CTA Case No. 5768 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BICOLANDIA DRUG CORPORATION (formerly known as ELMAS DRUG CORPORATION), Petitioner, -versus- C.T.A. CASE NO. 5768 COMMISSIONER OF INTERNAL Promulgated: REVENUE, FEB 12 2001 Respondent. x-----------------------------------------------------------x DECISION This case involves a claim for refund/tax credit in the amount of P40 1,964.00 for the taxable year 1996 arising from the alleged erroneous treatment of the 20% sales discounts granted to qualified senior citizens on their purchases of medicines as a deduction from gross income as prescribed by Revenue Regulations No. 2-94 instead of as tax credit as provided for in Rep 1..Jb. li ~ A._. ct N,o. 7432, otherwise known as the Sen..:~ pr ~; .� , �~ ~ "< ~ ~: ~_<1~ Citizens Act. .. c -~�_,;'.':. .f.:..� .� ���;�� ..':" . ,, The facts as simplified by the parties in their Joint Stipulation of Facts (see pag s 45 to 46, CTA records) . 293

.~ DECISION- CTA CASE NO. 5768 PAGE2 1. Petitioner Bicolandia Drug Corporation is a domestic corporation organized and existing under the laws of the Philippines with principal office address at Panganiban St., corner Pefiafrancia, Naga City. 2. In 1996, it operated four (4) drug stores located at !riga 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 drug stores by the Bureau of Food and Drugs, the local government units where its drugstores arc located, the Department of Trade and Industry and the Bureau of Internal Revenue. 4. Petitioner filed on April 15 , 1997, is Annual Income Tax Return for tax year 1996. 5. The Annual Income Tax Return was filed by Petitioner under protest. 6. On January 16, 1998, Petitioner filed with Respondent a claim for tax credit/refund for 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 Act No. 7432. i 7. To date, Respondent ha~��. ,ot � a nted Petitioner's claim for tax credit and it ~ ... _; ...: �.�i..�� �.�~�;' :.::;. ' ~;:~:.�. ~ro not acted upon the same until this d�aJe. � 8. The Petitioner's claim was filed within the two (2) year statutory period within which to file a judicial claim for tax refund. Petitioner alleges that on various dates during the period from January to December 1996, it granted 20% sales discounts to qualified senior citizens on their purchases of 294

DECISION- CTA CASE NO. 5768 PAGE3 medicines in compliance with Republic Act No. 7432 and its Implementing Rules and Regulations, which discounts amounted to P618,406.00.. By the mandate of Section 2(1) of Revenue Regulations No. 2-94, Petitioner then claimed said amount as deduction from its gross income for the taxable year 1996. Petitioner now asserts that Section 4(a) of R.A. No. 7432 was wrongfully implemented by Section 2(1) of said regulation considering that the law clearly provides that "the cost of 20% sales discounts to se11ior citizens may be claimed as tax credit'' and not a mere deduction from gross income. Thus, a refund/tax credit is in order, computed as follows: Net Sales p 107,556,499.00 Add : 20% Sales Discount to Senior Citizens 618,406.00 Gross Sales p 108,174,905.00 Less: Cost of Sales p 11,620,255.00 98,251 ,071.00 Merchandise inventory, beginning 109,454 ,698.00 Purchases Total merchandise available for sale p 121,074,953.00 Less: Merchandise inventory, end 22,823,882 .00 Gross Profit ,,, -. p 9,923,834.00 123,985.00 Add : Miscellaneous Income _:;.f::-;, Total Income p 10,047,819.00 ' ~':,'. Less: Operating Expenses 9,342,474.00 Net Income before Income Tax p 705,345 .00 81,386 .00 Less: Income subjected to final \~;J i< p 623,959.00 Net Taxable Income .�� � Income Tax Due - . . p 218,386 .00 Less: 1.) Tax Credit p 618,406.00 620,350 .00 2.) Income Tax Actually Paid 1,944.00 401,964 .00 Income Tax Refundable p 295

DECISION- CTA CASE NO. 5768 PAGE4 Petitioner presented documentary and testimonial evidence to support its claim. Respondent, on the other hand, submitted the case based on the pleadings without any intention of filing a memorandum (CTA rec., p. 194). The issues submitted for resolution are: 1. Whether or not the 20% sales discount granted to senior citizens on their purchases of m~dicines should be treated as a tax credit deductible from the tax due as provided under R.A. No. 7432 or merely as a deduction from gross income as provided under Revenue Regulations No. 2-94. 2. Whether or not Petitioner actually granted a total amount of SIX HUNDRED EIGHTEEN THOUSAND FOUR HUNDRED SIX PESOS (P618,406.00) sales discounts to senior citizens on their purchases of medicines in the year 1996; and 3. Whether or not Petitioner is entitled to a tax credit/refund in the amount of FOUR HUNDRED ONE THOUSAND NINE HUNDRED SIXTY FOUR PESOS (P401,964.00). Anent to the first issue, We already ruled in several cases that the 20% sales discounts granted to senior citizens should be treated c.:~ a tax credit and not as a mere ;�;-; '. . ~ - ' ~ v_� deduction from gross income (St9,. :{lo~nrt~ Drug Corporation vs. Commissioner of ~~~: :�>~~(�):. Internal Revenue, CTA Cas~ .: )~~ ~ . ~~f(::' ~ --ary 13, 19 8; Baliuag Dr~~ Corporation vs. CIR, CTA Cas,~� - ~9/ ~365, dated M ay 13, 1998; nnd Trinity . . ( � �' ~ � I" ' ~' rt1 . Franchising and Management �qrp~r-ation vs. CIR, CTA Case No. 5313, ~~te~ ,, August 18, 1998). For easy comprehension, the particular provisions of the law and regulation relied upon by the parties are hereunder reproduced: Republic Act No. 7432 288

DECISION- CTA CASE NO. 5768 PAGES "Sec. 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 transpot1ation 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". Section 2(i) of Revenue Regulations No. 2-94 "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 ti�om their gross sales for value-added tax and other percentage talUJ.urposes." (Underscoring supplied) In the case of Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5357, April6, 1998, we further elucidated, viz: "A cursory review of the wordings of Section 4 of Republic Act No. 7432 would reveal that the law literally inte11ded the cost of the 20% discount to be claimed as f$. f!t:~~lL~Y private establishments. We could not see any plausible reaso11 .fpr the respondent to interpret the phrase in a different way. The discoqpt b.~ir\if~Y.fiilable for tax credit as stated in the ~aw cannot be ma~e inco~~r~nt to'� tpean that such discount be �utiliz~d mste~d as. a deductzon frP'?fC.fP,.�ffJf,!C~me and fr om gross sales as what IS provtded m RR No. 2-94, ~~ , ... � \ � .� ~. �,1 �� �, . �:. ''::- t ,, ':�:.. To� be valid, an administrative regulation must not be in contravention butshoulfJ.confon11 tq the standards that the law prescribes. (Tayug Rural Bank vs. Centra'! Bank, 146 SCRA 120). Its promulgation must be authorized by the legislature. (Philippine Administrative Law, Cruz, 1994 ed., p. 32) RR No. 2-94 which engraved a new meaning to the phrase "tax credit" as referring to the 20% di scount which .is deductibl e from gross sales is patently incongruous and a deviation from the plai n intendment of

. DECISION- CTA CASE NO. 5768 PAGE6 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 ~ollar for 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 the tax is computed. (Underscoring supplied) Under RR No. 2-94, respondent has interpreted tax credit as synonymous to tax deduction in glaring contradiction to the above definition. Undoubtedly, there is a clear distinction, nay, 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 RA 7432 that the cost of the 20% discount granted by private establishments may be claimed by the latter as tax credit and m t as a deduction contrary to what has been declared in Revenue Regulations No. 2-94. In case of conflict between a statute and an administrative order, the former must prevail. (Kilusang Mayo Uno vs . Garcia, Jr., 239 SCRA 386) Fmihermore, the legal issue in this petition has already been settled in the case entitled Sto. Rosario l)rqg �vs. Commissioner of Internal Revenue, CTA Case No. 5367, date(p~~rJ.l~fY 16, 1998. . '/' :!"' '� ~ r : )#:� .t ~\, � r1. ,.''' � I� .� In declaring that tM!pr8y}~�{qns of RA 7432 prevail over Revenue Regulations No. 2-94! H.!~ ' hi~~~rtatlf to point out that the cost of the 20% di s~~unt shall npt be .rrrr~.f~fl ~-~~~p~Jction from the gross income of the petttloner nor deducteg rom }t~ gr~~s sales for VAT or other percentage tax purposes. The beile"It tpat' c~n b~ ' derived by taxpayers is the privilege of claiming these discounts'�aS';tax ~redit 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 them 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 Regulations No. 2-94 is null and 2... lJ ,. . \. (J

DECISION- CTA CASE NO. 5768 PAGE? void and it is Section 4(a) of RA 7432 that will apply in cases of this nature." Fmthermore, 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 fu ll amount of the discount (Commissioner of Internal Revenue vs. Elmas Drug Corporation, CA-G.R. SP No. 49946, October 1Q, 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 P6 12,291.96 out of the 1996 total claimed 20% discounts of P618,406.00 (Exhs. 0, Nand sub-markings). Finally, in order to determine the issue of whether or not Petitioner is entitled to the claim sought, it is necessary that Petitioner prove the following: 1. that it actually deducted the claimed amount of 20% sales discounts from its gross sales (income) in computing its i"1come tax due for 1996; 2. that it actually P..C. }..id...th\. e'� corresponding amount of income tax due for 1996 :' ~ as a result of fhe ~~~~cfjon of the claimed 20% sales discounts to senior .' ~ . . .. .' ~ citizens fi�om H~ ~f~~~: ~l}fe~ (inc? me); and . o'. �,..~\ �.,<� �. ~ -~ . :.'._~-~. --_.; �.. ' !;: 3. that the claimed�_: afnou n. t ';Oi f, 20.% sales di scounts to senior citizens i:s.::dulYe,. .--~���:~�)~-~ supported by cash, ~lips .~ r by copies of official receipts. i' Petitioner was able to establish the fact that it actually deducted the amount oJ � P577,521.50 representing 20% sales discounts to senior citizens from its 1996 gross sales of P108,135,442.82 resulting to a net sales of P!0/,556,499.11 for all of its four branches, detailed as follows:

DECISION- CTA CASE NO. 5768 PAGE8 Branch Exhibits Gross Sales Deductions Net Sales 20% Disc. to Senior Citizens Panotes, Daet E to E-2-a p 33,087,985.08 p 168,682.32 p 199.81 p 32,919,102.95 Panganiban, Naga F to F-2-a 30,252,467.56 201,229.82 1,222.41 30,050,015.33 Abella, Naga City G to G-2-a 26,212,482.77 174,612.52 26,037,870.25 !riga City H to H-2-a 18,582,507.42 32,996 .84 18,549,510.58 Total: P108,135,442 .83 P 577,521 .50 P1,422.22 P107,556,499.11 ----~~--------~==�------- The above 1996 net sales amoi.lnt of P107,556,499.00 is reflected in Petitioner's audited financial statements and 1996 annual income tax return as "SALES, net" (Exh. I- 1-a) and "GROSS SALES DURING THE YEAR (Exh. J-3), respectivly. Hence, out of the 1996 claimed amount of sales discounts of P618,406.00, only the amount of P577,521.50 was actually deducted from Petitioner's gross sales (income) in computing its 1996 income tax liability of P 1,944.00 (Exh. J). And Petitioner paid the said income tax liability out of its total tax credits ofP104,971.00 (Exh. J). It is worth reiterating that Petitioner was able to substantiate the amount of P612,291.96 as 20% sales discqiJnf~� ~t~tlfl~d to senior citizens. However, this amo~nt is :�,., >�.> .:, ;' ~�'. '' . .. ' inclusive of VAT, therefore, it ~~ ~~~ pr~per to exclude the 10% VAT or the amount ?.f : �.. � \.. ,.� .' . "' . P55,662.91. ~ccordingly, ~nlr ; !~e nfuount of P556,629.05 shall be the basis f.o~ .� . " \ .. computing Petitioner'.s allow~ble'ta:~-'credit. 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 back to its net sales of dOO

DECISION- CTA CASE NO. 5768 PAGE9 Pl 07,556,499.00. 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. In sum, only the direct cost of the substantiated amount of 20% sales discounts of P556.629.05 shall be allowed as tax credit which is P505 ,755 .73, computed below: Net Sales p 107,556,499.00 Add : 20% Sales Discounts to Senior Citizens 577,521 .50 Gross Sales p 108,134,020.50 Cost of Sales Divided by Gross Sales p 98,251,071.00 Percentage of Cost of Sales to Gross Sales p 108,134,020.50 Multiply by amount of 20% Sales Discounts to Senior 90 .860462% Citizens for 1996 duly substantiated by cash slips Allowable Tax Credit p 556,629.05 p 505,755.73 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 p 107,556,499.00 Add : 20% Sales Discount to Senior Citizens 577 521 .50 Gross Sales p 108,134,020.50 Less : Cost of Sales Merchandise inventory, beginning Purchases p 11,620,255.00 98 ,251,071 .00 Total merchandise available for sale 109,454,698.00 Less: Merchandise inventory, end P121 ,074,953.00 22,823,882 .00 Gross Profit p 9,882,949.50 Add : Miscellaneous Income 123,985.00 Total Income p 10,006,934.50

DECISION- CTA CASE NO. 5768 PAGE 10 Less: Operating Expenses 9,342,474.00 Net Income before Income Tax p 664,460.50 Less: Income subjected to final tax Net Taxable Income 81,386 .00 p 583,074.50 Income Tax Due p 204,076.08 Less: Tax Credits 1.) Cost of 20% Sales Discounts to Senior Citizens p 505,755.73 2.) Total Tax Credits per 1996 ITR p 104,971.00 Less: Tax Credits to be applied to next year 103.027.00 1 944.00 507,699.73 Income Tax Refundable ~ (303 623 fill} 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. CON~URR N~: ' ~&,~ M~ONO~.D~1~ R)'A.� ERNESTO D. ACOSTA Presiding Judge I '. ISSENTING: AMANCIO Q. SAGA Associate Judge 301

DECISION- CTA CASE NO. 5768 PAGE II CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, A1iicle VIII of the Constitution. ~o~e~ ERNESTO D. ACOSTA Presiding Judge ' � �., , 302