CTA Case No. 5509 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY VAS SALUS DRUG CORPORATION, Petitioner, versus - C.T.A. CASE NO. 5509 COMMISSIONER OF INTERNAL Promulgated: , REVENUE, NOV 26 1999 ~ Respondent. - - - - x-- - -- - - - - - - ~~~ - DECISION This case involves a claim fat' t'efund of alleged ovet�paid income tax in the amount of P23, 197.00 for the taxable yeat' 1994 at'ising ft�om the tt�eatment of the ;::0'1- sales discounts granted to qualified seniot' citizens on theit' pm�chases of medicines as a deduction ft�om gt'oss income as prescribed by Revenue Regulations No. 2-94, instead of tax credit as provided for in Republic Act No. 7432 <Senior Citizens Act). The facts are si mple. Petit i onet' is a domestic cot�pot�at ion <Exh. A> engaged in the t�etailing of medicines and othet' phat'maceutical pt�oducts <TSN, Sept. 10, 1997, p. 16). It is duly authorized to operate a drugstore under the name and business style of "Met'CUt'Y Dt�ug" by the Bm�eau of Food and Dt�ugs <Exh. B>, But�eau of Intet�nal Revenue <Exh. C), Depat�tment of Tt�ade and Industt�y <Exh. D>, and the Municipality of Tuguegarao, Cagayan <Exhs. E & F). In compliance with R.A. 7432, otherwise known as Sen i at' Citizens Act, Pet it ionet' gt�ant ed 20'1- sales discount on medicines sold to qualified senior citizens.

DECISION C.T.A. CASE NO. 5509 - 2- For the period from May to December 1994, the sales discounts granted to qualified senior citizens amounted to P35, 687. 4�9 <Exh. ,J-3) which Petitioner deducted from its gt~oss sales in 1994 <TSN, Sept. 10, 1897, p. 29). Petitioner filed its corporate annual income tax return for 1994 on April 17, 1995 <Exh. K) and the income tax paid for the period was P61, 169.16 <Exh. L). Petitioner allege that Section 2 ( i) of Revenue Regulations No. 2-94 treating the 20% sales discounts granted to qualified senior citizens as a tax deduction ft~om gt~oss sales is illegal, void and without fot~ce and effect inasmuch as Section 4 of R.A. 7432 unequivocally provides that the 20% sales discounts can be claimed as tax ct~edit. Hence, it filed a claim for refund in the sum of P23, 197.00 with the BIR on December 27, 1996 <Exh. 0). Contending inaction on the part of the Respondent, and considering further that the two-year reglementary period within which to file a judicial claim was about to lapse, the instant petition was filed on Apt~il 1.4, 1997. To suppot~t its claim, Petitioner presented both testimonial and documentary evidence. Respondent, on the othet~ hand, did not pt~esent any evidence but just submitted the case for decision based on the pleadings. The issues brought to Us for determination are:

DECISION C.T.A. CASE NO. 5509 - 3- (1) Whether or not the 20% sales discounts granted to qualified senior citizens on their purchases of medicines should be treated a s tax credit per Sec. 4 of R. A. 7432 or as deduction from gross <income) sales according to Sec. 2(i) of Revenue Regulations 2-94; and ( 2) Cor�o lla1��i 1 y, whether� Ot' not was overpayment of income tax by herein Petitioner. After a detailed review of the attending facts, evidence submitted and the law and jurisprudence in point, We rule in favor of the Petitioner. For better perception, the particular provisions of the abovementioned law and regulation are hereunder t� e pt�od uced: "Sec. 4. Privileges t=or the Senior, Citizens The Senior citizens shall be entitled to the following: a) the gt�ant of twenty pet�cent (20%) discount fr�om all establishments r�elative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country; Provided, That pt�ivate establishments may claim the cos t as tax credit. x x x" (undet�scor�ing supplied) Section 2<i), Revenue Regulation No. 2-94: "i. Tax Ct�edit-r�efet�s to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilizat i on of trans portation s e rvi ce s, hotels and similar lodging establishments, restaurants, drugstores, recreation center�s, theatet�s, cinema houses, concer�t

DECISION C.T.A. CASE NO. 550 9 -4 halls, cir~cuses, c.:n~nivals and othe1�~ similar places of culture~ leisure and amusement, which discount shall be deducted by the said establishments from their gross s al es fo r value-added tax or ot h et~ p et~cent a g e tax p tn~ p o s e s. " (underscoring supplied) This is not a case of f irs t i mpt~ess ion. In the cases of Sto. Rosario Drug Corporation vs. Commiss i on er of Internal Revenue , CTA Case No. 5367, 1 E,, 1998, and Elmas Drug Corporation vs. Commissioner of Internal Revenue , CTA Case No. 5311, August 27, 1998, We ruled that the 20 ~ sales discount should be treated as tax cr e di t and not as me r e d e d u c ti on f rom gross inco me. Moreover~ the case o f Del Rosario Drug Corporation vs. Commissioner of Internal Revenue , CTA Case No. 5 357, Apt~ i 1 6~ 1.998 , cited in Baliuag Drug Corporation vs. Commissioner of Internal Revenue, CTA Ca~;e No. 5365, May 13, 1998 , M. E. Holding Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5314, August 1.7, 1.998, and Trinity Franchising and Management Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5313, August 18, 1'398 , fur th er expounded on how the 20'1= discount t o seni or c it iz e ns shou l d b e treated , th us: " A cw�~s o t~y t~e vie w o f t h e w ot~ dings o f S ection 4 of Republi c Act No. 7432 wo ul d reveal that the law literal l y intended t h e cost of the 20'1= discount to be claimed as tax credit by private establishments. We could not see any plausible reason for t he 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 utilize d instead as

DECISION C.T. A. CASE NO. 5509 -5 a deduct ian Fr-om gr'a s s income and Fr-om gr'a s s sales as what is provided in RR No. 2-94. To be valid, an administrative regulation must not be in contravention but should confo r m to the standards that the law prescribe s . <Tayug Rural Bank vs. Central Bank, 146 SCRA 120). Its promulgation must be authorized by the legislature. <Philippine Administrative Law, Ct'uz, 1994 ed., p. 32) RR No. 2-94 which engraved a new meaning to the pht'ase "tax Ct'edit" as t'efet't'ing 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�, t'espondent has i nt et'pt'et ed tax credit as synonymous to tax deduction in glaring contradiction to the above definition. distinction, Undoubtedly, thet'e is a cleat' tet"ms. nay, difference between the two 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 not as a deduction contrary to what has been declared in Revenue Regulations No. 2-94. In case of conflict

DECISION C.T.A. CASE NO. 5509 6- between a statute and are administrative order, the former must prevail. <Kilusang Mayo Uno vs. Garcia, Jr., 239 SCRA 386) Furthermore~ the legal issue in this petition has already been settled in the case entitled Sto. Rosario Dt~t.tg vs. Commissionet~ of Intet~nal Revenue, CTA Case No. 5367, dated February 16, 1998. In declaring that the provisions of RA 7432 prevail over Revenue Regulations No. 2-94, it is important to point out that the cost of the 20~ discount shall not be treated as deduction from the gross income of the petitioner nor deducted from its gross sales for VAT or other percentage tax purposes. The benefit that can be derived by taxpayers is the privilege of claiming these discounts as tax credit and no longer as deductions as what other taxpayers have done. They cannot avail of tax credit and clai m 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 void and it is Section 4(a) of RA 7432 that will apply in cases of this nattwe." Prescinding from the above pronouncement, We have no reason to deviate therefrom which has now become ruling case law. We therefore proceed to the second issue. TSN, Evidence will disclose <Exhs. H, I, J, p & Q; Jul ~' 1.4, 1997' Sept. 10, 1.997 & Nov. 1.2, 1.997) that herein Petitioner complied with the Memorandum Circular of the Bureau of Food and Drugs (Exh. G). The P35,687.4-9 which corresponds to the total 20~ sales discounts granted to qualified senior citizens in 1994 was deducted from Petitioner's grass sales. Petitioner's income tax liability was then reduced by only 35% in the amount of

DECISION C.T.A. CASE NO. 5509 - 7- P12,490.00. Consequently, there was an ove~~pa y men t of income tax in the sum of P23, 197.(H) ~~ep~~esenting 651- of P35,687.49, computed as follows: SALES, Net P9,334,094.CO Add: ' cost of 20% Discount 35,687.00 to Senior Citizens P9,369,781.00 SALES, Gross COST OF SALES 0.00 Merchandise Invty., beg. 11, 123, 105.00 Purchases 2,657,871.00 8,465,234.00 Merchandise Invty., end GROSS PROFIT p 904,547.00 Add: Miscellaneous inco1e 16.333.00 TOTAL INCOME p 920,880.00 Less: Operating expenses 701,888.00 ----- Net Inco1e Before Inco�e Tax p 218,992.00 Less: Inco�e subjected to final tax NET TAXABLE INCOME 7 731.0 p 211 261. 0 INCOME TAX <P211,261.00 )( 35%) p 73,941.00 - Less: TAX CREDIT 35,687.00 (Cost of 20% Discount to p 38,254.00 Senior Citizens) 61,451.00 INCOME TAX PAYABLE p (23,197.00) INCOME TAX ACTUALLY PAID TAX REFUNDABLE/OVERPAID INCOME TAX WHEREFORE, in view of all the fo~~egoin g , Respondent is here b y OR DERE D t o GRANT a REFUND or issue a TAX CREDIT CERTIFICATE to Petitione~~ in the total amount of P23 , 197. 00 ~~ep~~esenting the latte~~, s ove ~~p aid income tax for the taxable year 1994. I SO ORDERED. A '"1t RAMON 0. DE VEY, Ass ociate J ud e

t.JE � I -�1 o1 ~j "-� R'vJANCICl Q. SA-�GA -� -~ ' ... J. ' L.._.'T: J. tCC,::)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY VAS SALUS DRUG CORPORATION, Petitioner, -versus- C.T.A. CASE NO. 5509 COMMISSIONER OF INTERNAL Promulgated: REVENUE, NOV 261999 ~ Respondent. X- ----------------------------------------- --- -------------- X DISSENTING OPINION The Majority Opinion is to the effect that the 20% sales discounts on sales of medicines to Senior Citizens is not deductible from gross sales and that the same 20% sales discount in full can be used as tax credit. I hereby express my Dissent to the Opinion of the majority. Under Section 4 of Republic Act No. 7432, the senior citizens are entitled to the following: "(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicine anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement; XXX XXX XXX

DISSENTING OPINION - CTA CASE NO. 5509 PAGE2 Section 4(a) refers to private establishments which are engaged in businesses requiring the use of inventories and purchases of goods as a necessary requirement in order to determine clearly the income of any such taxpayers, (Section 35, Tax Code, as amended by P.D. No. 1994). Under sub-section (a) of Section 4, the private establishments granting the 20% sales discount to senior citizens can directly deduct the 20% sales discount from the gross sales. However, in order to countervail the effect in the reduction of sales income, the same Section 4(a) allows the private establishments to use the cost of the 20% sales discounts as tax credit. The said cost of the 20% sales � discounts can be determined by the following formula, thus: Cost of Goods sold divided by Sales net of 20% sales discounts equals the percentage rate of the Cost of Goods Sold multiplied by 20% sales discounts at gross amount Or 1!8,465,234.00 .9069 X 35,687.00 = 1!32,365.00 1!9 ,334,094 .00 However, for private establishments granting the 20% sales discounts to semor citizens classified under Section 4(b), the same are directly deductible on the gross sales made to senior citizens as is done under Section 4(a). The only difference is that the private establishments are not allowed to tax credit the cost of the 20% sales discounts. On the basis of Section 4(a) of Republic Act No. 7432, there is recommended a tax refund or tax credit in the amount of P32,365.00, representing the cost of the 20% sales discount in the aggregate figure ofP35,687.00. In order to clearly reflect the correct amount of Tax Credit or Tax Refund, Petitioner' s Profit and Loss statement for taxable year 1994 is presented below:

DISSENTING OPINION - CTA CASE NO. 5509 PAGE3 Sales net of 20% sales discounts P9 ,334 ,094 .00 Less: Cost of Goods Sold Beginning Inventory of goods p 0.00 Purchases of Goods 11 ,123,105.00 Ending Inventory of goods 2,657,871 .00 8,465,234.00 p 868,860.00 Gross Profit 701,888.00' Less: Operating expenses p 166,972.00 . Net operating income 16,333.00 p 183,305.00 Add: Miscellaneous income 7731.00 Total p 175.574.00 _j ~ Less: Income previously subjected to Final tax -\ Amount subjected to Corporate Income Tax Tax due and actually paid upon filing of the annual income tax return p 6~~~ � Tax credit equivalent to the cost of the p 32.365.00 ~ 20% sales discounts As shown in the above presentation of the re-casted Profit and Loss Statement, it is ---- clearly indicated that had the cost of the 20% sales discount been determined and made available at the time the return was filed, Petitioner would have paid only the'arnmmt of - P29,086.00 in cash and the balance ofP32,365.00 be paid in Tax Credit Certificate ofthe same amount. In view hereof, Petitioner is entitled to a tax refund or tax credit certificate equivalent to the cost of the 20% sales discount or P32,365.00.