Commissioner of Internal Revenue v. Vas Salus Drug Corp.

FIFTH DIVISION [CA-G.R. SP No. 59873. January 31, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . VAS SALUS DRUG CORPORATION , respondent . D E C I S I O N BELLO , E. R., JR. , J p : Before Us are Petitions for Review of two (2) cases which were consolidated on April 2, 2001, CA-G.R. SP No. 59873 and CA-G.R. SP No. 600566 The first petition was instituted by the Commissioner of Internal Revenue (CIR). It was an appeal of the decision of the Court of Tax Appeals (CTA) in CTA Case No. 5509 dated November 26, 1999. Said decision ordered the CIR to refund or issue a Tax Credit Certificate to Vas Salus Drug Corporation (VSDC, for brevity) in the amount of P23,197.00 allegedly representing the latter's overpaid income tax for the year 1994. It is also questioning the CTA's Resolution dated July 7, 2000 which reduced the refundable amount to P19,751.82. The second petition, on the other hand, was filed by VSDC. It seeks the reversal of the above mentioned CTA Resolution inasmuch as it reduced the amount refundable to VSDC. The antecedent facts are as follows: VSDC is a duly licensed retailer of medicine and other pharmaceutical products, and operates a drug store located at Gonzaga St., Tuguegarao, Cagayan under the name and style of "Mercury Drug". In 1995, it granted a 20% discount to senior citizens on their purchases of medicine, pursuant to Republic Act 7432 and Its Implementing Rules and Regulations. In compliance with Revenue Regulation 2-94, these said discounts were treated by VSDC as deduction from gross sales to arrive at the net sales, instead of treating it as a tax credit as provided under Section 4 of Republic Act 7432. Thus, on December 27, 1996, VSDC filed a claim for tax refund/credit before the CIR of the full amount of the 20% sales discounts it granted to senior citizens for their medicine purchases in 1995. This amounted to P23,197.00. Since the CIR failed to act immediately upon VSDC's claim, and the two-year prescription period for filing an action for refund, as provided under Section 230 of the National Internal Revenue Code (NIRC), was about to expire, VSDC filed a Petition for Review before the CTA on April 14, 1997. On November 26, 1999, the CTA issued its Decision, the dispositive portion of which reads: "WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to GRANT a REFUND or issue a TAX CREDIT CERTIFICATE to Petitioner in the total amount of P23,197.00 representing the latter's overpaid income tax for the taxable year 1994. SO ORDERED." ( Rollo , p. 2) The CIR filed a Motion for Reconsideration to the above decision, and on July 7, 2000, a Resolution was issued by the CTA, the dispositive portion of which reads: "WHEREFORE, in the light of the foregoing, Respondent`s Motion for Reconsideration is hereby DENIED for lack of merit. The dispositive portion of the decision promulgated on November 26, 1999 is however MODIFIED to read as follows: "WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to GRANT a REFUND or issue a TAX CREDIT CERTIFICATE do Petitioner in the total amount of P19,751.82 representing the latter's overpaid income tax for the taxable year 1994. SO ORDERED." ( Rollo , p. 31) Both parties filed their respective petitions for review. The CIR is questioning both the November 26, 1999 decision, and the July 7, 2000 Resolution. VSDC, on the other hand, merely questioned the above Resolution for the same reduced the refundable amount. The issues raised by the CIR were the following: "1. Whether the 20% sales discount granted to qualified senior citizens under R.A. No. 7432 may be claimed by private establishments as a tax credit or as a deduction from gross income or gross sales. 2. Whether or not respondent is entitled to the refund or tax credit of the amount of P19,751.82 allegedly representing its overpaid income tax for taxable year 1994." ( Rollo , p. 8) VSDC, raised a single issue, that is, the correct interpretation of the term "cost" in paragraph (a) Section 4 of Republic Act 7432. Since the issues involved in both petitions are closely intertwined, we shall discuss them in concert. The provision of law in question is paragraph (a) Section 4 of Republic Act 7432 which was approved on April 23, 1992. It states: "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 establishment, restaurants and recreation centers and purchase of medicine anywhere in the country: Provided, That private establishments may claim the cost as tax credit;" It is the CIR's assertion that to allow private establishments to claim the 20% discount as tax credit instead of as deduction from gross income/gross sales would be to grant them benefits not intended by the law. In saying this, the CIR relied on the following provision of Revenue Regulations No. 2-94: "Sec. 2. DEFINITIONS . xxx xxx xxx 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 . xxx xxx xxx 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." A perusal of the foregoing provisions would show that there exists a discrepancy in their contents. Under RA No. 7432, the cost of the discount given by private establishments may be claimed as a tax credit. Under the implementing rules, however, as embodied in the above-mentioned Revenue Regulation, the discount shall be deducted from the gross income for income tax purposes and from their gross sales for VAT and other percentage tax purposes. The question now is which between the two must prevail. The answer to this query may be found in Article 7 of the Civil Code, to wit: "Art. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse, or custom, or practice to the contrary. When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws or the Constitution." (Emphasis supplied) The above provision shows the sources of law, as well as their order of preference, that is, 1) the Constitution; 2) laws (or presidential decrees); and 3) administrative or executive acts, orders, and regulations. ( Paras, Civil Code of the Philippines, Annotated [1994], pp. 43-44 ) Republic Act No. 7432 is an enactment of Congress, and thus, is a law. Revenue Regulation 2-94, on the other hand, is a mere administrative regulation. An administrative agency cannot amend an act of Congress. ( Fernando Juan vs. Celso Musgi, et al., G.R. No. 76053, October 27, 1987 ) It would follow, therefore, that the provisions of Republic Act No. 7432 must prevail over Revenue Regulation No. 2-94. The mandate of Republic Act No. 7432 is clear and unequivocal. Private establishments may claim the cost of the discount given to senior citizens as a tax credit. We must now resolve what the term "cost" meant, as used in Republic Act No. 7432. In the CTA's decision dated November 26, 1999, the computation of the refundable amount was based on the full amount of the 20% discount granted by VSDC to senior citizens. The net taxable income of P211,261.00 was multiplied by 35% to arrive at the income tax due which was P73,941. From this amount, the entire P35,687.00, claimed to represent the 20% discount given to senior citizens was deducted, thus arriving at P38,254.00 as the income tax payable. Since the tax actually paid by VSDC was P61,451.00, there appeared to be an overpayment of P23,197.00. In table form, the summary of the computation went as follows: Net taxable income P211,261.00 Income tax due (net taxable income x 35%) 73,941.00 Less: 20% discount given to senior citizens 35,687.00 Income tax payable 38,254.00 Income tax actually paid 61,451.00 Tax Refundable/Overpaid Income Tax P (23,197.00) In its Resolution dated July 7, 2000 which modified the refundable amount, the CTA, instead of using the entire P35,687.00 in the computation of Income Tax Payable, used the following formula: Gross Sales P9,369,781.00 Cost of Sales 8,465,234.00 Net taxable Income 211,261.00 Income tax due (net taxable income x 35%) 73,941.00 Less: Tax credit- "cost" of 20% discount given to senior citizens (P8,465,234.00/9,369,781.00 x P35,687.00) 32,241.82 Income tax payable P41,699.00 Less: Income tax actually paid 61,451.00 Income Tax Refundable P (19,751.82) In other words, the CTA ruled that the tax credit to be allowed for the discounts granted to senior citizens should be computed based on the direct or acquisition cost of the item rather than the cost of the actual discount granted to senior citizens. VSDC contends that the CTA's definition of the term "cost" will result in the violation of the former's constitutional right against confiscation of private property without due process and just compensation. To abide by the said interpretation, private establishments will have to shoulder not only indirect costs and operating expenses actually incurred in effecting the sales to senior citizens, but will also deprive them of profits. In effect, private establishments will have to subsidize a portion of the benefit granted by the State. VSDC further reasoned out that drugstores incur higher administrative costs when it transacts with a senior citizen, as compared to regular sales. The Bureau of Food and Drugs, as well as the Bureau of Internal Revenue require that records of sales to senior citizens be made and kept. Compliance with these rules necessitate additional work and expenses to petitioner. Under the interpretation given by the CTA to the word "cost", the taxpayer is made to shoulder all administrative and incremental costs of sales to senior citizens. These costs, therefore, will have to be charged to the income of petitioner on its regular sales, resulting in lesser profits to the taxpayer. In the assailed Resolution, the CTA justified the reduction of the refundable amount, as follows: ECaHSI "Finally, this Court takes this opportunity to correct the decision in the above-entitled case promulgated on November 26, 1999 with respect to the computation of the refundable amount. In the original decision, the computation was based on the full amount of the 20% discounts granted by petitioner to senior citizens. However, in the light of the decision of the Court of Appeals in the case of Commissioner of Internal Revenue vs. Elmas Drug Corporation (CA-G.R. SP No. 49946) promulgated on October 19, 1999, it should have been based on the cost of sales of the 20% discount given to senior citizens pursuant to the clear wordings of Section 4(a) of Republic Act No. 7432 which provides 'that private establishments may claim the cost as tax credit'. In the aforecited decision, the Court of Appeals, ruled thus: Section 4(a) of RA. 7432 clearly provides that private establishments, like the respondent in this case may claim the cost of the 20% discount as tax credit. If indeed the real intention of the legislators was to treat the full amount of the 20% discount as tax credit as argued by the respondent, why then would the final wordings of the law be 'Provided, that private establishments may claim the COST in tax credit . ' ( emphasis supplied ) Hence, the Court of Tax Appeals erred in granting the partial motion for reconsideration when it resorted to legislative deliberations of RA. 7432 and in considering the full amount of the 20% sales discount as tax credit." We agree with the CTA that the refundable amount must be reduced in accordance with its amended computation. RA 7432 used the word "cost" without specifying whether it refers to acquisition cost only, or to the full amount of the discount granted to senior citizens. Said omission resulted in an ambiguity as to how it should be applied. Since the law in question is a tax statute, the interpretation generally given to statutes of said nature must apply. It is settled that "a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. ( Commissioner of Internal Revenue vs. Tokyo Shipping Co . , Ltd . , et al.; G . R . No . 68252, May 26, 1995 ) The reason behind such interpretation has been discussed by the Supreme Court in several cases, one of which is Magsaysay Lines, Inc., et al. vs. Court of Appeals, et al. (G.R. No. 111184, August 12, 1996), and we quote: "And because taxes constitute the lifeblood of the government, through which its agencies continue to operate and with which the State effects its functions for the welfare of its constituents, tax exemptions (and, we might add, refunds in the nature of exemptions) must be strictly construed against the taxpayer and liberally in favor of the state." The government stands to lose more if we are to interpret "cost" as the total amount of discounts given to senior citizens, than if it were to be construed as acquisition cost only. It would therefore be more in accord with jurisprudence if we will apply the latter interpretation. We do not believe that such an interpretation would constitute deprivation of private property without due process and just compensation, as contended by VSDC. It is common knowledge that when determining the resale price of their goods, business establishments add in a considerable amount to the actual acquisition cost as their profit margin. This is in addition to the so-called administrative and incremental cost of sales. If we are to allow the business establishments to claim as tax credit an amount equivalent to the discount they have given, they would be getting more than what they have actually given since their mark up for profit would be included in that amount. Anyway, they have to spend for these additional costs of operation in the ordinary course of their business. In view of the foregoing, the petitions of both petitioners are hereby DENIED for lack of merit. The computation of the amount due to Vas Salus Drug Corporation, as embodied in the CTA's Resolution dated July 7, 2000, is hereby AFFIRMED. SO ORDERED. Jacinto and Guevarra-Salonga, JJ . , concur.