD.) AMANCIO Q. SAGA Associate Judge