Commissioner of Internal Revenue v. Bicolandia Drug Corp.

SPECIAL SEVENTEENTH DIVISION [CA-G.R. SP No. 63446. September 20, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . BICOLANDIA DRUG CORPORATION (FORMERLY KNOWN AS ELMAS DRUG CORPORATION) , respondent . D E C I S I O N AGCAOILI , J p : This petition for review seeks the reversal of the Court of Tax Appeals' (CTA) decision dated February 12, 2001 which granted respondent Bicolandia Drug Corporation's claim for tax credit/refund of the cost of 20% sales discount it granted to senior citizens under Republic Act No. 7432 (R.A. No. 7432) for the year 1996. The dispositive portion of the decision reads: WHEREFORE, in view of all the foregoing, Petitioner's claim for refund/tax credit is hereby GRANTED but in a reduced amount of P303,623.66. Respondent Commissioner of Internal Revenue is ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of herein Petitioner in the amount of P303,623.66 representing 1996 overpaid income tax for the year 1996. SO ORDERED." 1 As set forth in the decision of the CTA, the instant case has its genesis from the following undisputed facts: "1 Petitioner (now respondent) Bicolandia Drug Corporation is a domestic corporation organized and existing under the laws of the Philippines with principal office address at Panganiban St., corner Peafrancia, Naga City. 2. In 1996, it operated four (4) drug stores located at Iriga City; Abella, Naga City; Panganiban, Naga City and Panotes, Daet as franchisees under the business name and style of 'Mercury Drug'. 3. Petitioner is duly licensed to operate drugstores by the Bureau of Food and Drugs, the local government units where its drugstores are located, the Department of Trade and Industry and the Bureau of Internal Revenue. 4. Petitioner filed on April 15, 1997, its Annual Income Tax Return for the tax year 1996. 5. The Annual Income Tax Return was filed by Petitioner under protest. 6. On January 16, 1998, Petitioner filed with Respondent (now petitioner) a claim for tax credit/refund for the tax year 1996 in the amount of FOUR HUNDRED ONE THOUSAND NINE HUNDRED SIXTY FOUR PESOS (P401,964.00) arising from the twenty percent sales discount granted by Petitioner to qualified senior citizens in compliance with Republic A ct. No. 74 32. 7. To date, respondent has not granted Petitioner's claim for tax and has not acted upon the same until this date. 8. The Petitioner's claim was filed within the two (2) year statutory period within which to file a judicial claim for tax refund." 2 Respondent claimed that section 4(a) of R.A. No. 7432 which provides that "private establishments may claim the cost as tax credit" of the 20% discount they granted to senior citizens was wrongfully implemented by petitioner in his Revenue Regulation No. 2-94 which treated the cost of 20% sales discount merely as deduction from gross income. On February 12, 2001, the CTA rendered its assailed decision in favor of respondent. Thus: ". . . , We already ruled in several cases that the 20% sales discounts granted to senior citizens should be treated as a tax credit and not as a mere deduction from gross income ( Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5367 February 13, 1998; Baliuag Drug Corporation vs. CIR, CTA Case No. 5365, dated May 13, 1998; and Trinity Franchising and Management Corporation vs. CIR, CTA Case No. 5313, dated August 18, 1998 ). xxx xxx xxx In the case of Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, April 6, 1998 , we further elucidated, viz: 'A cursory review of the wordings of Section 4 of Republic Ac t No. 74 32 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credi t by private establishments. We could not see any plausible reason for the respondent to interpret the phrase in a different way. The discount being available for tax credit as stated in the law cannot be made incoherent to mean that such discount be utilized instead as a deduction from gross income and from gross sales as what is provided in R R No. 2-9 4. To be valid, an administrative regulation must not be in contravention but should conform to the standards that the law prescribes. (Tayug Rural Bank vs. Central Bank, 146 SCRA 120). Its promulgation must be authorized by the legislature. (Philippine Administrative Law, Cruz, 1994 ed, p. 32) R R No. 2-9 4 which engraved a new meaning to the phrase 'tax credit' as referring to the 20% discount which is deductible from gross sales is patently incongruous and a deviation from the plain intendment of the law. It is even repugnant to the common dictionary acceptation of said phrase. Black's Law Dictionary, 6th ed., defines tax credit in this wise: An amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer's liability dollar to dollar, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before tax is computed . (Emphasis supplied) Under R R No. 2-9 4, respondent has interpreted tax credit as synonymous to tax deduction in glaring contradiction to the above definition. Undoubtedly, there is a clear distinction, may, difference between the two terms. Under these circumstances, the law should reign supreme over subordinate rules and regulations where the provisions of the latter are not in accord with the former. It is clearly provided in Section 4(a) of R A 74 32 that the cost of the 20% discount granted by private establishments may be claimed by the latter as tax credit and not as a deduction contrary to what has been declared in Revenue Regulati ons No. 2-9 4. In case of conflict between the statute and an administrative order, the former must prevail. (Kilusang Mayo Uno vs. Garcia, Jr., 239 SCRA 386) Furthermore, the legal issue in this petition has already been settled in the case entitled Sto. Rosario Drug vs. Commissioner of Internal Revenue, CTA Case No. 5367, dated February 16, 1998. In declaring that the provisions of R A 74 32 prevail over Revenue Regulati ons No. 2-9 4, it is important to point out the cost of the 20% discount shall not deducted from gross sales for VAT or other percentage tax purposes. The benefit that can be derived by taxpayers is the privilege of claiming these discounts as tax credit and no longer as deductions as what other taxpayers have done. They cannot avail of tax credit and claim said discounts as deductions at the same time because this would be tantamount to granting them benefits that are already disproportionate to the obligations imposed upon by virtue of said law. This is to make clear for both the taxpayers and respondent that the tax credit privilege takes the place of claiming these discounts as deductions pursuant to this Court's stand that Section 2(i) of Revenue Regula tions No. 2-9 4 is null and void and it is Section 4(a) of R A 74 32 that will apply in cases of this nature.' Furthermore, the Court of Appeals affirmed the said ruling but held that the amount to be deducted as tax credit should be the direct cost or cost of sales of the 20% discount and not the full amount of the discount (Commissioner of Internal Revenue vs. Elmas Drug Corporation, CA-G.R. SP No. 49946, October 19, 1999). Having settled the legal issue, we now proceed to the factual issues. Based on the evidence on record, Petitioner was able to substantiate only the amount of P612,219.96 out of the 1996 total claimed 20% discounts of P618,406.00 (Exhs. O, N and sub-markings). xxx xxx xxx In other words, in computing Petitioner's 1996 overpaid income tax, the total 20% sales discounts granted to senior citizens in the amount of P577,521.50 previously deducted by Petitioner from its gross sales shall be added to its net sales of P107,556,499.00 The reason being that the 20% sales discount is no longer treated as a deduction from gross income but rather as a tax credit. Nevertheless, only the direct cost of the 20% sales discounts shall be allowed as tax credit and not the entire amount of the 20% sales discounts. xxx xxx xxx Consequently, a re-computation of petitioner's 1996 income tax liability using the above figure of P505,755.73 as allowable tax credit will result to an overpaid income tax of P303,623.66, as follows: Net Sales P107,556,499.00 Add: 20% Sales Discounts to Senior 557,521.50 Citizens Gross sales P108,134,020.50 Less: Cost of sales Merchandise inventory, beginning P11,620,255.00 Purchases 109,454,698.00 Total merchandise available 121,074,953.00 for sale Less: Merchandise inventory, end 22,823,882.00 98,251,071.00 Gross Profit P9,882,949.50 Add: Miscellaneous Income 123,985.00 Total Income P10,006,934.50 Less: Operating Expenses 9,342,474.00 Net Income before Income Tax P664,460.50 Less: Income subjected to final tax 81,386.00 Net Taxable Income P583,074.50 Income Tax Due P204,076.08 Less: Tax Credits 1) Cost of 20% Sales Discounts to Senior Citizen P505,755.73 2) Total Tax Credits per 1996 ITR 104,971.00 Less: Tax Credits to be applied next year 1,944.00 507,699.73 103,027.00 Income Tax refundable P(303,623.66) 3 ============ Hence, this petition anchored on the following grounds: "1. The Tax Court erred in holding that the 20% discount granted to qualified senior citizens under R. A. 74 32 may be claimed as tax credit instead of as deduction from gross income or gross sales, considering that the purpose of R. A. 74 32 is to grant benefits and special privileges to senior citizens, not to private establishments that give the discount. 2 The Tax Court erred in granting the refund or tax credit to respondent, considering that the 20% discount given by respondent to senior citizens was not paid to the government as a tax." 4 Petitioner argues that the grant of tax credit to respondent would, in effect, grant private establishments the benefits not intended by law. According to petitioner, "the purpose of R.A. No. 7432 is to grant benefits and special privileges to senior citizens. The law was not intended to grant private establishments benefits greater than those granted to senior citizens. To allow the 20% discount as a credit against the tax liability is to grant private establishments a benefit greater than the 20% discount that they are supposed to give." 5 Respondent, on the other hand, maintains that "section 4 of R.A. No. 7432 provides in clear and unequivocal language that the discounts granted to senior citizens may be claimed as tax credit and that Revenue Regulation No. 2-94 which is a mere implementing administrative regulation cannot modify, alter or depart from the clear mandate of section 4 of R.A. No. 7432 thus it is null and void for being inconsistent with the very statute which it seeks to implement." 6 The tax credit provided by law, respondent further posits, "is intended to free the private establishments from the burden of subsidizing a benefit to senior citizens which is granted or mandated by the government." 7 "A contrary rule will constitute a clear deprivation of Petitioner's property without due process and without just compensation." 8 This petition is barren of merit. As a matter of principle, this court will not set aside the conclusion reached by an agency such as the CTA which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority, 9 which is not present in the instant case. The crux of the petition gyrates on section 4 of R.A. No. 7432, "An Act To Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes," which 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 ;" 10 In its implementation, the Department of Finance through the Bureau of Internal Revenue (BIR) issued Revenue Regulation No. 2-94. Pertinent to the instant case, sections 2(i) and 4 respectively provide: "SEC. 2. Definitions . For purposes of these regulations: xxx xxx xxx 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 income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes ." 11 "Sec. 4. Recording/Bookkeeping Requirement For Private Establishments . Private establishments, i.e., transport services, hotels and similar lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, giving 20% discounts to qualified senior citizens are required to keep separate and accurate receipt of sales made to senior citizens, which shall include the name, identification number, gross sales/receipts, discounts, dates of transactions and invoice number for every transaction. 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 ." 12 The fundamental issue to be resolved herein is whether or not the cost of 20% sales discount granted to qualified senior citizens under R.A. No. 7432 may be claimed by private establishments as a tax credit. We rule in the affirmative. SCETHa It bears stressing that the first and fundamental duty of the court is to apply the law. As has consistently been held, "when the law speaks in clear and categorical language, there is no reason for interpretation or construction, but only for application." 13 Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no choice but to see to it that its mandate is obeyed. 14 Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true intent. A statute is ambiguous if it is admissible of two or more possible meanings, in which case, the court is called upon to exercise one of its judicial functions, which is to interpret the law according to its true intent. 15 Such is not the case at hand. The law is clear in this case. As stated earlier, the granting by private establishments of 20% discount to senior citizens entitles them to " claim the cost as tax credit ." Any interpretation substituting the phrase "tax credit" to "deduction from gross income tax" is unwarranted. Tax deduction and tax credit have different connotations and application. In the former, the taxes are deducted from the gross income in computing the taxable income, while in the latter, the taxes are deducted from the income tax itself. 16 In other words, a tax credit entitles a corporation or establishment to deduct directly from the income tax due the cost of the 20% sales discount given to senior citizens; while a deduction from "gross income" merely entitles the establishment or corporation to deduct the cost of the 20% sales discount given to senior citizens after arriving at the "gross sales less returns, discounts and allowances and costs of goods sold." 17 The construction given by petitioner in Revenue Regulation No. 2-94 issued to implement section 4 (a) of RA. No. 7432 which provides that the 20% discount granted to senior citizens by private establishments shall be "deducted from their gross income" is clearly beyond the meaning of the phrase "tax credit." Hence, there being an obvious dichotomy between the two phrases, sections 2(i) and 4 of Revenue Regulation No. 2-94 cannot be given effect. The rule-making power of a public administrative body is a delegated legislative power, which it may not use either to abridge the authority given it by Congress or the Constitution or to enlarge its power beyond the scope intended. Constitutional and statutory provisions control what rules and regulations may be promulgated by such a body, as well as with respect to what fields are subject to regulation by it. 18 Indeed, where the legislature has delegated to an executive or administrative officers and boards authority to promulgate rules To carry out an express legislative purpose, the rules of administrative officers and boards, which have the effect of extending, or which conflict with the authority-granting statute, do not represent a valid exercise of the rule-making power but constitute an attempt by an administrative body to legislate. 19 It bears emphasis that the fundamental issue raised herein appear to be the very issue settled by this court in our previous rulings. Sections 2(i) and 4 of Revenue Regulation No. 2-94 has consistently been held unenforceable in CA-G.R. SP No. 49946, entitled "Commissioner of Internal Revenue, Petitioner vs. Elmas Drug Corporation, Respondent," promulgated on October 19, 1999 and in CA-G.R. SP No. 44844, entitled "Mar-Tess Drug Corporation, Petitioner vs. Hon. Roberto F. De Ocampo, et al., Respondents," promulgated on February 28, 2000. Petitioner further contends that since "the 20% discount was not paid by respondent to the government as a tax, it cannot be refunded by way of tax credit." 20 In support thereof, he cites section 230 of the tax code pertaining to recovery of tax erroneously or illegally collected. Petitioner's contention cannot be dignified. Section 230 21 of the National Internal Revenue Codes provides: "SEC. 230. 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 penalty claimed 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. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years after the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; provided, however, that the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." The requirements laid down by the above rule are: (1) a tax has been erroneously or illegally assessed or collected against the taxpayer; (2) a claim for refund or credit is filed with the Commissioner of Internal Revenue; and (3) the claim must be filed within two (2) years from the date of payment of the tax or penalty. As clearly established in the instant petition: (1) the enforcement of Revenue Regulation No. 2-94 to the taxable income of respondent is erroneous and illegal; (2) respondent filed a tax credit/refund with the Commissioner of Internal Revenue on January 16, 1998 after payment of income tax due; 22 and (3) the claim for tax credit/refund was undisputedly filed by respondent within the two-year prescriptive period. 23 Thus, having complied with the requirements of section 230 of the National Internal Revenue Code, respondent's claim for tax credit/refund is in order. Significantly, under the principle of solutio indebiti provided in Art. 2154 of the Civil Code, 24 the BIR received something when "there (was) no right to demand it," and thus "the obligation to return arises." Heavily militating against petitioner is the ancient principle that "no one, not even the state, shall enrich oneself at the expense of another." 25 This guiding principle indeed was taken into consideration during the deliberations of the Bicameral Conference Committee Meeting on Social Justice held on February 5, 1992: "THE CHAIRMAN (SEN. SHAHANI). Pero sa private hospitals hindi ba puwedeng . . . SEN. ANGARA. Baka magreklamo sila, eh. Parang appropriation of private property na 'yon. THE CHAIRMAN (REP. UNICO). Itong 'free medical and dental services in government establishments,' there is no more rebate on this because these are all government . . . REP. OJEDA. Free na, eh. SEN. ANGARA. Free na ito. REP. UNICO. Unlike in private hospitals and private clinics. SEN. ANGARA. Hindi natin mamando ito eh. Parang confiscation of private properties. Itong letter (g) will now become letter (e). xxx xxx xxx THE CHAIRMAN, (Rep. Unico). By the way, before that ano, about deductions from taxable income. I think we incorporated there a provision na on the responsibility of private hospitals and drugstores hindi ba? SEN. ANGARA. O, o. THE CHAIRMAN, (Rep. Unico). So, I think we have to put in also a provision here about the deductions from taxable income of that private hospitals, di ba ganon 'yan? xxx xxx xxx SEN. ANGARA. . . . in the case of private hospitals . . . they got the grant of 15% discount, provided that, the private hospital can claim the expense as a tax credit. REP. AQUINO. Yah . . . could be allowed as deductions in the perpetrations of . . . (inaudible) income . . . SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano? REP. AQUINO. O, o, tax credit. Tama. Okay. Hospitals ba o lahat ng establishments na covered? xxx xxx xxx SEN. ANGARA. From all establishments. Alisin na natin 'yung kuwan kung ganon. Can we go back to section 4 ha? REP. AQUINO. Oho. SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all establishments at cetera, et cetera, provided that said establishments provided that private establishments may claim the cost as a tax credit. Ganon Ba? REP. AQUINO. Yah. SEN. ANGARA. Dahil kung government, they don't need to claim it. THE CHAIRMAN, (Rep. Unico). Tax credit. SEN. ANGARA. As a tax credit rather than as a kuwan deduction. Okay. REP. AQUINO. Okay" While the purpose of R.A. No. 7432 is remarkably noble and commendable, the private establishments, however, are the ones made to bear the costs of the benefits given to senior citizens. It does not only make the private establishments suffer some loss of earnings but it likewise penalizes them for failure to comply with R.A. No. 7432. It is, therefore, fair and justifiable to grant respondent the claimed tax credit, the ultimate purpose of which is to decrease the tax liability of the corporation concerned. WHEREFORE, the assailed decision dated February 12, 2001 of the Court of Tax Appeals is hereby AFFIRMED and the petition, DISMISSED for lack of merit. SO ORDERED. Asuncion and Enriquez, Jr . , JJ ., concur. Footnotes 1. Rollo , 27. 2. Ibid ., 19. 3. Ibid ., 21-27. 4. Ibid ., 9. 5. Ibid ., 12. 6. Ibid ., 58. 7. Ibid ., 61. 8. Ibid ., 62. 9. Cynamid Philippines, Inc. v. Court of Appeals, 322 SCRA 639 (2000); Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605 (1999). 10. Bold type given. 11. Underlining added. 12. Underlining added. 13. Sea-Land Service, Inc. v. Court of Appeals, G.R. No. 122605, April 30, 2001; Cebu Portland Cement Co. v. Municipality of Naga, 24 SCRA 708 (1968). 14. Quijano v. Development Bank of the Philippines, 35 SCRA 270 (1970); Luzon Surety Co., Inc. v. De Garcia, 30 SCRA 111 (1969). 15. Rizal Commercial Banking Corporation v. Intermediate Appellate Court, 320 SCRA 279 (1999). 16. Teodoro and De Leon, The Law on Income Taxation, 1993 ed., 106. 17. Section 27. Rates of income on domestic corporations . (A) . . . For purposes of this Section, the term "gross income" derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. 18. United BF Homeowner's Association and Home Insurance and Guaranty Corporation v. BF Homes, Inc., 310 SCRA 304 (1999). 19. People v. Maceren, 79 SCRA 450 (1977). 20. Rollo , 13. 21. Now, section 229 of the National Internal Revenue Code of 1997. 22. Rollo , 33. 23. Ibid , 8, 19, 56. 24. Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. 25. Citibank, N.A. v. Court of Appeals, 280 SCRA 459 (1997).