CTA Case No. 5365 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BALIUAG DRUG CORPORATION, Petit i oner, - versus - C.T.A. CASE NO. 5365 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This case involves a claim for refund of alleged overpaid income tax for the calendar years 1993, 1994 and 1995, arising from petitioner's interpretation that the 20% sales discount granted to senior citizens under Republic Act (R ..A.) 7432 should be treated as tax credit instead of a deduction from gross income as opined by the respondent in Revenue Regulations No. 2-94 and BIR Ruling No. 67-95. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines. It is engaged in the operation of a drugstore located in Plaza Naning, Poblacion, Baliuag, Bulacan under the name and business style "MERCURY DRUG". It is duly licensed by the Bureau of Food and Drugs to sell pharmaceutical products with proper permits & licenses from local government units and other government agencies.

DECISION - C.T.A. CASE NO. 5365. - 2- For the years 1993, 1994 and 1995, petitioner granted 20% sales discounts to qualified senior citizens pursuant to R.A. 7432, o t h e r wi s e k n own a s ".4 n .4 c t ro Maximize The (..'on tri bu ti on 0 f Sen.i or Citizens ro Na t.i on 8 u i 1 d .in g ,, Gran t 8 en e f .i t s .4 n d Spec .i a 1 Pr i v .i 1 e g e s .4 n d For 0 ther Purposes". Petitioner treated these discounts as a deduction from its gross income in compliance with Revenue Regulations No. 2-94 issued by the respondent which implemented R.A. No. 7432. On June 29, 1995, unconvinced with the interpretation of the respondent regarding RA 7432, particularly Section 4(a) thereof, petitioner filed a letter-claim for refund or tax credit with the Bureau of Internal Revenue for the years 1993, 1994 and 1995. This claim represents alleged overpaid income tax arising from respondent's erroneous interpretation that 20% sales discount should be treated as a deduction from gross income for income tax purposes or from gross sales for value-added tax or other percentage tax purposes rather than as a tax credit. In the said letter-request for refund, petitioner treated the 20% sales discounts in complete reversal with respondent's view, that is, as a tax credit rather than as a mere deduction. On April 15, 1996, petitioner lodged its appeal with this Court in order to toll the running of the two-year

DECISION - C.T.A. CASE NO. 5365. - 3- judicial prescriptive period to file a claim for refund pursuant to Section 230 of the Tax Code. In its petition for review, petitioner argues that the 20% sales discount granted to senior citizens should be treated as tax credit because Section 4 of RA 7432 provides in clear and unequivocal language that discounts granted to senior citizens may be claimed as TAX CREDIT. It further asseverates that Section 2(i) of Revenue Regulations No. 2-94 which is a mere administrative regulation, cannot modify or alter the clear mandate of said law. Consequently, Section 2(i) of Revenue Regulations No. 2- 94 is void and without force and effect for being inconsistent with the statute it seeks to implement. In answer thereto, respondent raised the following special and affirmative defenses: 8. 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 Tax Code, as amended by P.O. No. 1457. 9 . In claim for refund, it is incumbent upon the petitioner to show that it is entitled thereto. Failure of the petitioner to prove the same is fatal to its claim for refund. 10. Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from taxation. ( Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95)

DECISIO N - C.T.A. CASE NO. 5365. - 4- and as such, they are looked upo n wit h disfavor ( Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121 ) . Thus, this Court is tasked in resolving the following t wo legal issues: 1. The proper interpretation of Section 4(a) of Republic Act No. 7432, specifically the treatment of the 20% sales disco u nt on purc h ase of medici n es afforde d to senior citizens; and 2. Th e vali d it y of Revenue Regulations No . 2-94, i mplementing the aforesaid law insofar as treating the 20% sales disco un ts as deduction fro m gross income for income tax purposes and from gross sales for value-added tax or other percentage tax purposes. After a careful scr u tiny and thoroug h analysis of the a ntecedent facts of the case, t his Court resolves t he legal issues i n fav o r of the petitio ner. To gi v e li gh t to t h e above iss u es, We are qu o ting our own ruling in a ver y recent case of Del Rosario Drug Corporation vs. Commissioner of Internal Revenue, C.T . A. Case No. 5357, dated April 6, 1998 , wherein we held: XXX XXX XXX After a painstaking scruti ny of t h e attending facts, the issues involved, the respective arg ume n tation of the parties and the ap p licable j u rispr ud e n ce, l a ws a n d re gu lations in poi n t, t h is Co u rt h ereby r u les i n favor of the petitioner.

DECISION - C.T.A. CASE NO. 5365. - 5- For easy reference, the pertinent provisions of law and regulations in question are hereby reproduced, to wit: A) Section 4 of Republic Act No. 7432: "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 a nd 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. x x x" (underscoring supplied) B) Section 2 (i) of RR 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 from their gross income for income tax purposes and from their gross sales for value- added tax or other percentage tax purposes." (underscoring supplied) 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

DECISION - C.T.A. CASE NO. 5365. - 6- 20% discount to be claimed as t:ax 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 deduct:ion 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. ( Tayug Rural Bank vs Centra l Bank , 146 SCRA 120) Its promulgation must be authorized by the legislature. ( Ph i l i ppine Adm i ni st rativ e Law , Cru z, 1994 ed., p. 32) 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. 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 dollar 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.

DECISI ON - C. T .A. CASE NO. 5365. - 7- Under t hese circ umstances, the law s h ould reign s upreme over s u bordi nate rules a nd 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 t h e 20% discount granted by private establis hm ents may be clai med by t h e latter as tax credit a n d not as a de d uctio n contrary to wh at h as bee n d eclared in Revenue Regulatio n s No. 2-94. In case of conflict betwee n a statute a n d are a dministrative order, t h e fo rm er mu st p r e v ai l . (Kilusang Mayo Uno vs. Garcia. Jr .� 239 SCRA 386) Furt h ermore, the legal issue in this petition has already been settled in t he case entitled Sto. Rosario Drug vs. Commissioner of Internal Revenue. CTA Case No. 5357. dated February 16. 1998 . I n declaring that t h e p rovisions of RA 7432 p revail over Reve nu e Reg u latio n s No. 2 - 94, it is important to point out t hat t he cost of t h e 20% disco un t shall not be treated as deduction from the gross i ncome of t h e petitioner nor ded u cted from its gross sales for VAT or other p erce n tage tax purposes. The benefit that can b e derived by taxpayers is the privilege of clai ming t h ese discou n ts as tax credit an d no lo n ger as ded uctio ns as what ot h er taxpayers have done. They cannot avail of tax cre d it and clai m said disco un ts as de du ctions at the same ti me because t h is would be ta n t amoun t to granting t he m benefits that are already disproportio nate to the obligations imposed upon them by virtue of said law. This is to make clear for bot h the taxpayers and respondent that t he tax credit privilege takes the place of clai ming these discounts as deductio ns p u rs ua n t t o this Court's sta nd t h at Section 2(i) of Revenue Regulations No. 2-9 4 is nu l l a nd void a n d it is Section 4 ( a) of RA 7432 that will a pply in cases of this nature. XXX XXX XXX Notably, the above decision settled t h e legal issues at hand.

DECISION - C.T.A. CASE NO. 5365. - 8- However, inasmuch as petitioner did not bother to submit any evidence to prove its entitlement to the refund sought, this Court is denying petitioner's prayer for refund. In our Resolution, dated May 8, 1997, We denied the admission of all the documentary evidence formally offered by petitioner, to wit: The Court is now tasked to resolve the formal offer of evidence filed by petitioner. A careful review of the records of this case will reveal that petitioner failed to submit to this Court the evidence he is offering. Nothing in the records will substantiate its request for admission considering that the documents are nowhere to be found. xxx. WHEREFORE, in view of the foregoing and considering the late filing of said formal offer, the Court resolves to DENY the admission of Exhibits A, B, B-1, C, D, E, F, F-1 to F-7, inclusive, G, H, I and J. The testimonies of petitioner's witnesses, Ms. Melissa Israel and Ms. Anita M. Javier, are ADMITTED as part of the records (stenographic notes) of this case. Succinctly put, since no evidence has been offered by the petitioner, nothing is submitted to this Court for consideration. Records further show that petitioner did not bother to file a motion for reconsideration nor submitted the said exhibits subsequently. It also failed to file a memorandum. WHERE FORE, in view of the foregoing, the instant petition for review is hereby DENIED for lack of evidence.

DECISION - - 9- C.T.A. CASE NO. 5365. SO ORDERED. WE CONCUR: .I I 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, Article VIII of the Constitution. G Q .~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals