Commissioner of Internal Revenue v. Central Luzon Drug Corp.

SPECIAL THIRTEENTH DIVISION [CA-G.R. SP No. 70480. August 13, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CENTRAL LUZON DRUG CORPORATION , respondent . D E C I S I O N DE GUIA-SALVADOR , J p : Before Us is a petition for review of the decision of the Court of Tax Appeals (CTA) dated April 15, 2002 in C.T.A. Case No. 6054, ordering petitioner to issue in favor of respondent tax credit certificate in the amount of P2,376,805.63. The Facts Respondent Central Luzon Drug Corporation is a retailer of medicines and other pharmaceuticals products and is doing business under the name and style "Mercury Drug". In 1997, it operated eight (8) drugstores in Balanga, Bataan; Mabalacat, Pampanga; Camiling, Tarlac; Arayat, Pampanga; Maharlika, Cabanatuan City; Apalit, Pampanga; Tarlac, Juan Luna; and Balanga, Paterno. DcTaEH From January to December 1997, in compliance with 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 "), respondent granted 20% sales discount to qualified senior citizens on their purchases of medicines. The total cost of the discounts amounted to P2,798,508.00. 1 In preparing its Income Tax Return for the year 1997, respondent, relying on the provision of Revenue Regulation No. 2-94 implementing R.A. 7432, treated the 20% as a deduction from gross income. Respondent's 1997 Income Tax Return, which was filed under protest, reflected a net loss from operations in the amount of P2,405,140.00. 2 On March 19, 1999, respondent lodged with petitioner a claim for tax refund/credit in the amount of P2,660,829.00 representing the 20% sales discounts it granted to qualified senior citizens, computed as follows: SALES, Net P176,742,607.00 Add: Cost of 20% Discount to Senior Citizens 2,798,508.00 SALES, Gross P179,541,115.00 LESS COST OF SALES Merchandise Inventory, beg. P20,905,489.00 Purchases 168,762,950.00 Merchandise Inventory, end (27,281,439.00) P162,387,000.00 GROSS PROFIT 17,154,115.00 Miscellaneous income 402,124.00 TOTAL INCOME P17,556,239.00 Less: operating expenses 16,913,699.00 NET INCOME BEFORE INCOME TAX P642,540.00 INCOME TAX DUE (35%) 137,679.00 Less: TAX CREDIT (Cost of 20% Discount to senior citizens) 2,798,508.00 INCOME TAX PAYABLE P2,660,892.00 INCOME TAX ACTUALLY PAID 0.00 TAX REFUNDABLE/ OVERPAID INCOME TAX P2,660,829.00" 3 Since petitioner was not able to decide the claim for tax refund/credit on time, respondent filed a petition for review with the CTA on April 6, 2000. 4 On April 15, 2002, the CTA rendered the assailed decision ordering petitioner to issue tax credit certificate in the amount of P2,376,805.63 in favor of respondent. 5 The Issues Dissatisfied, petitioner elevated the case before this Court through the present Petition for Review raising the twin issues, viz : "1. Whether the 20% sales discount granted to qualified senior citizens under R.A. 7432 may be claimed by private establishments as a tax 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 P2,376,805.63 allegedly representing overpaid income tax for the year 1997." The Court's Ruling We deny the petition. There is nothing novel in this case as the principal issue raised herein had, in a couple or so of cases, been previously ruled upon by this Court. Apropos the main issue of whether the 20% sales discount granted to qualified senior citizens under R.A. 7432 may be claimed by private establishments as a tax credit or as a deduction from gross income/gross sale, the CTA correctly ruled that the same should be treated as tax credit instead of as a mere deduction from the gross income. We quote from its well-reasoned disquisition on this point, thus: AIDTHC "A cursory review of the wordings of Section 4 of Republic Act No. 7432 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credit 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 RR no. 2-94. To be valid, an administrative regulation must not be in contravention but should conform to the standards that the law prescribes . . . . Its promulgation must be authorized by the legislature. RR No. 2-94 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. In declaring that the provisions of RA 7432 prevail over Revenue Regulations No. 2-94, it is important to point out that the cost of the 20% discount shall not be treated as deduction from the gross income of the petitioner nor deducted from its gross sales for VAT or other percentage tax purposes. The benefit that can be derived by taxpayers is the privilege of claiming this discount as tax credit and no longer as deductions as what others taxpayers had done. They cannot avail tax credit and claim said discounts as deduction at the same time because this would be tantamount to granting them benefits that are already disproportionate to the obligations imposed upon them by virtue of said law. This is to make clear for both 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 Regulation No. 2-94 is null and void and it is Section 4(a) of RA 7432 that will apply in cases of this nature. ( Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, April 6, 1998 ) xxx xxx xxx [T]he law is clear in the 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" 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. 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'." (citing Commissioner of Internal Revenue vs. Bicolandia Drug Corporation, CA-G.R. SP. No. 63446, September 20, 2001) Petitioner contends that the aforequoted decision of the CTA is incorrect since it "applied a literal interpretation of the law." 6 We do not agree. Under the verba legis or the plain meaning rule , if the statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. 7 The principle rests on the valid presumption that the words employed by the legislature in a statute correctly express its intent or will and preclude the court from construing it differently. The legislature is presumed to know the meaning of the words, to have used words advisedly, and to have expressed its intent by the use of such words as are found in the statute. 8 Section 4(a), R.A. 7432 provides in clear, unambiguous and unequivocal terms that private establishments granting 20% discount to qualified senior citizens " may claim the cost as tax credit ". There being no ambiguity in the language employed, the CTA therefore committed no error in applying said law according to its express terms. Its use of the plain meaning or literal rule therefore is but in keeping with its sworn duty to apply the law in accordance with the intent of the legislature. The intent of the Legislature to be ascertained and enforced is the intent expressed in the words of the statute . 9 It bears to stress that tax credit and deduction have different connotations and applications. " Tax credit " is defined and understood as a credit against income tax itself, 10 as distinguished from a mere deduction which applies only to reduce the income upon which the income tax is to be computed. " Tax credit " is an amount subtracted from an 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 in that the former is subtracted from tax while the latter is subtracted from income before the tax is computed. 11 As the subject law uses the term "tax credit", it must be taken to mean exactly what it says. Moreover, the plain and evident intent of the legislature in enacting R.A. 7432 is to treat the 20% discount as a tax credit rather than as a deduction. 12 Neither can We go along with petitioner's argument that to allow respondent to claim the 20% discount as tax credit instead of as a mere deduction from gross income/gross sales would be to grant a benefit not intended by law. The main objective of R.A. 7432 is to provide assistance and special privileges to senior citizens. In the implementation thereof, the State essentially requires drugstores, like herein respondent, to give 20% of the value of the medicines sold in the form of a discount in prices. This is tantamount to taking of private property for public use under the power of eminent domain. While the State's power of expropriation is authorized by the Constitution, it should not be exercised without payment of "just compensation" (Article III, Section 9). As aptly held in Maosca vs. Court of Appeals , 13 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". The tax credit scheme provided under the subject law is designed to compensate private establishments the full and fair equivalent of the property taken from them, hence, it would be highly inappropriate to consider the same as "benefit not intended by law". Having ruled that respondent is entitled to claim the cost of the 20% discount it granted to qualified senior citizens, as a tax credit, We now turn to the next issue, viz : whether respondent is entitled to a tax credit despite incurring a net loss for taxable year 1997. Petitioner opines that since the 20% discount given by respondent was not paid as a tax, it could not be refunded by way of a tax credit. We find no legal basis to support this opinion. Petitioner's conclusion was drawn from the framework of Section 229 of the Tax Code wherein actual payment by the taxpayer or actual receipt by the government of the tax sought to be refunded/credited is a condition sine qua non for the availment of tax credit. Be it stressed that the tax credit provided under Section 229 pertains exclusively to illegally collected or erroneously paid taxes. However, there are other instances under the Tax Code wherein tax credit or refund is allowed although it does not pertain to illegally collected or erroneously paid taxes, such as in the case of the excess input tax paid by VAT-registered person 14 or the excise tax paid on goods locally produced or manufactured but actually exported. 15 The standards and mechanics for the grant of tax credit in these cases are different from those under Section 229. On the other hand, R.A. 7432 is a special law providing another instance of a tax credit. The law uses the method of tax credit in the context of "just compensation" and not on the basis of illegally collected or erroneously paid taxes. Hence, We do not see any plausible reason why the conditions provided under Section 229 of the Tax Code should be applied in cases covered by R.A. 7432. Besides, R.A. 7432 does not require prior tax payment as a condition for claiming the cost of the discount as tax credit. Where the law itself does not explicitly provide for such a condition, this Court cannot do otherwise. CaHcET WHEREFORE, the instant petition is hereby DENIED and the assailed April 15, 2002 Decision of the Court of Tax Appeals is AFFIRMED in toto . No costs. SO ORDERED. Barrios and Magpale, JJ . , concur. Footnotes 1. P. 9, Rollo . 2. P. 45, Rollo . 3. P. 56, Rollo . 4. P. 40, Rollo . 5. Pp. 24-35, Rollo . 6. P. 16, Rollo . 7. Republic vs. Court of Appeals , 299 SCRA 199. 8. Republic vs. Court of Appeals , supra . 9. Regalado vs. Yulo , 61 Phil. 173, 179 (1935). 10. Ballantines Law Dictionary, 3rd edition. 11. Black's Law Dictionary. 12. pp. 97-99, Rollo . 13. 252, SCRA 412. 14. "Sec. 110. Tax Credits. xxx xxx xxx (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 sales 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) 15. 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 . (Emphasis supplied)