SOUTHERN LUZON DRUG CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

I REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals Q~EZON CITY SECOND DIVISION SOUTHERN LUZON DRUG C.T.A. CASE NO. 7449 CORPORATION, Members: Petitioner, -versus- CASTANEDA, JR., Chairperson UY, and �PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Pro mulgated: ---~-A--R---2--4--2~7-0-0-9-----1-_-.-()-.(--~---~-'~-� - L REVENUE, - X R espondent. X --------------------------------------------- DECI S ION PALANCA-ENRIQUEZ, J.: This c~se involves Republic Act No. (RA) 7432, otherwise known as An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and Other Purposes, passed on April 23, 1992. It granted, among others, a 20% sales discount on purchases of medicines by qualified senior citizens. THE CASE This is a Petition for Review filed on April 17, 2006 by Southern Luzon Drug Corporation (hereafter "petitioner") praying for the issuance of a tax credit certificate in the amount of P10,773 ,413.63, representing D <��Jh, 'il. l.

C.T.A. CASE NO. 7449 2 DECISION the twenty percent (20%) sales discounts granted to qualified semor citizens on their purchases of medicines during the taxable year 2003, as provided for in RA 7432. THE PARTIES Petitioner Southern Luzon Drug Corporation IS a domestic corporation organized and'�existing under the laws of the Philippines, with principal office address at No. 7 Merctiry Avenue, Bagumbayan, Quezon City. Respondent, on the other hand, IS the duly appointed Commissioner of Internal Revenue, with office address at BIR National Office Building, Diliman, Quezon City, where he may be served with summons, notices and other legal processes. THE FACTS The facts, as culled from the records of the case, are as follows: In 2003, petitioner operated eleven (11) drug stores located in San Pablo Ultimart; Batangas Caedo, Bauan Kapitan Ponso; Lopes GV Vera; Nasugbu JP Laurel; Puerto Princesa Malvar; Pinamalayan Mabini; Palawan Valencia; Palawan Rizal; Robinson's Place Lipa and Lucena RedV.

---- C.T.A. CASE NO. 7449 3 DECISION Petitioner is duly licensed to operate drug stores by the Bureau of Food and Drugs, the local govemment units where the drugstores are located, the Department of Trade and Industry, and the Bureau ofintemal Revenue. During the period from January to December 2003 , petitioner allegedly granted twenty percent (20%) sales discounts to qualifi ed senior citizens on their purchases of medicines, in compliance with RA 7432 and its Implementing Rules and Regulations. On April 29, 2004, petitioner fil ed its Annual Income Tax Return for taxable year 2003 and treated its senior citizens discounts as prepaid tax credit. On April 12, 2006, petitioner fi led with respondent a request for the issuance of a tax credit certificate in the amount of P10,773 ,413 .63, equivalent to the twenty percent (20%) sales discount granted by the petitioner to qualified senior citizens during the year 2003 , in compliance with RA 7432. Due to the inaction of the respondent and in order to toll the running of the two-year prescriptive period in filing a claim for refund, petitioner filed the instant Petition for Review on April 17, 2006.

C.T.A. CASE NO. 7449 4 DECISION In his Answer, respondent alleged the following special and affirmative defenses: "4. The claim for refund is still under examination by the Respondent Bureau of Internal Revenue; 5. The burden of proof is upon the Petitioner to prove that it is entitled to the claim for refund; 6. The grant of a claim for refund is tantamount to an exemption from taxation which should be strictly construed against the taxpayer and in favor of the government; 7. The correct interpretation and enforcement of the provisions on the tax credits of Republic Act �No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes" is contained in Revenue Regulations No. 2-94, specifically, Section 2, paragraph (1) so states: : "(1) Tax Credits-. refers to the amount representing the twenty percent (20%) discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging cinema houses, concert halls, circuses, carnivals and other similar places �of cultures, 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 or other percentage tax purposes." 8. The provision under Republi c Act No. 7432, which states that the twenty percent (20%) sales discounts on purchases or medicines by senior citizens be treated as a tax credit is a misnomer @11 as it runs counter to the solemn duty of the government to collect all taxes; :J73

',. C.T.A. CASE NO. 7449 5 DECISION 9. The power of taxation is a high prerogative of sovereignty. Its relinquishment is never presumed and any reduction or diminution thereof with respect to its mode or .its rate must be strictly construed and the same must be couched in clear and unmistakable terms in order that it may be applied. (Floro Cement Corporation vs. Gorospe, G.R. No. 46787, August 2, 1991); 10. In Statutory Construction, in cases of ambiguities, the principle that the contemporaneous construction of statute given by the executive officers of the govemment whose duty is to execute it is entitled to great respect and . should ordinarily control the construction, it is so firmly embedded in our jurisprudence that no authorities need be cited to support it. (Phil. Assoc. of Free Labor Unions vs. BIR). Execute officials are presumed to have familiarized themselves with all consideration pertinent to the meaning and purpose of the law and to have formed an independent, consideration pertinent to the meaning and purpose of the law and to have formed an independent, consideration pertinent to the meaning and purpose of the law and to have formed an independent, conscientious and competent expe1i opinion thereon (Richard vs. Drewry-Hitghes Co. 94 S.E. 989)." Petitioner presented Cyre M. Clores, Nolito A. Diola and Nunilon Tagle, as witnesses, and documentary evidence, marked as Exhibits "A" to "BB", inclusive of their submarkings�, which were all admitted by the Court. On the other hand, for the repeated failure of the counsel for respondent to appear despite due notice at the scheduled initial presentation of evidence for the respondent, upon motion of counsel for petitioner, respondent was deemed to have waived his right to present evidence and to have rested his case. Petitioner was granted thirty (30)

C.T.A. CASE NO . 7449 6 DECISION days from May 26, 2008 to file its memorandum, while respondent was granted � twenty (20) days from notice to file his memorandum. Considering that only petitioner filed its "Mem.orandum" on June 24, 2008 , the case was deemed submitted for decision on June 24, 2008. Hence, this decision. ISSUES As stipulated by the parties, the following are the issues for this Court's consideration: I WHETHER OR NOT PETITIONER'S CLAIM FOR REFUND OR TAX CREDIT IS SUBSTANTIATED BY DOCUMENTARY EVIDENCE. II WHETHER OR NOT THE SALES DISCOUNT GRANTED BY THE PETITIONER TO SENIOR CITIZENS ON THEIR PURCHASES OF MEDICINE SHOULD BE TREATED AS TAX CREDIT OR MERELY AS A DEDUCTION FROM GROSS INCOME. III WHETHER OR NOT PETITIONER ACTUALLY GRANTED AND IS ENTITLED TO THE ISSUANCE OF A TAX CREDIT CERTIFICATE IN A TOTAL AMOUNT OF Pl0,773 ,413 .63 SALES REPRESENTING THE DISCOUNTS IT GRANTED TO S'ENIOR CITIZENS ON THEIR PURCHASES OF MEDICINES IN THE YEAR 2003. :J7G

. -- C.T.A. CASE NO. 7449 7 DECISION Principal Issue The foregoing Issues raised by the parties boil down to the principal issue of whether or not petitioner is entitled to a tax credit certificate in the amount of Pl0,773 ,4 13.63, representing the cost of twenty percent (20%) sales discounts given to qualified senior citizens for thetaxable year ending December 3_\ 2003. THE COURT'S RULING The petition is partly meritorious . Section 4 (a) of RA 7432 provides: "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 transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchases of medicines anywhere in the �country: Provided, that private establishments may claim the cost as tax credit;" �I Pursuant to the aforequoted provision, RA 7432 grants to senior citizens the privilege of obtaining a twenty percent (20%) discount on their purchases of medicines from any private establishment in the country (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, 456 SCRA 414), and the latter may then claim the cost of the discount as a . (#J tax credit to be deducted from its tax liabilities (Bicolandia Drug Corporation

C.T.A. CASE NO. 7449 8 DECISION [Formerly Elmas Drug Corporation} vs. Commissioner of Internal Reve nue, 492 SCRA 159). Petitioner's contention Petitioner contends that it is entitled to a tax credit in the total amount ofP10,773 ,413 .63 for taxable yeai� 2003, representing the twenty percent (20%) sales discounts granted to qualified senior citizens pursuant to RA 7432 and its Implemen~ing Regulations. In support of its claim, petitioner presented the following documentary evidence: Summary of Petitioner' s Sales for 2003 (Exhibits "Q" to "Q-1") ; Summary of the Amount of Sales Discount Granted to Senior Citizens for 2003 (Exhibits "R" to "R-1' ) ; cash slips evidencing the purchases of medicines by senior citizens for 2003 (Exhibit "U'); Sample BIR and BFAD Special Record Books for 2003 (Exhibit "V'); Sample Form 153 or Daily Cash, Accounting Receivable, and Sales Report of petitioner filed by its MDC-San Pablo Ultimart branch on January 1, 2003 (Exhibit "Y') ; Cashier's Report fil ed by petitioner's MDC-San Pablo Ultimart branch on January 1, 2003 (Exhibits "Y-1 " to "Y-2 '); Daily Sales of Senior Citizens on January 1, 2003 (Exhibit "Y-3 "); and Z Totalizer of all MDC-San Pablo Ultimart branch, cash register machine on January 1, 2003 (Exhibits "Y-4 " to "Y- 7'). v�)?...j,

C.T.A. CASE NO. 7449 9 DECISION In his final report dated February 8, 2007 (Exhibit "W"), the Court Commissioned Independent CPA, Mr. Nunilon P. Tagle, certified that the amount of Pl 0,586,390.10 represents the 20% sales discounts granted by petitioner to qualified senior citizens for the year 2003, broken down as follows: Branch Amount per book Amount Per Audit Vari ance Ultimart San Pablo 3,778 .17 2,350,233.80 2,3 46,455 .63 Caedo Batangas 6 14,399 .19 Bauan Batangas 3,790,565 .92 3, 176, 166.73 461 ,778.83 Lopez GV Vera Nasugbu Batangas 2,377, 146.64 1,915,367.81 5,985.44 Puerto Princesa 4 ,789 .64 502,005 .3 1 496,019 .87 Malvar 589.73 Pinamalayan 791 ,976 .67 787,187.03 7,416.34 Puerto Princesa 4,184.07 249,65 3.3 6 249,063 .63 Valencia 13,041.57 Puerto Princesa Rizal 719, 183.71 711 ,767.33 109,824.40 Robinson Place Lipa 726, 198 .71 722,014 .64 9,634.48 Lucena Red V 1,235,421.86 195,389 .00 182,347.43 TOTAL I 09,824.40 0 0 9,634 .4 8 11,821,811.96 10,586,390.10 After comparing the amount of the 20% privilege discounts granted to senior citizens per petitioner's Special Record Books or as claimed by petitioner, and as audited by the independent CPA, the Court finds that the amount per Special Record Books exceeded the audited amounts. (;A

C.T.A. CASE NO. 7449 10 DECISION Therefore, only the audited amount of P.l 0,586,390.1 0 wi ll be considered as basis for computing petitioner' s refundable amount, as this amount is the one that has been duly substantiated. Also, the Court notes that the substantiated amount of P10,586,3 90.10 is inclusive of value - added tax (VAT). The said amount shall be further reduced by deducting th erefrom the 10% VAT or the � ' � w � amount of P962,399.10. Hence, only the remaining amount of P9,623,991.00 may be claimed as tax credit by petitioner. However, in order to validly claim the amount ofP9,623 ,991.00, as tax credit, petitioner must also establish that the related gross sales to senior citizens (inclusive of 20% discount privilege) were declared as part of its taxable income. Record shows that petitioner presented its Annual Income Tax Return for taxable year 2003 and reported as sales the amount of P327,241,289.00 (Exhibit "C ") , which was likewise reflected in its Audited Financial Statements for the same taxable year (Exhibit "D '') . A perusal of of petitioner's General Ledger (Exhibit "Z '') and Cash Receipts and Sales Book (Exhibit "AA ') shows that the sales in the amount of P327,241,289.00 included the gross sales to senior citizens relative to the claimed 20% sales discounts of P9,623,991.00. Therefore, the gross sales

)' C.T.A. CASE NO. 7449 11 DECISION to semor citizens pertaining to the claimed 20% sales discounts of P9,623,991.00 formed part of petitioner's taxable income for taxable year 2003. Since petitioner had an income tax liability for 200.3 in the amount of P612,599.00, as reflected in its Annual Income Tax Return (Exhibit "C''), and failed to substantiate its prior years excess credits in the amount of P14,947,202.00, the claimed 20% sales discounts of P9,623,991.00 shall be partially applied against the income tax due of P612,599.00. Thus, the unused tax credits arising from the 20% sales discounts granted by petitioner to senior citizens for taxable year 2003 amounted only to P9,0 11 ,392.00, computed as follows: Gross Income P30,629,942.00 Less: Deductions 32,074,979.00 Taxable Income Minimum Cor orate Income Tax (MCIT) Due (P1,445,037.00) Less: Tax Credits p 612,599.00 20% Sales Discounts granted to senior citizens P9 ,623,991.00 Excess Tax Credits P9,011,392.00 It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law and took effect on March 21, 2004, providing that starting taxable year 2004, the 20% sales discount granted by . . establishments to qualified senior citizens is to be treated as tax M

C.T.A. CASE NO. 7449 12 DECISION deduction, no longer as tax credit (lVJ.E. Holding Corporation vs. The Hon. Court ofAppeals, 547 SCRA 389). WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO ISSUE a Tax Credit Cetiificate in favor of petitioner in the amount of NINE MILLION ELEVEN THOUSAND 'FHREE HUNDRED NINETY TWO PESOS (P9,011,392.00), representing the unused tax credits arising from the tw:enty percent (20%) sales discounts granted to qualified senior citizens on their purchases of medicines for the period covering taxable year 2003, pursuant to RA 7432. SO ORDERED. ~~-AI~[~- ~~ OLGA~~A-ENRIQUEZ Associate Justice WE CONCUR: ' C2~~C2-~ Q.. E~P.UY %ANITO C. CASTANEDA;".fR~ Assoctate Justice Associate Justice 381

C.T.A. CASE NO. 7449 13 DECISION ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. <2~t:-C2.~~ Q WANITO c. CASTANEDA, .JR. . � : Associate Justice I '', , Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~cL, Q~ ERNESTO D. ACOSTA Presiding Justice