Mercury Drug Corp. v. Commissioner of Internal Revenue

FIFTH DIVISION [CA-G.R. SP No. 63056. October 20, 2003.] MERCURY DRUG CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N CARANDANG , J p : This is a Petition for Review seeking a partial modification of the Resolution 1 of the Court of Tax Appeals dated December 20, 2000 in CTA Case No. 5315, entitled MERCURY DRUG CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, the dispositive portion of which reads: "WHEREFORE,. in view of the foregoing, Petitioner's Partial Motion for Reconsideration is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the total amount of EIGHTEEN MILLION THIRTY EIGHT THOUSAND FOUR HUNDRED EIGHTY NINE & 71/100 (P18,038,489.71) representing the overpaid income tax due for taxable years 1993 and 1994." 2 Petitioner is a retailer of pharmaceutical products and operates drug stores nationwide under the name and business style of "Mercury Drug". Pursuant to the Senior Citizen's Law, Republic Act No. 7432 3 , petitioner granted 20% sales discounts to qualified senior citizens on their purchases of medicines between the period covering January 1993 to December 1994. On April 15, 1994, petitioner filed its Annual Income Tax Return for 1993 and claimed as a deduction from its gross income the amount of THREE MILLION SEVEN HUNDRED NINETEEN THOUSAND TWO HUNDRED EIGHTY-EIGHT PESOS (P3,719,288.00), representing the 20% sales discounts granted by petitioner to senior citizens in 1993. DHSACT On April 17, 1995, petitioner again filed its Annual Income Tax Return covering taxable year 1994 and claimed THIRTY FIVE MILLION FIVE HUNDRED THOUSAND FIVE HUNDRED NINETY FOUR (P35,500,594.00) as deductions from its gross income, the amount representing the 20% sales discounts given by petitioner to senior citizens in 1994. On June 26, 1995, within two years from the filing of the income tax return for 1993 and the payment of taxes due thereon, petitioner filed with respondent a claim for refund in the amount of TWO MILLION FOUR HUNDRED SEVENTEEN THOUSAND FIVE HUNDRED THIRTY SIX (P2,417,536.00), corresponding to the excess in corporate income tax paid for 1993 as a result of petitioner's error in claiming the 20% sales discounts as deductions from gross income instead of a tax credit. Similarly, on December 15, 1995, within two years from filing of the 1994 income tax return, petitioner filed a claim for refund with respect to its income tax payments for 1994, claiming as excess payment the amount of TWENTY THREE MILLION SEVENTY FIVE THOUSAND THREE HUNDRED EIGHTY SIX (P23,075,386.00), again, due to petitioner's mistake in claiming the 20% sales discounts as gross income deductions instead of tax credits. Since respondent had not acted upon petitioner's claims for refund and the two-year period within which to file a judicial claim for refund was about to prescribe, petitioner filed a petition for review with the Court of Tax Appeals (CTA) on December 29, 1995. 4 For failure to file an Answer, respondent was declared in default allowing petitioner to present its evidence ex parte . The CTA rendered its Decision 5 in favor of petitioner holding that there was indeed a refundable amount due since the 20% sales discounts should be treated as tax credits and not as mere deductions from gross income. The CTA went on to explain that if the amounts of P3,719,288.00 and P35,500,594.00 corresponding to the 20% sales discounts granted by petitioner to senior citizens for the years 1993 and 1994 were to be treated as gross income deductions, a higher tax liability would result but where the sales discounts are properly treated as tax credits, tax liability would be less. The erroneous computation would have thus resulted in an overpayment of taxes. 7 However, the CTA disallowed a portion of petitioner's claimed sales discounts for 1994 amounting to P25,743,699.32 on the ground that the submitted evidence consisted of the original cash slips instead of the duplicate originals casting doubt on the validity of said transactions. Upon Petitioner's Partial Motion for Reconsideration 7 , however, the CTA modified its decision and granted the sales discounts it previously disallowed. However, in computing the total amount to be refunded to petitioner, the CTA based the amount of the tax credit on " the cost of the discount and not the whole amount of the 20% senior citizen's discount " 8 , following its earlier ruling in CIR vs. Elma's Drug Corporation, 9 which case is still pending appeal with the Supreme Court. The CTA thus granted petitioner a refund of ONE MILLION SIX HUNDRED EIGHTY EIGHT THOUSAND ONE HUNDRED SEVENTY EIGHT & 43/100 (P1,688,178.43) for 1993 and SIXTEEN MILLION THREE HUNDRED FIFTY THOUSAND THREE HUNDRED ELEVEN & 28/100 (P16,350,311.28) for 1994 or a total refundable amount of only EIGHTEEN MILLION THIRTY EIGHT THOUSAND FOUR HUNDRED EIGHTY NINE & 71/100 (P18,038,489.71) as overpaid income tax for 1993 and 1994 instead of the actual sales discounts of P3,522,123.25 (1993) 10 and P34,211,769.45(1994) 11 In sum, petitioner was allowed to recover by way of tax credit merely 20% of the acquisition cost of medicines sold to senior citizens although it had granted a discount and had foregone revenue equivalent to 20% of the selling price of medicines sold to senior citizens. Petitioner Mercury Drug hence filed the instant Petition for Review, with the following assignment of errors that can be reduced to the sole issue as to the correct computation of the amount of the tax credit: DCAEcS I. THE COURT OF TAX APPEALS ERRED IN NOT RULING THAT IN COMPUTING THE TAX CREDIT TO BE ALLOWED PETITIONER FOR DISCOUNTS GRANTED TO SENIOR CITIZENS ON THEIR PURCHASE OF MEDICINES, THE ACQUISITION COST RATHER THAN THE ACTUAL DISCOUNT GRANTED TO SENIOR CITIZENS SHOULD BE THE BASIS. II. THE COURT OF TAX APPEALS ERRED IN FINDING THAT THE RULINGS OF THE COURT OF APPEALS IN THE MAR-TESS DRUG CASE AND THE ELMAS DRUG CASE ARE THE SAME. III. THE COURT OF TAX APPEALS ERRED IN NOT APPLYING THE RULING OF THE COURT OF APPEALS IN THE MAR-TESS DRUG CASE WHICH IS A LATER CASE AND WHICH HAS BECOME FINAL AND EXECUTORY. IV. THE NON-APPLICATION OF THE RULING IN THE MAR-TESS DRUG CASE THAT THE 20% SALES DISCOUNT MAY BE CLAIMED AS TAX CREDIT VIOLATES THE EQUAL PROTECTION OF THE LAWS. 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", is a social justice measure, which confers specific benefits and special privileges to senior citizens. Section 4 thereof provides in part: a) The grant of twenty percent 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 issue in the instant case centers on the proper interpretation of the term "cost"' as used in the proviso of the aforequoted Section 4(a) of RA 7432. The CTA interpreted the term to mean the acquisition cost of medicines sold to senior citizens, which is determined by applying the ratio of Cost of Sales to Gross Sales to the amount of the 20% sales discount. In other words, the allowable tax credit would be equivalent to 20% of the acquisition cost of medicines sold to senior citizens although the private establishment had in fact granted a discount equivalent to 20% of the selling price. Petitioner, on the other hand, asserts that the clear intent of the law is to allow private businesses to claim a tax credit based on the selling price of the medicines sold so as not to deprive them of profits due from such sales had there been no discounts given. Petitioner invokes the fundamental principle that "private property shall not be taken for public use without just compensation", 12 claiming that it would amount to a gross violation of due process and the just compensation requirement if private establishments were forced to grant a 20% discount without full compensation. This, says petitioner, is sheer confiscation a clear deprivation of property without due process. The petition is bereft of merit. The interpretation of the term "cost" as used in Section 4(a) of RA7432 is not a novel issue and has already been passed upon by this Court in the case of Commissioner of Internal Revenue vs. Elmas Drug Corporation 13 which held that: "[T]he cost of the 20% discount represents the actual amount spent by drug corporations in complying with the mandate of RA7432 . 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." As well as in the case of Trinity Franchising and Management Corp. vs. Commissioner of Internal Revenue , 14 which reiterated the earlier ruling in this wise: "Anent the issue on the interpretation of the term `cost' where the 20% discount shall be applied, this Court had earlier ruled in CIR vs. Elmas that the proviso "Provided, that private establishments may claim the cost as tax credit" does not intend to treat the entire amount of 20% discount as tax credit ." We concur with the interpretation that the term "cost" refers to the acquisition cost of the medicines sold, or the actual amount directly spent by drugstores in complying with the requirements of the law. The cost includes all business expenses directly incurred to produce the merchandise and to bring them to their present location and use. 15 We, therefore, fully agree with respondent CTA that the proper basis for the computation of the amount of the tax credit is the cost of the 20% discount and not the whole amount of the 20% discount. cIECTH Section 4(a) of RA7432 allows private establishments to claim only the cost of the 20% discount as tax credit because if the real intention of the framers of the law was to consider the whole amount of the 20% discount as tax credit, the law could have clearly said so. But as correctly pointed out by the Commissioner of Internal Revenue in Commissioner vs. Elmas Drug Corp ., RA7432 instead explicitly used the term "cost" with reference to the 20% discount. Properly, therefore, the tax credit should be computed by multiplying the total of amount of the discounts with the ratio of the Cost of Sales to the Gross Sales. Thus, where the amount of discounts granted by petitioner for the year 1993 totals P3,522,123.25 and the percentage of Cost of Sales is 84.89% (Cost of Sales divided by Gross Sales), only the amount of P2,989,930.43 is allowable as tax credit 16 , and where the amount of discounts granted by petitioner for the year 1994 is P34,211,769.45 and the percentage of Cost of Sales is 84.11 %, the tax credit allowable is only P28,775,519.28 17 There is nothing objectionable with the formula used in arriving at the amount of the tax credit due to private establishments granting the 20% senior citizens discount. Neither the wordings of the statute itself nor the precepts of due process and just compensation militate against it. As a general rule, words that have, or have been used in, a technical sense or those that have been judicially construed to have a certain meaning should be interpreted according to the sense in which they have been previously used. 18 Thus, when the words and phrases of a statute are clear and unequivocal, its literal meaning must be applied without attempted interpretation and the statute must be taken to mean exactly what it says. The legislature is presumed to know the meaning of the words and to have used such words in the statute to express its intent. 19 Republic Act No. 7432 is a piece of social legislation whose rudimentary purpose is to implement the policy of the state in promoting the welfare of the elderly. Even if the mandate to grant a 20% discount to senior citizens can be likened to a "taking" of private property by the state, such exercise of an inherent power may not be assailed where the "taking" is for a public purpose and there is payment of just compensation. Private establishments are allowed by law to claim tax credits for the discounts it gives to senior citizens as a form of compensation, belying the claim of confiscation of property. A tax credit is an amount directly deducted from one's total tax liability, resulting to a 100% tax benefit in favor of the taxpayer. Expounding on the nature of the tax benefit, this Court held in the case of Mar-Tess Drug Corporation vs. Hon. Roberto F. De Ocampo 20 , that: ". . . a tax credit entitles an establishment to a 100% tax benefit because a tax credit is subtracted from the income tax liability, while a deduction from the gross income entitles the establishment to 35% tax benefit only because the amount of the discounts is deducted only from the gross income in arriving at the net taxable income to which the 35% corporate income tax will be applied; . . ." Certainly, payment by tax credit goes beyond the ordinary concept of a full and fair equivalent of the value of the property taken. The amount spent by the drugstores by reason of the discount is directly deducted from petitioner's income tax liability peso for peso 21 . This tax benefit scheme more than compensates petitioner for the profits it bemoans to have lost in complying with the law. For, in truth, it actually benefits petitioner to a greater extent than if it gained profits from regular sales since the revenue earned thereby would have still been subject to the regular income tax whereas a tax credit is granted at full value. Consequently, We uphold the findings of the Court of Tax Appeals. Such findings of a highly specialized body devoted to the resolution of tax problems and exercising particular expertise over the review of tax cases take persuasive hold absent a finding of an improvident exercise of its authority. 22 WHEREFORE, the instant petition is DISMISSED. The assailed Resolution of the Court of Tax Appeals dated December 20, 2000 is hereby AFFIRMED. SEAHID SO ORDERED. Labitoria and Gozo-Dadole, JJ ., concur. Footnotes 1. Annex "E" of the Petition, Rollo , pp. 104115 2. Rollo , pp. 114115 3. An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes 4. Annex "A" of the Petition, Rollo , pp. 3442 5. Annex "C" of the Petition, Rollo , pp. 5583 6. Rollo , p. 63 7. Annex "D" of the Petition, Rollo, pp. 84103 8. Rollo , p. 113114 9. CA-G.R. SP No. 49946, promulgated on October 19, 1999 10. Rollo , p. 65 11. Rollo , p. 113 12. Sec. 1(2), Art. III, 1997 Constitution 13. CA-G.R. SP No. 49946, promulgated on October 19, 1999 14. CA-G.R. SP No. 60269, April 4, 2001 15. Black's Law Dictionary, 7th Ed. 16. CTA Decision dated September 6, 2000, Rollo , pp. 6566 17. CTA Resolution dated December 20, 2000, Rollo , pp. 112113 18. Agpalo, R.E., Statutory Construction, 1995 Ed., p. 145, citing Krivenko vs. Register of Deeds , 79 Phil 461 (1947) 19. Agpalo, R.E., Statutory Construction, 1995 Ed., p. 99. 20. CA-G.R. SP No. 44844, dated February 28, 2000 21. See definition of tax credit, Black's Law Dictionary, 7th Ed. 22. Philippine Refining Company vs. Court of Appeals , 256 SCRA 667 and Commissioner of Internal Revenue vs. Court of Appeals , 303 SCRA 614