Commissioner of Internal Revenue v. Central Luzon Drug Corp.

FOURTH DIVISION [CA-G.R. SP No. 67439. August 29, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CENTRAL LUZON DRUG CORPORATION , respondent . D E C I S I O N DE GUIA-SALVADOR , J p : The Commissioner of Internal Revenue seeks the nullification of the 16 October 2001 Resolution 1 of the Court of Tax Appeals in C.T.A. Case No. 5767, granting respondent's motion for reconsideration and ordering him to issue a Tax Credit Certificate in favor of respondent Central Luzon Drug Corporation in the amount of P903,038.39, the decretal portion of which reads: "WHEREFORE, in view of the foregoing, the Motion for Reconsideration filed by Petitioner is hereby GRANTED. Accordingly, the dispositive portion of the decision dated February 12, 2001 is MODIFIED as follows: 'WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of the Petitioner in the amount of P903,038.39 computed as follows: (a) Computation of adjusted amount of 20% discount given to senior citizens: PER PETITIONER'S CLAIM P904,769.00 LESS: DISALLOWANCES a) Per independent CPA's verification No supporting documents P843.88 b) Per court's verification No supporting documents 438.48 Overstatement of sales discount 448.25 1,730.61 ADJUSTED SALES DISCOUNT P903,038.39' SO ORDERED." The facts are: Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style "Mercury Drug". From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00. On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with Republic Act No. 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals via a Petition for Review. On February 12, 2001, the Tax Court rendered a Decision 2 dismissing respondent's Petition for lack of merit. In said decision, the Court of Tax Appeals justified its ruling with the following ratiocination: ". . ., 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 unavailing. Moreover, whether the recovery of the tax is made by means of a 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. . . xxx xxx xxx Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is not available." ISDCHA Respondent lodged a Motion for Reconsideration. The Court of Tax Appeals, in its assailed resolution, granted respondent's motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of this Court in CA G.R. SP No. 60057 entitled " Central Drug Corporation vs. Commissioner of Internal Revenue " promulgated on May 31, 2001, to wit: "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." 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 or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally produced or manufactured but actually exported. 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, . . ." Petitioner appealed the above-quoted decision through the instant Petition for Review raising two (2) issues, viz: "1. Whether the 20% sales discount granted to qualified senior citizens under R.A. No. 7432 may be claimed by private establishments as tax credit or as a deduction from gross income or gross sales. 2. Whether or not respondent is entitled to the refund or tax credit of the amount of P903,038.39 allegedly representing its over paid income tax for taxable year 1996." The petition is devoid of merit. At the outset, Republic Act No. 7432, otherwise known as An Act to Maximize the Contribution of the Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for other Purposes, was enacted " [P]ursuant to Article XV, Section 4 of the Constitution, [as] it is the duty of the family to take care of its elderly members while the State may design programs of social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies: 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 goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of underprivileged, sick, elderly, disabled women and children." 3 In accordance therewith, the law aims to: "1) establish mechanisms whereby the contribution of the senior citizens are maximized; 2) adopt measures whereby our senior citizens are assisted and appreciated by the community as a whole; 3) establish a program beneficial to the senior citizens, their families and the rest of the community that they serve." 4 Laboring on these objectives, petitioner argued that since the purpose of RA 7432 is to grant benefits and special privileges to senior citizens, " [T]he 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 The argument must fail. Heavily militating against petitioner is the fact that R.A. 7432 was enacted pursuant to the constitutionally declared principles and policies of the State. In the implementation thereof, the State is in essence exercising its power of eminent domain. The benefits granted to senior citizens do not come directly from the State but from affected private establishments by way of granting twenty percent (20%) discounts to qualified senior citizens on their purchases. Accordingly, the Court cannot agree to petitioner's proposition that the corresponding tax credit granted to private establishments is tantamount to " benefit not intended by law ", but rather a compensation for taking of private property. In Manosca vs. Court of Appeals , 6 it was ruled that the power of eminent domain should not be understood as being confined only to the expropriation of vast tract of land and landed estates. The case at hand is another instance of expropriation of private property by the State for public use. Simple justice requires that private establishments should be compensated through issuance of tax credit certificates in the amount equivalent to the discount it granted pursuant to R.A. 7432. The reason for this construction is anchored upon a logical reading of the text in the light of the fundamental purpose of the law vis a vis the constitutional requirement for the exercise of the power of eminent domain by the State. As held in Manosca , supra, the only direct constitutional qualification for the exercise of such power is that " private property shall not be taken for public use without just compensation. " This proscription is intended to provide a safeguard against possible abuse and so to protect as well the individual against whose property the power is sought to be enforced. Given the purpose underlying the enactment of R.A. 7432 and the rationale for the grant of a tax credit to private establishments, the Court cannot sustain petitioner's postulate that the cost of 20% discount should not be treated as a tax credit but a mere deduction from gross income or gross sales by invoking the provisions of Section 2(i), Revenue Regulation (RR) 2-94, implementing R.A. 7432. Worth emphasizing is the definition of a tax credit and how it differs form a deduction. Black's Law Dictionary defines " Tax Credit " as "an amount subtracted from individual's or entity's tax liability to arrive at the total tax liability." Tax credit reduces the taxpayer's liability while deduction reduces taxpayer's taxable income upon which the tax liability is computed. A credit differs from deduction to the extent that the former is subtracted from tax while the latter is subtracted from income before the tax is computed. The burden imposed by R.A. 7432 upon private establishment cannot go beyond or differ from what the statute expressly and clearly imposed. 7 The provisions of Section 2(i) of RR 2-94 8 created an apparent inconsistency with the provisions of Section 4(a) of R.A. 7432. 9 Since R.A. 7432 unequivocally allows tax credit in favor of private establishments, RR 2-94 cannot change the law it implements by treating said tax credit as a deduction from gross sales or gross income. As the subject law uses the term "tax credit", it is thus far fetch to assume the same as a "deduction". The term tax credit should be applied in its strict sense. This considering, a question now arises: whether the tax credit could be availed of notwithstanding the fact that the taxpayer has no tax liability from which tax credit could be deducted. We hold in the affirmative. In taxation, the principles of tax credits application to other tax liabilities and to carry-over said credits to succeeding taxable periods are not new. Sections 112(C), 130(D) (excise tax on imported goods) and 204 of the National Internal Revenue Code (NIRC) allow the application of tax credits against any internal revenue tax for which the taxpayer is directly liable. 10 So also, tax credits granted under the authority of Section 75 in relation to Section 76 (corporate quarterly income tax) Section 110 (VAT) and special law e.g. the Omnibus Investment Code (executive Order No. 226), can be carried over to the succeeding taxable periods. 11 RA 7432 is another special law wherein tax credit is authorized. Hence, the Court cannot see any valid reason why private establishments should be denied availment of tax credit upon a flimsy excuse that they have no tax liability from which the credit could be deducted. Current practice obviously allows these establishments to carry over their tax credits to the succeeding taxable periods or to apply the same against any internal revenue tax for which they are liable. Corollarily, the Court likewise does not find merit to petitioner's submission that "since the 20% discount given by respondent was not paid as a tax, it cannot be refunded by way of tax crediting" , citing the dissenting opinion of Judge Saga, to wit: ". . ., it could be clearly deciphered that for the availment of tax credit, it is necessary that the taxpayer has a tax liability from which the credit may be deducted. Thus, inasmuch as Petitioner suffered a net loss during the taxable year in question, accordingly, tax credit is unavailing. It bears stressing that tax refund takes place when there is actually a reimbursement of the tax. Accordingly, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the tax payer, tax refund or tax credit can no longer be granted." (Emphasis supplied) Otherwise stated, petitioner in effect submits that had respondent incurred net profit and therefore incurred a corresponding income tax liability for said taxable year; it would entitled to tax credit. For sure, this would create an unjust and unsound situation whereby profit-earning private establishments would be placed in a better position than losing establishments. To deny respondent tax credit on the ground that it has not paid taxes due to net losses in operations and to grant the same to profit-earning establishment would result in a miscarriage of justice and is blatantly repugnant to the principle of fair play. Moreover, petitioner's proffered justification " if no tax has been paid to the government , . . . tax refund or tax credit is unavailing " is devoid of merit. The Court opines that its applicability is limited to Section 229 of the Tax Code, which pertains exclusively to refunds or credits of tax erroneously or illegally collected whereby actual payment or actual receipt by the government is a condition precedent for the availment of tax credit. But, that is not the situation here. This case concerns availment of tax credit pursuant to R.A. 7432, which, to repeat, does not require prior payment of taxes by private establishments before tax credit could be availed of. WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto . No costs. SO ORDERED. TDcAIH Jacinto and Bello, Jr . , JJ . , concur. Footnotes 1. Annex "A," Petition, Rollo , p. 24. 2. Annex "D," Petition, Rollo , p. 43. 3. Section 1, R.A. 7432. 4. Ibid . 5. Petition, Rollo , p. 15. 6. 252 SCRA 412. 7. Commissioner of Internal Revenue vs. Court of Appeals, 303 SCRA 508. 8. Sec. 2. Definitions . . . 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 place of culture, leisure and amusement, which discount shall be deducted by the said establishment from their gross income for income tax purposes and from their gross sales for value-added tax and other percentage tax purposes . (Emphasis supplied) 9. "Sec. 4. Privileged 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 ."(Emphasis supplied) 10. "Sec. 112. Refunds or Tax Credits of Input Tax. xxx xxx xxx (C) Cancellation of VAT Registration. A person whose registration has been canceled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106 (C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for unused input tax which may be used in payment of his other internal revenue taxes." (Emphasis supplied) Sec. 130 (D) of NIRC in relation to BIR Ruling No. 442 (September 15, 1988) allows purchaser of locally-manufactured goods who exported the same may request refund of the excise tax element or issuance of a corresponding tax credit certificate which can be used in the payment of other internal revenue tax liabilities . "Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes . . . . xxx xxx xxx A Tax Credit Certificate validly issued under the provisions of this Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable . Any request for conversion into refund for unutilized tax credits may be allowed, subject to the provisions of Section 230 of this Code: . . ." 11. Sec. 76. Final Adjustment Return . Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either : xxx xxx xxx (B) Carry-over the excess ; or xxx xxx xxx Sec. 110. Tax Credits . . . . (B) Excess Output or Input Tax . If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters . Any input tax attributable to the purchase of capital goods or to zero-rated by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112." (Emphasis supplied)