CTA Case No. 6048 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY TROPICAL HUT FOOD MARKET, INC., Petitioner, -versus- C.T.A. CASE NO. 6048 COMMISSIONER OF INTERNAL Pro m u l ga ted: REVENUE, Respondent. MAY1 ~~~~ X---------------------------------------------------------X DECISION This case involves a claim for refund/tax credit in the amount of P1 ,056,224.00 allegedly representing overpaid income tax for taxable year 1997 due to the erroneous issuance of Revenue Regulations No. 2-94 treating the 20% sales discounts granted to qualified senior citizens under Republic Act No. 7432 as deductions from gross income instead of as tax credit. The facts are as follows: Petitioner is a domestic corporation organized a".d existing under the laws of the Philippines with principal office address at No. 163 E. Delos Santos Avenue, Mandaluyong, City. It operates as a retailer of medicines and other pharmaceutical products and coffee shops that sell hamburgers, beverages and other food items under the name and style of "Tropical Hut" and as such, the drugstores and coffee shops are duly licensed to operate by the Bureau of Food and Drugs, the Department of Trade and Industry and the local government units where the drugstores are located (pars. 1 & 2, Joint Stipulation of Facts)

DECISION C.T.A. CASE NO. 6048 Page 2 Petitioner alleged that during the year 1997, it granted 20% sales discounts in the total amount ofP1 ,624,960.00 to qualified senior citizens on their purchases of medicines from petitioner's drugstores and dine-in purchases of hamburgers, beverages and other food items from petitioner's fast food stores 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: "SECTION. 4. Privileges for the Senior Citizens. - The semor 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 filed on April 15, 1998 (Exhibit C), petitioner averred that it was forced to claim the 20% sales discounts to senior citizens of P1 ,624,960.00 as deduction from its gross income pursu..:nt to the following provisions of Section 2(i) of Revenue Regulations No. 2-94, which implements Section 4(a) of R. A. No. 7432: "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 and other percentage tax purposes."

DECISION C.T.A. CASE NO. 6048 Page 3 However, it is petitioner' s view that Section 2(i) of Revenue Regulations No. 2-94 is erroneous considering that Section 4(a) ofR.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 filed on March 19, 1999 (Exhibit G), petitioner computed its alleged 1997 income tax overpayment as follows: Net Sales p 1,785,338 ,753 .00 Add : 20% Sales Discount to Senior Citizens 1,624,960 .00 Gross Sales p 1,786,963,713.00 Less: Cost of Sales Merchandise inventory, beginning p 178,872 ,715.00 Purchases 1,429,180,568.00 Total merchandise available for sale p 1,608,053,283.00 Less: Merchandise inventory, end 179,540 ,065 .00 1,428,513,218.00 Gross Profit p 358,450,495.00 Add : Miscellaneous Income 87,718,696.00 Total Income p 446,169,191 .00 Less: Operating Expenses 429,544,139 .00 Net Income before Income Tax p 16,625,052 .00 Less: Income subjected to final tax 87 052 .00 Net Taxable Income p 16 538 000.00 Income Tax Due p 5,788 ,300 .00 Less: Tax Credit (Cost of 20% Sales Disc. 1,624,960 .00 to Senior Citizens) p 4,163,340 .00 Income Tax Still Payable Less: Income Tax Actually Paid 5,219,564 .00 Income Tax Refundable p :l Q56 224 QQ There being no action on the request for refund/tax credit on the part of the respondent, petitioner filed the instant Petition on April 3, 2000, well within the two-year prescriptive period provided for under Section 230 [now 229] of the Tax Code. Respondent, in his Answer filed on May 8, 2000, advanced by way of Special and Affirmative Defenses that:

DECISION C.T.A. CASE NO. 6048 Page 4 "4.) The petitioner's claim for tax refund/credit is still undergoing administrative routinary investigation/examination by the respondent's Bureau; 5.) The alleged tax sought to be refunded was collected pursuant to law and pertinent BIR implementing rules and regulations; hence, the same is not refundable; 6.) Petitioner's allegation that it erroneously and excessively paid the tax during the year under review does not ipso facto warrant the refund/credit; 7.) Claims for tax refund or tax credit are construed in strictissimi juris against the taxpayer as they partake the nature of an exemption from tax, and it is incumbent upon the petitioner to prove that it is entitled thereto under the law. Failure on the part of the Petitioner to prove the same is fatal to its claim for refund/credit; and 8.) Petitioner must show that it has complied with the proviSIOns of Sections 204(c) and 229 of the 1997 Tax Code." In its memorandum, petitioner asserted that the respondent's definition of the term "tax credit" in paragraph (i) of Revenue Regulations No. 2-94 is contrary to Section 4, paragraph (a) of Republic Act No. 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 Section 2, par. (i) of Revenue Regulations No. 2-94 is a mere implementing administrative regulation and cannot modify, alter or amend the clear mandate of Section 4 of Republic Act No. 7432 which it seeks to implement. Respondent, on his part, argued that Revenue Regulations No. 2-94 merely provides the guidelines for the implementation of Republic Act No. 7432 and it did not in any way amend, modify or alter the said law. According to respondent, the said regulations were issued pursuant to the power of the Secretary of Finance to promulgate rules and regulations and even recognized under Section 10 of Republic Act No. 7432.

DECISION C.T.A. CASE NO . 6048 Page 5 Respondent likewise alleged that since the 20% sales discount is not a tax paid to the Bureau of Internal Revenue, the same cannot be refunded as tax credit in accordance with Section 204(c) of the Tax Code, as amended. Lastly, respondent maintained that claims for tax refund are in the nature of tax exemptions and are to be strictly construed against the taxpayer. Thus, the issues we are tasked to resolve are: 1. Whether or not the 20% sales discounts granted to qualified senior citizens on their purchases of medicines and dine-in purchases from petitioner should be treated as deductions from gross income pursuant to Revenue Regulations No. 2-94, or as tax credit deductible from the tax due pursuant to Republic Act No. 7432; and if the issue is resolved in favor of petitioner, 2. Whether or not petitioner has proven with sufficient evidence its claim for refund or tax credit. We find for the petitioner. Time and again, this Court has consistently held that the 20% sales discounts granted to qualified senior citizens should be treated as tax credit and not as mere deductions from gross income. In the case of Sto. Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5367, promulgated on February 16, 1998, We elucidated, thus: "The provision of 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

DECISION C.T.A. CASE NO. 6048 Page 6 (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 rules 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 citizens is an amount deductible from the establishment's gross sdes, which is completely contradictory to the literal or widely accepted meaning of the 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." Further, as correctly pointed out by petitioner in its memorandum (CTA records, pp. 240-242), the deliberations of the Bicameral Conference Committee Meeting on ,� Social Justice held on February 5, 1992 which finalized the contents of Republic Act No. 7432 clearly show that the real intent of the lawmakers was to treat the sales discounts to senior citizens as tax credit rather than as deductions from gross income, thus : "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 the private hospitals and drugstores, hindi ba? SEN. ANGARA. 0 , 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?

DECISION C.T.A. CASE NO . 6048 Page 7 REP. AQUINO. Section 11 sa atin ano? THE CHAIRMAN, (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin? MS. ADVENTO. Singit na po ba 'yung 15% on credit . .. (inaudible/did not use microphone). � SEN. ANGARA. Hindi pa, hindi pa. THE CHAIRMAN, (Rep. Unico) Ah, ' di pa ba naisama natin? SEN. ANGARA. 0 , o. You want to insert that? THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e. SEN. ANGARA.... in the case of private hospitals ... they got the grant of 15% discount, provided that, the private hospitals can claim the expense as a tax credit. REP. AQUINO. Yah . . . could be allowed as deductions m the perpetrations of ... (inaudible) income . . . SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano? REP. AQUINO 0, o, tax credit, Tama, Okay. Hospitals ba o lahat ng establishments na covered? THE CHAIRMAN. (Rep. Unico) Sa kuwan lang ' yon, as private hospitals lang. REP . AQUINO. Ano ba 'yung establishments na covered? SEN. ANGARA. Restaurant. . lodging houses, recreation centers. REP . AQUINO. All establishments covered siguro? SEN. ANGARA. From all establishments. AEsin na natin 'yung kuwan kung ganon. Can we go back to Section 4 ha? REP. AQUINO. Oho.

DECISION C.T.A. CASE NO . 6048 Page 8 SEN. ANGARA. Letter A. To capture that thought, we ' ll say the grant of 20% discount from all establishments et. cetera, et cetera, provided that said establishments - provided that private establishments may claim the cost as a tax credit. Garron ba ' yon? 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 kuwan - deduction, Okay. REP. AQUINO. Okay. SEN. ANGARA. Sige, Okay. Di, subject to style na lang sa letter A. " (pp. 22-24 underscoring supplied) The Court of Appeals affiimed our ruling in the following cases: 1. Commissioner ofInternal Revenue vs. Elmas Drug Corporation, CA-G.R. SP No. 49946, promulgated October 19, 1999; 2. Trinity Franchising and Management Corporation vs. Commissioner of Internal Revenue, CA-GR. SP No. 60269, promulgated Apri/4, 2001; 3. The Commissioner of Internal Revenue vs. Bicolandia Drug Corporation (formerly known as Elmas Drug Compa,ny), CA-G.R. SP No. 62824, promulgated May 3, 2001 ; and 4. Central Luzon Drug Corporation vs. Commissioner ofInternal Revenue, CA- G.R. SP No. 6005 7, promulgated May 31, 2001. In the case of Central Luzon Drug Corporation vs. Commissioner of Internal Revenue, supra, the Court of Appeals also ruled that the full amount and not only the cost of the 20% sales discounts to senior citizens should be the basis of the tax credit, to wit: "Lastly, the concept of tax credit as just compensation, leads us to conclude that the term "cost" under Sec. 4(a) of R.A. 7432 refers to cost of

DEC ISION C.T.A. CASE NO. 6048 Page 9 acquisition, not the cost of medicines sold to senior citizens, which was already reduced by 20%. Just compensation is the full and fair equivalent of the property taken from the private owner by the expropriator. It is intended to fully indemnify the owner for the loss sustained. The actual, basis or market value of the property is the standard of just compensation. Among the factors considered are the cost of acquisition of the property, the current value of like properties and its actual or potential uses. Clearly, the cost of medicines sold to senior citizens, which is already discounted does not come close to the full and fair equivalent of the property taken. It should not be the basis of the tax credit." Therefore, what is now left for us to determine is whether or not petitioner was able to sufficiently prove the factual aspect of its claim for refund. The auditing firm Vicente E. Reyes & Associates, through its Partner, Mr. Rene Amby Reyes, was commissioned by this Court pursuant to CTA Circular 1-95, as amended , to verify petitioner' s claim. In its report dated March 23, 2001 (pages 69-192, CTA Records) , Vicente E. Reyes & Associates certified that out of the claimed 20% sales discounts to senior citizens ofP1,624,960.00 for 1997, only the amount ofP1 ,406,638.92 was properly supported by cash slips broken down as follows : Supermarket Division p 919,021.28 Coffee Shop Division 487 617.64 Total: p 1.406.638.92 This Court finds the said report to be in order upon examination of the " Summary of Sales and Discounts to Senior Citizens for the year 1997" (Pre-marked Exhibit 0) and petitioner' s cash slips (Pre-marked as Exhibit M, with the cash slip numbers as sub- markings). However, since the substantiated amount of P1 ,406,638 .92 is inclusive of VAT, it is but proper to exclude the 10% VAT or the amount of P127,876.27. Accordingly, only the amount of P1 ,278,762.65 or P1 ,278,763 .00 shall become petitioner's allowable tax credit.

DEC ISI ON C.T.A. CASE NO. 6048 Page 10 Records likewise reveal that petitioner actually deducted from its 1997 gross sales the amount ofP1 ,624,960.00 representing 20% sales discounts to senior citizens resulting to a 1997 net sales of P1 ,785,338,753 .00. The latter amount is indicated in petitioner's 1997 audited financial statements as "S a 1 e s, net" (Exhibit B-1) and in Section C, Schedule 1 of its 1997 income tax return as "Gross Sales During The Year" (Exhibit C-1- a). As a result of said deduction, petitioner paid an income tax due of P5 ,219,564.00 (Exhibits C-c, D, E, & F) on taxable income ofP14,913 ,040.00. In computing petitioner's 1997 overpaid income tax, it becomes necessary to add back to petitioner' s net sales of P1 ,785 ,338,753 .00 the amount of P1 ,624,960.00 previously deducted from its gross sales, the reason being that the 20% sales discounts to senior citizens is no longer to be treated as deductions from gross income but rather as tax credit. Consequently, a re-computation of petitioner's 1997 income tax liability using the figure of P1 ,278,763 .00 as allowable tax credit will result to an overpaid income tax of P710,027.00, detailed as follows: Net Sales p 1,785,338 ,753.00 Add : 20% Sales Discount to Senior Citizens 1,624 ,960 .00 Gross Sales p 1,786 ,963,713 .00 Less: Cost of Sales p 178,872 ,715 .00 Merchandise inventory, beginning 1,429,180,568 .00 Purchases Total merchandise available for sale P1 ,608 ,053,283.00 Less: Merchandise inventory, end 179,540,065.00 1,428,513,218.00 p 358,450,495.00 Gross Profit 87,718,696 .00 Add : Miscellaneous Income p 446 ,169,191 .00 Total Income 429,544,139 .00 Less: Operating Expenses p 16,625 ,052 .00 Net Income before Income Tax 87 052 .00 Less: Income subjected to final tax p 16 538 000 00 Net Taxable Income

DECISION C.T.A. CASE NO. 6048 Page 11 Income Tax Due p 5,788 ,300 .00 Less: 1.) Tax Credit- Cost of 20% sales p 1,278,763.00 discounts to senior citizens 2.) Income Tax Actually Paid 5,219,564 .00 6,498,327.00 Income Tax Refundable E 71QQ2ZQQ WHEREFORE, in view of all the foregoing, p �titioner's claim for tax credit is hereby GRANTED but in the reduced amount of P710,027.00. Respondent Commissioner of Internal Revenue is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of herein petitioner amounting to SEVEN HUNDRED TEN THOUSAND TWENTY SEVEN PESOS (P710,027.00) representing overpaid income tax for taxable year 1997. SO ORDERED. Q __ _... ~~<2.~ Q . <l:ffiANITOC. CASTANEDA, 1f. , Associate Judge I CONCUR: ~ tQ - 0t-v4- ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance wi h Section 13, Article VIII of the Constitution. ~tQ. Q~ ERNESTO D. ACOSTA Presiding Judge