Central Luzon Drug Corp. v. Commissioner of Internal Revenue

SPECIAL FOURTH DIVISION [CA-G.R. SP No. 60057. May 31, 2001.] CENTRAL LUZON DRUG CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N GUERRERO , B.J . , J p : Before Us is a petition for review of the decision of the Court of Tax Appeals, (hereafter, CTA) dated 24 April 2000 and its resolution dated 06 July 2000, dismissing petitioner Central Luzon Drug Corporation's (hereafter, Central Luzon Drug) claim for tax refund or credit in the amount of P150,193.00, which represents the 20% discount given to senior citizens under R.A. 7432. The material antecedents: Petitioner Central Luzon Drug is a retailer of medicines and other pharmaceutical products since 19 December 1994. In 1995, it opened three [3] drugstores as a franchise under the business name and style of "Mercury Drug". The stores were located in Balanga, Bataan, in Mabalacat, Pampanga, and in Camiling, Tarlac. 1 For the period January to December 1995, petitioner granted 20% in sales discount to qualified senior citizens on their purchases of medicines, as mandated by Sec. 4(a) of R.A. 7432, entitled An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for other purposes. 2 The total cost of the discounts amounted to P219,778.00. 3 For the taxable year 1995, petitioner reported a net loss of P20,963.00 in its income tax return (hereafter, ITR). 4 Petitioner deducted the P219,778.00 discount given to senior citizens from its gross income for that year, 5 pursuant to Revenue Regulation No. 2-94. However, on 27 December 1996, petitioner filed a claim for refund or credit of the amount of P150,193.00, which was itemized as follows: "S A L E S, Net 37,014,807.00 Add: Cost of 20% Discount To Senior Citizens 219,778.00 S A L E S, Gross 37,234,585.00 COST OF SALES Merchandise inventory, beg 1,232,740.00 Purchases 41,145,438.00 Merchandise inventory, end 8,521,557.00 33,856,621.00 GROSS PROFIT 3,377,964.00 Miscellaneous Income 39,014.00 TOTAL INCOME 3,416,978.00 Operating expenses 3,199,230.00 NET INCOME BEFORE INCOME TAX 217,748.00 =========== INCOME TAX (35%) 69,585.00 Less: TAX CREDIT (Cost of 20% Discount to Senior Citizens) 219,778.00 INCOME TAX PAYABLE (150,193.00) INCOME TAX ACTUALLY PAID -0- TAX REFUNDABLE/OVERPAID INCOME TAX (150,193.00)" 6 =========== The amount claimed represents the tax credit allegedly due to petitioner under R.A. 7432, which was arrived at by applying the P219,778.00 discount given to senior citizens as a tax credit and thereafter reducing from it petitioner's income tax liability of P69,585.00. In this claim for refund, instead of a net loss of P20,963.00, as previously reported in its ITR, petitioner had a tax liability. This is due to the fact that petitioner no longer applied the cost of discount to senior citizens, as a deduction from its gross income because it considered Rev. Reg. No. 2-94 a deviation from the mandate of R.A. 7432, which explicitly treated the discounts as tax credit, not as deduction from income. 7 Since petitioner did not pay any income tax for 1995, as indicated in its ITR but from its computation it had a tax liability of P69,585.00, petitioner reduced the P219,778.00 tax credit due it by offsetting its tax liability and thereby arriving at the amount of P150,193.00. But as the Commissioner of Internal Revenue was not able to decide the claim for refund on time, petitioner filed a petition for review with the CTA on 18 March 1998. 8 On 24 April 2000, the CTA dismissed the petition, thus: "In sum, even if the law allows the 20% sales discounts, which herein Petitioner granted to senior citizens as tax credit, the subject claim is still denied. As already adverted to, by virtue of the recomputation/adjustment made by the petitioner, a tax due of P69,585.00 resulted. The 20% sales discounts granted to senior citizens for the year, on the other hand, amounted to P219,778.00 or P218,838.77 (Exh. S) per CPA certification. Only the amount of P69,585.00 can be granted as tax credit. Inasmuch as the said amount is still due and collectible from the Petitioner, a credit of the same amount may be applied against same tax liability. However, the amount of P150,193.00 which is the subject of this petition, cannot be allowed as tax credit. A tax credit is usually but not necessarily of greater benefit, since the application is against tax liability. (Law of Federal Income Taxation, Mertens, 1975 Ed., Vol. 5, Chap. 33, p. 5). In other words, if there is no tax liability then tax credit is not available. If there is a tax liability but it is less than 20% sales discounts granted to senior citizens, as in the case at bar, the tax credit will be only to the extent of the tax liability. WHEREFORE, in view of all the foregoing, the Petition for Review is hereby DISMISSED for lack of merit." 9 On 24 May 2000, petitioner moved to reconsider 10 but the CTA, on 06 July 2000, denied the motion. 11 Hence, this petition which raised the following issues: "a. Whether or not Petitioner which suffered a loss and paid no taxes during the taxable year is entitled to a tax refund/tax credit, equivalent to the twenty percent (20%) sales discounts granted to senior citizens on their purchase of medicines pursuant to Republic A ct 74 32. b. Whether or not Section 204 (3) and 230 of the Ta x Co de a general law which limit the amount of tax credit due to the amount of taxes paid prevails over the provisions of Section 4 of Republic A ct 74 32, a special law. c. Whether or not the term 'cost' under paragraph (a) Section 4 of Republic A ct 74 32 is equivalent to acquisition cost." 12 We grant the petition. First . The CTA correctly ruled that discounts given under R.A. 7432 should be treated as tax credits, not deductions from income based on the plain wording of the law. However, the CTA denied the refund because no tax was erroneously, illegally and actually collected from petitioner. The CTA applied Sec. 230 of the Tax Code, now Sec. 229 of the amended code, to wit: "SECTION 229. Recovery of Tax Erroneously or Illegally Collected . No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any sum alleged to have been collected without authority; or of any sum alleged to have been collected without authority; or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress." Under this provision, it is necessary that: (1) the government has actually collected and received the tax sought to be recovered; and (2) the claimant establish the legal basis for the grant of the refund. 13 A tax is erroneously paid if it is made under a mistake of fact while a tax is illegally collected if it is made under duress. 14 The basis of a refund under Sec. 229 is the principle of the solutio indebiti or quasi-contract. 15 However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credited by petitioner was not erroneously paid or illegally collected. We take exception to the CTA's sweeping but unfounded statement that "both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the government." 16 Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected and erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, 17 or that of excess input tax paid by a VAT-registered person, 18 or that of excise tax paid on goods locally produced or manufactured but actually exported. 19 The standards and mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4(a) of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, to wit: "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. . . ." 20 Again, a plain reading of this provision would reveal a different category of tax credit, distinct from the ones previously mentioned. Thus, the CTA seriously erred in applying the standards of Sec. 229 of the Tax Code to a situation undeniably covered by Sec. 4(a) of the R.A. 7432. DAcSIC Second . After determining the applicable law, we now turn to the issue of whether petitioner is entitled to a tax refund or credit despite incurring a net loss for the taxable year. The CTA opined that a tax credit cannot exceed a taxpayer's liability such that "if there is no tax liability then tax credit is not available." 21 This conclusion was made within the framework of Sec. 229 although nothing in this provision expressly prohibits the carry over or application of excess tax credits to liabilities in the succeeding taxable period. On the contrary, other authorized instances of tax refunds or credits under the Tax Code permit such carry over of tax credits to succeeding taxable periods. 22 In fact, a tax credit authorized under Tax Code in the form of a certificate, may be applied against any internal revenue tax, except withholding taxes. 23 Does it follow then that a tax credit under a special law may likewise be carried over to the next taxable period? Section 4[a] of R.A. 7432 is silent on the matter and so we must look elsewhere for a clue on the intent of the legislature. The main thrust of R.A. 7432 is to provide assistance, benefits and privileges to senior citizens to promote their welfare. One of these privileges is the grant of a 20% discount on the purchase of medicines. By doing so, the state reduced the earnings of drugstores, which amounts to an exercise of the power of eminent domain. The situation of drugstores in the instant case is no different from that of private cemeteries which are required by ordinance to reserve 6% of their total areas for the burial of paupers 24 or that of newspapers which were required by the Comelec to provide a one-half [] page space for the common use of political parties and candidates. 25 In these instances, the Supreme Court held that there was "taking" of private property for which just compensation was due to the owners. To require drugstores to donate 20% of the value of medicines sold, in the form of a discount in prices, amounts to a "taking" under the power of eminent domain. Compensation is thus due to these drugstores and the state, by reason of lack of resources, has devised a tax credit scheme to address this concern. 26 In this way the state does not spend a thing but still complies with its obligation to compensate the drugstores. In this light, we are convinced that a tax credit due to a drug store under R.A. 7432, may be carried over to succeeding taxable periods or applied to other internal revenue tax liabilities. The tax credit is the just compensation given to drugstores albeit in an innovative form reminiscent of the LBP bonds authorized under the Comprehensive Agrarian Reform Law. 27 The tax credit, as a valid substitute to the traditional mode of cash payment, should, therefore, go to the drugstores in its entirety and without limitations that contradict its nature as a form of just compensation. Thus, a construction of Sec. 4(a) of R.A. 7432 which limits the amount of tax credit due to drugstores to the extent of their tax liability offends the principle of just compensation. Aside from his rationale, current practice in tax credits under the Tax Code bolsters our conclusion on carry-over to other taxable periods and application to other tax liabilities. Lastly, the concept of tax credit as just compensation, leads us to conclude that the term "cost" under Sec. 4(a) of R.A. 7432 refers to cost of acquisition, not the cost of medicines sold to senior citizens, which was already reduced by 20%. Just compensation is the full and fair equivalent of the property taken from the private owner by the expropriator. It is intended to fully indemnify the owner for the loss sustained. 28 The actual, basic or market value of the property is the standard of just compensation. Among the factors considered are the cost of acquisition of the property, the current value of like properties and its actual or potential uses. 29 Clearly, the cost of medicines sold to senior citizens, which is already discounted, does not come close to the full and fair equivalent of the property taken. It should not be the basis of the tax credit. Finding petitioner's computation of its tax credit to be in order, We grant the entire amount. WHEREFORE, the instant petition is hereby GRANTED and the decision of the CTA, dated 24 April 2000 and its resolution, dated 06 July 2000 are SET ASIDE. A new one is entered granting petitioner's claim for tax credit in the amount of P150,193.00. No costs. CIAHaT SO ORDERED. Rosario, Jr . and Santos, JJ . , concur. Footnotes 1. Rollo , p. 52. 2. Id ., p. 53. 3. Id ., p. 68. 4. Id ., p. 59. 5. Id ., pp. 2; 53. 6. Rollo , p. 68. 7. Ibid ., pp. 64-74. 8. Rollo , p. 52. 9. Ibid ., pp. 32-33. 10. Rollo ., p. 40. 11. Ibid ., pp. 37-38. 12. Ibid ., p. 5. 13. Aban, Benjamin, Law of Basic Taxation in the Phil., 1994 ed., p. 208. 14. Ibid ., p. 207. 15. Ibid ., p. 204. 16. Rollo , p. 30. 17. Sec. 76C, National Internal Revenue Code of 1997. 18. Sec. 110 B, supra . 19. Sec. 130 D, supra . 20. Sec. 4(a), R.A. 7432. 21. Rollo , p. 33. 22. Sec. Sec. 76C; Sec. 110B; Sec. 112C; and Sec. 130D, 1997 NIRC. 23. Sec. 204C, 2nd par., 1997 NIRC. 24. City Govt. of Quezon City v. Ericta , 122 SCRA 759, 766-767 [1983]. 25. Phil. Press Institute v. COMELEC , 244 SCRA 272, 279 [1995]. 26. Rollo , pp. 31-32; 10-13. 27. Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian Reform , 175 SCRA 343. 28. Manila Railroad Co. v. Velasquez , 32 Phil 286. 29. Cruz, Isagani, Constitutional Law, 1995 ed., p. 73.