Commissioner of Internal Revenue v. Mercury Drug Corp.

THIRD DIVISION [CA-G.R. SP No. 62923. June 28, 2006.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . MERCURY DRUG CORPORATION , respondent . [CA-G.R. SP No. 62970 1 . June 28, 2006.] MERCURY DRUG CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N PERLAS-BERNABE, E ., J p : Before the Court are consolidated 2 petitions for review of the Decision 3 dated January 9, 2001 of the Court of Tax Appeals (CTA) in CTA Case No. 5612 which ordered the Commissioner of Internal Revenue (hereinafter Commissioner) to refund to, or issue a tax credit certificate in favor of, Mercury Drug Corporation (hereinafter Mercury Drug) in the amount of P37,114,479.00 representing overpaid corporate income tax for the taxable year 1995. 4 The facts are as follows: Mercury Drug is a domestic corporation duly licensed to engage in the retailing of medicines and other pharmaceutical products and to operate drug stores nationwide. In 1995 it granted 20% discount on medicines sold to qualified senior citizens pursuant to Republic Act (RA.) No. 7432 5 allegedly in the total amount of P80,158,974.00. On April 15, 1996, it filed its annual corporate income tax return (BIR Form No. 1702) 6 for the taxable year 1995 and paid an income tax due of P117,137,616.00 on a taxable income of P334,678,902.00. In compliance with Section 2(i) of Revenue Regulations (RR) No. 2-94 implementing Section 4 of RA No. 7432, it treated the above amount of P80,158,974.00 as a deduction from its gross income. Attached to the above return, however, is a letter 8 to the Commissioner protesting the allegedly erroneous treatment of the 20% discount to senior citizens a deductions from gross income instead of as tax credits. On December 27, 1996, Mercury Drug filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of the amount of P52,103,333.00 9 representing allegedly overpaid income tax for the taxable year 1995 contending that the amount of P80,158,974.00 should be taken as a tax credit instead of a deduction from gross income. It argued that Section 2(i) of RR No. 2-94 is an erroneous implementation of Section 4(a) of RA No. 7432. Since the claim remained unacted upon and the two-year reglementary period within which to file a claim for refund is about to prescribe, Mercury Drug filed a Petition for Review 10 before the CTA on April 13, 1998, docketed as CTA Case No. 5612. After due proceedings, the CTA rendered the assailed Decision. While it declared that the discounts granted should be treated as a tax credit instead of mere deductions from gross income, it limited the allowable credit to the direct cost of the said discounts and not to the entire amount. It computed Mercury Drug's allowable tax credit and income tax refundable, 11 to wit: ALLOWABLE TAX CREDIT OVERPAYMENT Cost of Sales P11,763,268,305.00 Net Sales P13,895,491,950.00 Divided by Gross Sales 13,975,650,924.00 Add: 20% Sales Percentage of Cost of Discounts to Senior Sales to Gross Sales 84.1697% Citizens 80,158,974.00 Multiply by Adjusted Gross Sales P13,975,650,924.00 Amount of 20% Sales Less: Cost of Sales Discounts to Senior Merch. Inv. (MI) Citizens for the year beginning P2,928,397,228.00 1995 (Annex B, p. 5) 77,427,023.13 Purchases 12,178,833,010.00 Allowable Tax Credit P65,170,120.00 Total Goods Avail. ============== for Sales P15,107,230,238.00 Less: MI, end 3,343,961,933.00 Cost of Sales P11,763,268,305.00 Gross Profit P2,212,382,619.00 Add: Misc. Income 88,636,017.00 Total Income P2,301,018,636.00 Less: Oprtng. Expenses 1,855,302,566.00 Net Inc. Before Inc. Tax P445,716,070.00 Less: Inc. Subjected to Final Tax 30,878,194.00 Net Taxable Income P414,837,876.00 Income Tax due P145,193,257.00 Less: 1.) Tax Credit Cost of the 20% sales dscnts. 65,170,120.00 2) Inc. Tax Actually Paid 117,137,616.00 182,307,736.00 Income Tax Refundable P(37,114,479.00) ============== Both the Commissioner and Mercury Drug filed their respective Petitions for Review. A reading of their respective petitions would show that the core issues for resolution are: 1. Should the 20% discount granted to qualified senior citizens on. their purchases of medicines from Mercury Drug be treated as a deduction from gross income pursuant to RR No. 2-94 or as a tax credit pursuant to RA No. 7432; 12 and 2. What is the correct interpretation of the term "cost" under Section 4(a) of RA No. 7432? 13 There is no merit to the petition in CA-G.R. S.P. No. 62923 . In CA-G.R. SP. No. 62923 , the Commissioner prays the Court to reverse and set aside the assailed CTA Decision and instead render judgment denying Mercury Drug's claim for refund. He contends that the purpose of RA No. 7432 is to grant benefits and special privileges to senior citizens. To allow the 20% discount as a tax credit is to grant private establishments a greater benefit not intended by law, thus, said discount may be claimed only as a deduction from gross income or gross sales, as the case may be, pursuant to RR No. 2-94. 14 We disagree. aIETCA Section 4(a) of RA No. 7432 provides: "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 ; xxx xxx xxx" (Emphasis Ours) In point is the case of Commissioner of Internal Revenue vs. Central Luzon Drug Corporation 15 (hereinafter Luzon Drug Corporation Case), where the Supreme Court, speaking through Justice ( now Chief Justice) Artemio V. Panganiban, categorically ruled that the 20 percent discount required by law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned since RA No. 7432 unconditionally grants a tax credit to all covered entities. The provisions of RR No. 2-94 modifying such grant, treating them as deductible from gross income for income tax purposes or from gross sales for VAT or other percentage tax purposes were thereby declared void. The Supreme Court stressed that "the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use." 16 The Supreme Court ratiocinated that "(t)he discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit ." Thus, the CTA correctly ruled that the 20% discount granted by Mercury Drug on medicines sold to qualified senior citizens in 1995 should be treated as tax credit instead of mere deductions from gross income. On the other hand, there is partial merit to the petition in CA-G.R. SP. No. 62970 . In CA-G.R. SP. No. 62970 , Mercury Drug prays the Court to modify the assailed CTA Decision and grant its claim for refund in the amount of P52,103,333.00. It contends that the CTA's definition of the term "cost" as referring to acquisition. cost will result in the violation of its "constitutional right against confiscation of private property without due process and without just compensation." 17 It claims that by the said definition, it would be made to unduly shoulder all administrative and incremental costs of sales to senior citizens thereby reducing its income. It asserts that since the full amount of 20% discount represents lost revenues as a direct result of its compliance with RA No. 7432, it is this amount that should be allowed as a tax credit and not merely the direct cost thereof. We agree. In the Luzon Drug Corporation case, the Supreme Court ruled: "When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount when claimed shall be treated as a reduction from any tax liability, plain and simple." 18 The Court further elucidated: "As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation . This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given , but also to the promptness of its release. Equivalent to the payment of property taken by the State, such issuance when not done within a reasonable time from the grant of the discounts cannot be considered as just compensation . In effect, respondent ( i.e. , the private establishment concerned) is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues ." 19 (Emphasis and parenthetical notes Ours) The Supreme Court spoke of "tax credit certificate indicating the correct amount of the discounts given" and "equivalent amount . . . to cope with the reduction in its revenues." While it was not expressly declared. by the Supreme Court, the ineluctable conclusion is that the full amount of discounts given , not merely the direct cost, may be claimed as tax credit since this is the "equivalent amount" that "would have entered the coffers and formed part of the gross sales " and which constitutes "the permanent reduction in their (private establishments') total revenues." However, while this Court agrees that it is the full amount of the discounts given that may be claimed as a tax credit, it must be the full amount as proved by the claimant. The CTA noted that there were discrepancies between the amounts corresponding to the 20% discount to senior citizens claimed by Mercury Drug as per its Register of Senior Citizens Sales Transactions, and as per audit of its independent auditor Vicente E. Reyes and Associates, through its partner Mr. Rene Amby Reyes. To remedy the situation, it made a summary of the should-be basis for the tax credit, 20 which was the lower of the two amounts on the per branch monthly basis. 21 After making the necessary tabulation, it found that "(f)or the year 1995, the lesser of the claimed vis--vis audited amounts on a per branch monthly basis amounted to P77,427,023.13." 22 None of the parties herein questioned the computation of the said amount, but only challenged the applicable basis of the "cost" of discount which, as earlier discussed, should be the full amount and not merely 65% ( i.e. , the percentage of cost of sales to gross sales) thereof. Thus, the tax credit of Mercury Drug should be recomputed as follows: Net Sales P13,895,491,950.00 Add: Amount that was actually deducted from gross sales as allegedly representing 20% discounts to senior citizens 80,158,974.00 Gross Sales P13,975,650,924.00 Less: Cost of Sales Merchandise Inventory (MI), Beginning P2,928,397,228.00 Purchases 12,178,833,010.00 Total Goods Available for Sale P15,107,230,238.00 Less: MI, end 3,343,961,933.00 11,763,268,305.00 Gross Profit P2,212,382,619.00 Add: Miscellaneous Income 88,636,017.00 Total Income P2,301,018,636.00 Less: Operating Expenses P1,855,302,566.00 Net Income Before Inc. Tax P445,716,070.00 Net Income Before Inc. Tax P445,716,070.00 Less: Inc. Subj. to Final Tax 30,878,194.00 Net Taxable Income P414,837,876.00 Times: Applicable corporate tax rate x 35% Income Tax Due P145,193,257.00 Less: 1.) Tax Credit Cost of 20% discounts given to senior citizens P77,427,023.13 2.) Income Tax Actually Paid 117,137,616.00 194,564,639.13 Income Tax Credit P(49,371,382.13) ============ The Commissioner additionally argued that since the 20% discount was not actually paid by Mercury Drug as a tax, it cannot be refunded by way of a tax credit. 23 He further argued that the latter's "right to apply the entire cost of the 20% sales discount ( i.e. , over and above the acquisition cost of the medicine) as a tax credit against income tax is a mere privilege which can be availed of only if the income tax per return is sufficient to absorb the same. (citations omitted)" 24 The Luzon Drug Corporation case declared: "While a tax liability is essential to the availment or use of any tax credit , prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed." Applying the foregoing precept to the instant case, the Court finds that while Mercury Drug had paid. only the amount of P117,137,616.00 when its proper tax liability is P145,193,257.00, it is nevertheless entitled to a tax credit for the full amount of P77,427,023.13. However, the assailed Decision ordered the Commissioner "to REFUND, or in the alternative, to ISSUE A TAX CREDIT CERTIFICATE" 25 in favor of Mercury Drug. Considering that RA No. 7432 only provided for a "tax credit" but was silent as to "refunds" and considering further that the tax payment made was less than the appropriate tax liability, a refund of the amount claimed is not in order. Ideally, a tax credit certificate indicating the correct amount of the discounts given, in this case P77,427,023.13, should be issued to the claimant Mercury Drug. However, since it seeks to simultaneously apply its tax credit to its tax liability for the taxable year 1995, a tax credit certificate to cover only the net amount should accordingly be issued. WHEREFORE, premises considered, the petition in G.R. SP. No. 62923 is DISMISSED, but the petition in CA-G.R. SP. No. 62970 is partly GRANTED. The assailed Decision dated January 9, 2001 of the CTA in CTA Case No. 5612 is hereby MODIFIED directing the Commissioner of Internal Revenue to issue a tax credit certificate in favor of Mercury Drug Corporation only in the amount of P49,371,382.13. SO ORDERED. Reyes, Jr. and Abdulwahid, JJ., concur. Footnotes 1. Part of the initial caseload assigned to the Ponente pursuant to Office Order No. 16-04-EV dated October 26, 2004. 2. CA-G.R. SP. No. 62970 was ordered consolidated with CA-G.R. SP. No. 62923 via the Resolution dated November 12, 2003 issued by the former Seventh Division. 3. Rollo of CA-G.R. SP. No. 62970, pp. 18-30. 4. Id . at 30. 5. Otherwise known as "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes." 6. Rollo of CA-G.R. SP. No. 62970, pp. 152-154. 7. Ibid . 8. Id . at 159. 9. Income tax benefit of tax credit 100% Income tax benefit of tax deduction 35% Differential 65% x the amount representing 20% discount granted in 1995 x P80,158,974.00 P52,103,333.10 10. Rollo of CA-G.R. SP. No. 62970, pp. 91-97. 11. Id . at 28-29. 12. Rollo of CA-G.R. SP. No. 62923, p. 9. 13. Rollo of CA-G.R. SP. No. 62970, p. 4. 14. Rollo of CA-G.R. SP. No. 62923, pp. 13-14. 15. G.R. No. 159647, 15 April 2005 (456 SCRA 414). 16. Supra at 443-444. 17. Rollo of CA-G.R. SP. No. 62970, p. 5. 18. Luzon Drug Corporation case, supra at 440. 19. Supra at 444. 20. Annex B to the assailed Decision: Id . at 83-87. 21. Annex A to the assailed Decision: Id . at 31-82. 22. Assailed Decision: Id . at 27. 23. Rollo of CA-G.R. SP. No. 62970, p. 202. 24. Id . at 178-179. 25. Id . at 29.