Commissioner of Internal Revenue v. Bicolandia Drug Corp.

THIRTEENTH DIVISION [CA-G.R. SP No. 70534. June 2, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . BICOLANDIA DRUG CORPORATION (formerly known as ELMAS DRUG CORPORATION) , respondent . D E C I S I O N TRIA TIRONA , J p : Is the 20% sales discount given by drugstores to Senior Citizens deductible against the drugstores' gross income or can they claim it as tax credit? This issue is again before Us in this petition for review under Rule 43 of the Rules of Court; where the petitioner seeks the reversal and setting aside of the Decision, 1 dated 16 April 2002, rendered by the Court of Tax Appeals, containing the following decretal portion: "WHEREFORE, in view of all the foregoing, petitioner's claim for tax credit is hereby GRANTED but in a reduced amount of P348,043.61. Respondent Commissioner of Internal Revenue is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of herein petitioner the amount of THREE HUNDRED FORTY EIGHT THOUSAND FORTY THREE PESOS & 62/100 (P348,043.61) representing overpaid tax for the taxable year 1997." The facts as, found by the Court of Tax Appeals, are as follows: Respondent is a domestic corporation organized and existing under the laws of the Philippines with principal address at Panganiban St. corner Peafrancia, Naga City. In 1997, it operated seven (7) drug stores located in Iriga City; Abella, Naga City; Panganiban, Naga City; Panotes, Daet; Pili, Camarines Sur, Tabaco, Albay and Lukban, Daet, as franchisees under the business name and style of "Mercury Drug." 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 duly license it to operate drug stores. Respondent alleged that during the year 1997, it granted 20% sales discounts in the total amount of P637,746.00 on medicines sold to qualified senior citizens in compliance with Section 4(a) of 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" which provides, thus: "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 establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit.'' In its 1997 Income Tax Return 2 filed on 15 April 1998, respondent averred that it was forced to claim the 20% sales discounts to senior citizens of P637,746.00 as deduction from its gross income pursuant to the following provisions of Section 2(i) of Revenue Regulations No. 2-94, which implements Section 4(a) of R.A. 7432, which provides: "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 sales for value-added tax and other percentage tax purposes." However, it is respondent's view that Section 2(i) of Revenue Regulations No. 2-94 is erroneous considering that Section 4(a) of R.A. No. 7432 clearly provides that "the cost of the 20% sales discounts to senior citizens may be claimed as tax credit" and not as mere deductions from gross income. Thus, in its Administrative Claim for Refund 3 filed on 19 March 1999, respondent computed its alleged income tax overpayment as follows: Net Sales P149,396,824.00 Add: 20% Sales Discount to Senior Citizens 637,746.00 Gross Sales P150,034,570.00 Less: Cost of Sales Merchandise inventory, beginning P22,823,882.00 Purchases 159,390,308.00 Total merchandise available for sale P182,214,190.00 Less: Merchandise inventory, end 46,226,332.00 P135,987,858.00 Gross Profit P14,046,712.00 Add: Miscellaneous Income 189,404.00 Total Income P14,236,116.00 Less: Operating Expenses P13,380,667.00 Net Income before Income Tax P855,449.00 Less: Income subject to final tax 112,212.00 Net Taxable Income P743,237.00 ============ Income Tax Due P260,133.00 Less: 1.) Income Tax Actually Paid P36,922.00 2.) Cost of 20% Sales Discounts P637,746.00 674,668.00 Income Tax Refundable P414,535.00 ============ There being no action on the request for refund/tax credit on the part of the petitioner, respondent filed a petition on 03 April 2000 before the Court of Tax Appeals (CTA), well within the two-year prescriptive provided under Section 229 of the Tax Code. Petitioner, in his Answer, 4 advanced by way of Special and Affirmative Defenses the following: "4. The alleged claim for refund is subject to administrative investigation/examination by the respondent (petitioner herein); 5. Petitioner (respondent herein) failed to show that the taxes subject of the case at bar were erroneously or illegally collected; 6. Furthermore, R.A. 7432 is silent as to how and when the cost should be tax credited, hence, the need and subsequent issuance of Revenue Regulations No. 2-94, prescribing the guidelines for the effective and proper implementation of said law as mandated by Section 245 of the Tax Code, as amended by P.D. 1457; 7. Taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable; 8. In an action for tax refund/credit, the burden of proof is on the petitioner to show that it is entitled thereto. Failure of the petitioner to prove the same is fatal to its claim for refund; 9. It is incumbent upon the petitioner to show that it has complied with the provisions of Sections 204 and 229 of the National Internal Revenue Code, as amended; 10. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation ( Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and as such, they are looked upon with disfavor ( Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121)." In its memorandum, herein respondent asserts that petitioner's definition of the term "tax credit" in paragraph (i) of Revenue Regulations No. 2-94 is contrary to Section 4, paragraph (a) of R.A. 7432; that the intent of Congress is to treat the sales discounts granted to senior citizens as tax credit instead of mere deductions from gross income and that Sec. 2 par. (i) of Revenue Regulations No. 2094 is a mere implementing administrative regulation and cannot modify, alter or amend the clear mandate of Section 4 of R.A. 7432 which it seeks to implement. Petitioner, on his part, maintains that Section 4 of R.A. 7432 is silent as to when and how the costs of the 20% discounts incurred by private establishments should be claimed as tax credit, thus, the necessity for the issuance of Revenue Regulations No. 2-94 which defines "tax credit" as deduction from gross income for income purposes or from gross sales for value-added tax or other percentage tax purposes and not from income tax liability. According to petitioner, the issuance of RR 2-94 is a valid exercise of the Commissioner of Internal Revenue's rule making power as expressly mandated in Section 10 of R.A. 7432. Petitioner further contends that to allow private establishments to claim the 20% discounts as credits against tax liability is tantamount to refunding the said establishments a tax not paid to the government which is contrary to the provisions of Section 229 of the Tax Code. Lastly, petitioner argues that R.A. 7432 was not intended to grant private establishments such benefits greater than the 20% discounts they give to senior citizens. From these arguments, the CTA rendered its questioned Decision, finding for respondent and ordering petitioner to issue a tax credit in the reduced amount of P384,043.61 in favor of respondent. Dissatisfied with the CTAs decision, petitioner timely appealed the case before Us, raising two issues, to wit: "1. Whether the 20% sales discount granted to qualified senior citizens under R.A. 7432 may be claimed by private establishment as a tax credit or as a deduction from gross income or gross sale; 2. Whether or not respondent is entitled to the refund or tax credit of the amount of P348,043.61 allegedly representing its overpaid income tax for taxable year 1997." Petitioner posits than the purpose of R.A. 7432 is to grant benefits and special privilege to senior citizens and not to private establishments that gave the discount. Hence, to allow the 20% discount as a credit against the tax liability is to grant a benefit greater than the 20% discount they are supposed to give. Petitioner further argues that the 20% discount may be claimed only as a deduction from gross income or gross sales pursuant to Revenue Regulations 2-94, which according to petitioner was validly promulgated in the exercise of his rule making power. Petitioner finally contends that the 20% discount given by respondent to senior citizen was not paid to the government as a tax, thus the CTA erred in granting the refund or tax credit. The appeal utterly lacks merit. The argument of petitioner that the purpose of R.A. 7432 is to grant benefits and special privileges to senior citizens and not to private establishments that give the discount, is flawed, nay ridiculous. Pursuant to the constitutional mandates of Section 10 of Article II, Section 11 of Article XIII and Section 4 Article XV, Congress enacted R.A. 7432. Without any incentive, full cooperation from private establishments to conform to the directive of R.A. 7432 cannot be expected since they would unreasonably be burdened with giving these discounts to qualified senior citizens at their own expense. This would clearly result to expropriation of private property without just compensation. Hence, to effectively implement R.A. 7432 and to encourage private establishments concerned to comply therewith, the law making body sensibly granted these establishments incentive in the form of tax credit. In fact, the members of Congress and Senate during deliberations at the Bicameral Conference Meeting on Social Justice held on 05 February 1992, recognized the same, thus: "Senator Angara: Baka magreklamo sila eh. Parang appropriation of private property na yon."; "Hindi natin mamando ito, eh. Parang confiscation of properties."; "I-tax credit na lang natin para walang cash out ano?" 5 Anent the contention of petitioner that the 20% discount may be claimed only as a deduction from gross income or gross sales pursuant to Revenue Regulations 2-94, which according to petitioner was validly promulgated in the exercise of his rule making power, is equally flawed. As elucidated by CTA in the case of Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, 6 to wit: "The provision Section 4 of R.A. 7432 is crystal clear the 20% discounts granted to qualified senior citizens may be claimed as tax credit. And as a settled rule of statutory construction, when the language of the law is clear and unequivocal, the law must be taken to mean exactly what it says ( Marin vs. Nacianceno, 19 Phil. 238). Construction and interpretation come only after it has been demonstrated that the application is impossible or inadequate without them ( People vs. Mapa, G.R. No. L-22301, August 30, 1967). It is true that the respondent has the power of subordinate legislation effected by her issuance of implementing rates and regulations such as Revenue Regulations No. 2-94 in the case at bar, but the said power, is not without limit. The administrative regulation must not be in sharp conflict with the governing statute it seeks to implement (Nestle Philippines, Inc. vs. Court of Appeals, et al., 203 SCRA 504) Revenue Regulations No. 2-94 gave a new meaning to the phrase "tax credit", interpreting it to mean that the 20% discount granted to qualified senior citizen is an amount deductible from the establishment's gross sales, which is completely contradictory to the literal or widely accepted meaning of said phrase, as an amount subtracted from an individual's or entity's tax liability to arrive at the total tax liability (Black Law's Dictionary). xxx xxx xxx In view of such apparent discrepancy in the interpretation of the term "tax credit" the provisions of the law under R.A. 7432 should prevail over the subordinate regulation issued by respondent under Revenue Regulations No. 2-94." Clearly, it was an ultra vires act for petitioner to promulgate Revenue Regulations No. 2-94. He cannot change the intention of the law making body by casually promulgating a subordinate regulation in contravention of the statute it seeks to implement. EaCDAT Moreover, this Court already had the occasion to rule on the same issue in the cases of Mar-Tess Drug Corporation vs. Hon. Roberto F. De Ocampo, et al. 7 and Central Luzon Drug Corporation vs. Commissioner of Internal Revenue, 8 where Our colleagues in the Third Division and Special Tenth Division, respectively, were in unison in ruling that the 20% discounts granted to qualified senior citizens may be claimed as tax credit and not as mere deduction against the tax payer's gross income. We intend not to deviate from the aforesaid rulings. Rather, We adopt the rationale and ruling of Our colleagues as well as the CTA in allowing the tax payers to directly claim the 20% discount as tax credit. Further considering that "it has been the long-standing policy and practice of this Court to adopt the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is 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 its authority." 9 Petitioner's contention that the 20% discount given by respondent to senior citizen was not paid to the government as a tax, thus the CTA erred in granting the refund or tax credit, is misplaced. Section 229 of the Tax Code contemplates a situation where a taxpayer erroneously paid a tax or said tax was illegally collected, hence justifying a refund. Under said provision, it is necessary that: (1) the government has actually collected and received the tax sought to be recovered; and (2) the claimant establish the legal basis for the grant of the refund. 10 As earlier discussed, Sec. 4(a) of R.A. 7432 is an instance of a tax credit, and as such, it does not in any way refer to illegally collected or erroneously paid taxes. Thus, the standards obtaining under Section 229 cannot be applied to the instant case. WHEREFORE, the present appeal is hereby DISMISSED for lack of merit. The assailed Decision, dated 16 April 2002, rendered by the Court of Tax Appeals is AFFIRMED in toto. No pronouncement as to costs. SO ORDERED. Agcaoili and Sundiam, JJ . , concur. Footnotes 1. Rollo, p. 26. 2. Rollo, p. 43. 3. Rollo, p. 55. 4. Rollo, p. 58. 5. Respondent's Comment, dated 27 July 2002, Rollo , p. 71-72. 6. CTA Case No. 5367, 16 February 1998. 7. CA-G.R. Sp No. 44844, promulgated on 28 February 2000. 8. CA-G.R. Sp No. 60057, promulgated on 31 May 2001. 9. Commissioner of Internal Revenue vs. Court of Appeals, 204 SCRA 182 (1991). 10. Aban, Benjamin, Law of Basic Taxation in the Philippines, 1994 ed., p. 208.