Southern Luzon Drug Corp. v. Commissioner of Internal Revenue

NINTH DIVISION [CA-G.R. SP No. 60058. May 7, 2002.] SOUTHERN LUZON DRUG CORP. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N REYES, JR., A. , J p : Before the Court is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure assailing the 24 April 2000 Decision 1 of the Court of Tax Appeals in C.T.A. Case No. 5583, the dispositive portion of which reads: "WHEREFORE, in view of all the foregoing, the Petition for Review is hereby DISMISSED for lack of merit. SO ORDERED." Petitioner Southern Luzon Drug Corporation is a duly licensed retailer of medical and other pharmaceutical products. It also operates two (2) Mercury Drug Stores. In 1995, in compliance with Republic Act No. 7432, petitioner granted 20% discounts to senior citizens on their purchases of medicines. Eventually, in preparing the Income Tax Return for the year 1995, petitioner, relying with Revenue Regulation No. 2-94, treated the 20% sales discounts granted by the petitioner as deductions from the gross sales to arrive at the net sales instead of treating it as tax credits as provided in Section 4 of Republic Act No. 7432. On 27 December 1996, petitioner lodged with respondent Commissioner of Internal Revenue a claim for tax refund/credit of the full amount of the 20% sales discounts it granted to senior citizens totaling to P89,609.00 in accordance with Republic Act No. 7432. As the two (2) years prescriptive period for filing an action for a refund would soon expire and petitioner's claim remained unacted, petitioner instituted a Petition for Review 2 in the Court of Tax Appeals on 18 March 1998. On 24 April 2000, the Court of Tax Appeals issued the herein assailed Decision, the dispositive portion of which was quoted at the outset. In a Resolution 3 dated 07 July 2000, the Court of Tax Appeals dismissed petitioner's Motion for Reconsideration . 4 Undaunted, petitioner elevated the case before this Court through the present Petition for Review, assigning the following as issues, to wit: "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 Act 7432. EaScHT b. Whether or not Section 204 (3) and 230 of the Tax Code 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 Act 7432, a special law. c. Whether or not the term "cost" under paragraph (a) Section 4 of Republic Act 7432 is equivalent to acquisition cost. We find the Petition meritorious. In denying petitioner's tax claims, the Court of Tax Appeals ratiocinated, thus: xxx xxx xxx. It must be pointed out that petitioner's computation of its refundable amount should be as follows: Gross Sales P28,293,230.00 20% Sales Discount 115,530.00 Gross/Net Sales 28,177,700.00 Less: Cost of Goods sold 25,725,838.00 Gross Profits 2,451,862.00 Less: Operating Expenses 2,501,453.00 Net Operating Profit/Loss (P49,591.00) Add: Miscellaneous Income Per Schedule 3, ITR 8,122.00 Net Income/Loss (P41,469.00) Income Tax Due Thereon P0.00 Amount of 20% as finally Determined P115,429.95 Less: 1. Amount excluded by Independent CPA 130.76 2. Item disallowed by the Court 151.05 281.81 Amount of 20% Sales Discount Allowed P115,148.14 Cost of the 20% Sales Discount: P25,725,838.00/P28,293,230.00 = 90.0% x P115,148.14 = P104,669.66 However, even if the above computation shows the amount of P104,669.66 as the total of the 20% sales discount based on the formula shown, this cannot be granted because no income tax was paid by the petitioner during the taxable year involved. It must be borne in mind that both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the government. Tax refund taxes place when there is actually a reimbursement of the tax. In tax credit, the government applies the amount determined to be reimbursable after proper verification against any sum that may be due and collectible from the taxpayer. (Law of Basic Taxation in the Philippines, Aban, 1st Ed., p. 208). Accordingly, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the taxpayer, tax refund or tax credit is made by means of claim for refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of claim for refund or tax credit, before recovery is allowed it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. This requires factual proof (Collector vs. William Li Yao, Dec. 28, 1963). The taxpayer who paid the tax can file a claim for refund or credit where there is an overpayment of the tax (Law of Federal Income Taxation, Mertens, 1995 Ed., Vol. 15, Chap. 58, p. 2). In the case at bar, it is undisputed that petitioner did not pay any tax by virtue of its net loss position in 1995. Furthermore, Section 204(3) of the Tax Code, as amended, in relation to Section 230 presupposes payment of tax, to wit: SEC. 204 (3). . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the commissioner a claim for credit or refund within two years after the payment of the tax or penalty. SEC. 230. Recovery of tax erroneously or illegally collected . . . . In any case, so such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment . (Emphasis supplied.) We would also like to stress at this point that Republic Act No. 7432 only provides that the 20% sales discount granted to senior citizens may be claimed as tax credit. It does not contain any proviso that a refund may be claimed as an alternative thereto. xxx xxx xxx. 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 P25,921.00 resulted. The 20 % sales discounts granted to senior citizens for the year, on the other hand, amounted to P115,530.00 or P115,299.19 (Exh. K) as per CPA certification. Only the amount of P25,921.00 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 P89,609.00, which is the subject claim for refund, 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 the 20% sales discounts granted to senior citizens, as in the case at bar, the tax credit will be only to the extend of the tax liability. xxx xxx xxx. In gist, it is the submission of the Court of Tax Appeals that since petitioner did not pay any tax as it yielded a net loss position in 1995, it follows that tax refund or credit is unavailing as tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the government. We are not persuaded. To begin with, Republic Act No. 7432 was enacted to give effect to the constitutional mandate. Section 1 of said statute, reads: "Pursuant to Article XV, Section 4 of the Constitution, it is the duty of the family to take care of its elderly members while the sate (sic) may design programs of social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies provides: The State shall provide social justice in all phases of national development, Further, Article XIII, Section 11 provides: The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential good, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the under privileges, such, elderly, disabled, women and children. Republic Act No. 7432 is an incentive or support given by the Government, and not by the private sector, to the senior citizens of the Republic. From this point of view, it is clear then that the question whether or not a private company that complied with the mandates of Republic Act No. 7432 had paid tax to the Government is immaterial. From the very nature of Republic Act No. 7432 as a state incentive to its senior citizens, the moment a private company extended the 20% sales discounts, that company is entitled to tax refund or credit. To rule otherwise would be isolative of Constitutional provision that no private property should be taken without due process and without just compensation (Sec. 9, Article III, 1987 Philippine Constitution). Neither can we discern any tenability as to the claim of the Court of Tax Appeals that petitioner is not entitled to a refund or tax credit for the taxable year 1995 on the ground that it has not paid income tax to the government. While it is true that under Section 230 of the 1995 Tax Code, the remedy of refund is available only to taxes that are erroneously or illegally paid to the government, this rule is only a general rule , and thus admit exceptions. One of the exceptions is Republic Act No. 7432 as Section 4 of said Statute, provides: "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 . . . " (emphasis supplied) The mandatory nature of treating the 20% sales discounts as tax credits means that Republic Act No. 7432 does NOT require prior tax payments as a condition for claiming these discounts as tax credits. Thus, Section 2(i) of the Revenue Regulation No. 2-94, reads: "Section 2(i), Revenue Regulation No. 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 or other percentage tax purposes ." (emphasis supplied) To be more emphatic, the Court concurs with the Dissenting Opinion of Presiding Judge Ernesto D. Acosta when he opined that: "I disagree with the sweeping statement made by the majority that 'if there is not tax liability then tax credit is not available'. I believe that there is no legal basis for such a statement. Section 4 (a) of Republic Act No. 7432 explicitly provides that private establishments which grant the 20% discount may claim the cost as tax credit. Said Law does not require prior tax payments as a condition for claiming these discounts as tax credit . A similar situation exists under the Investment Incentives Act, a special law where tax credits are granted even when there are no prior tax payments made such as tax credit granted covering purchases of domestic capital equipment, and domestic breeding stocks and genetic materials. CDAHIT The State, in its goal of providing social justice in all phases of national development, channels the benefits through these drug companies by ordering them to grant the 20% discount with the view of reimbursing them because it is still the State who is the sole benefactor and not the private drug companies. To impose a condition that taxes must first be paid before there can be a refund is to lose sight of the essence and purpose of Republic Act No. 7432. This particular law uses the method of refund or tax credit in the context of reimbursement and not on the basis of erroneous or illegal collection of taxes. Aptly put, if the drug stores granting the 20% discounts to senior citizens suffers a net loss during a taxable year, then they should still be allowed to claim the discounts given as tax credit to be applied to their future tax liabilities. This is what Republic Act 7432 provides and this is what should be done in the instant case. It may even be possible that the loss position suffered by the petitioner may be partly due to the discounts it granted to senior citizens. In granting the drug companies the benefit of tax credits, the State, in effect, provides them with a viable exchange for the burdens imposed upon them by this law. As a court of law, our decision should merely apply the provisions of Republic Act No. 7432 and not impose conditions where the law itself provides none. xxx xxx xxx." WHEREFORE, premises considered, the Petition is GRANTED; and the assailed 24 April 2000 Decision of the Court of Tax Appeals is hereby declared as NULL and VOID. Respondent Commissioner of Internal Revenue is ORDERED to refund the amount of P89,226.79 as tax credit to herein petitioner. No costs. SO ORDERED. Vasquez, Jr . and Guaria, III, JJ . , concur. Footnotes 1. Rollo , p. 26. 2. Rollo , p. 60. 3. Rollo , p. 41. 4. Rollo , p. 79.