COMMISSIONER OF INTERNAL REVENUE v. SAN AGUSTIN DRUG CORPORATION

REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY ENBANC COMMISSIONER OF INTERNAL C.T.A. E.B. NO. 80 REVENUE, (C.T.A. CASE NO. 6536) Petitioner, Present: -versus- ACOSTA, Presiding Justice, CASTANEDA, JR. , SAN AGUSTIN DRUG BAUTISTA, UY, CASANOVA, and PALANCA-ENRIQUEZ, JJ. Promulgated: CORPORATION, Respondent. X ------------------------------------------------------------------------------------ X DECISION PALANCA-ENRIQUEZ, J.: It is a well-accepted principle that in case of conflict between a statute and an administrative rule and regulation, the former must prevail. A rule or regulation must conform to and be consistent with the provisions of the enabling statute in order for such rule or regulation to be valid. The instant case is a classic illustration of this precept. Thus, the question posted herein is whether Revenue Regulations 2-94, Section 2(i) ~

C.T.A. E.B. NO. 80 2 (C.T.A. CASE NO. 6536) DECISION 1s m accordance with Section 4 of Republic Act No.7432(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 ", with respect to the proper treatment of tax credit. THE CASE Before Us is a Petition For Review filed by the Commissioner of Internal Revenue (hereafter "petitioner") under Section 11 of Republic Act No. 9282 (An Act Expanding the Jurisdiction of the Court of Tax Appeals), in relation to Rule 43 ofthe 1997 Rules of Civil Procedure, as amended, which seeks the reversal the Decision dated November 25 , 2004 issued by the Second Division in C.T.A Case No. 6536. The assailed Decision was disposed as follows: "IN VIEW OF THE FOREGOING, the Petition for Review is hereby GRANTED. Respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of Three Hundred Twenty Thousand Five Hundred Thirty Four Pesos (P320,534,00) representing overpaid income tax for the taxable years 2000 and 2001 pursuant to Sec. 4(a) ofR.A. No. 7432. SO ORDERED." ~

C.T.A. E.B. NO. 80 3 (C.T.A. CASE NO. 6536) DECISION and the Resolution dated March 31, 2005 issued by the same Division of this Court in C.T.A. Case No. 6536, the dispositive portion of which reads as follows : "WHEREFORE, premises considered, respondent' s Motion for Reconsideration is hereby DENIED for lack of merit. SO ORDERED." THE FACTS During the period January 1, 2000 and December 31 , 2001 , SAN AGUSTIN DRUG CORPORATION (hereafter "respondent") granted 20% percent sales discount to qualified senior citizens on their purchases of medicines in compliance with RA 7432. Respondent treated these discounts as mere deductions from its gross income based on the provisions of Revenue Regulations No. 2-94 (hereafter "RR 2-94"), which implement RA 7432. On April 16, 2001 and April 15, 2002 respondent filed its Annual Income Tax Returns for taxable years 2000 and 2001 , respectively (Exhibits "B "& "N" ).

C.T.A. E.B. NO. 80 4 (C.T.A. CASE NO. 6536) DECISION On July 9, 2002, respondent filed with petitioner a claim for a tax credit/refund in the total amount of P320,534.00 for the taxable years 2000 and 2001 arising from the twenty (20%) percent discount it granted to qualified senior citizens under RA 7432 which were treated as mere deductions form gross income instead of as tax credits (Exhibit "U"). Respondent's administrative claims were computed as follows: TAXABLE YEAR 2000 p 2,963,886.00 P24,767, 191.00 Sales, Net 22,787,625.00 162,862.00 Add: Cost of20% Discount to Senior Citizens (3, 120,269 .00) Sales, Gross 24,930,053.00 Less: Cost of Sales 41,342.00 Merchandise Inventory, Beginning 46,220.00 22,631 ,242.00 Purchases 40,191.00 2,298,811.00 Merchandise Inventory, Ending 2,772.00 12,192.00 Gross Profit 2,3 11 ,003.00 Add: Other Income (net of Interest subject to 2,181,811.00 final tax) 129,192.00 TOTAL INCOME Less : Operating Expenses 46,220.00 NET INCOME BEFORE TAX INCOME TAX (32%) (42,963 .00) MCIT (162,862.00) Less: Income Tax Actually Paid ( 159,605 .00) Payment per RCBC 129762 WTX Cost of 20% discounts to senior citizens Income Tax Refundable/Creditable TAXABLE YEAR 2001 P3,120,269.00 P28,692,052.00 Sales, Net 27,179,476.00 281,586.00 Add: Cost of20% Discount to Senior Citizens Sales, Gross 28,973,638.00 Less: Cost of Sales Merchandise Inventory, Beginning !11 Purchases

C.T.A. E.B. NO. 80 5 (C.T.A. CASE NO. 6536) DEC ISION Merchandise Inventory, Ending (4,212,924.00) 26,086,821.00 Gross Profit 2,886,817.00 Add: Other Income (net oflnterest subject to final tax) 51,835.00 TOTAL INCOME Less: Operating Expenses 2,938,652.00 NET INCOME BEFORE TAX 2,483,333.00 INCOME TAX (32%) 455,319.00 Less: Incom e Tax Actually Paid Cost of20% Discounts To Senior Citizens 145 ,702.00 Income Tax Refundable/Creditable (25,045 .00) TOTAL INCOME TAX REFUNDABLE (281 ,586.00) (160,929 .00) (320,534.00) On September 20, 2002, petitioner lodged its appeal with this Court due to the alleged inaction of the respondent. After trial on the merits, the Division of this Court rendered the assailed Decision on November 25, 2004. Not satisfied, herein petitioner moved for a reconsideration of the same, which the Division denied in the aforesaid Resolution dated March 31, 2005. Hence, this petition. ISSUE Petitioner submits this sole issue for Our consideration: WHETHER OR NOT PETITIONER IS ENTITLED TO A TAX CREDIT IN THE AMOUNT OF P444,448.00 ALLEGEDLY REPRESENTING OVERPAID INCOME TAXES FOR THE YEARS 2000 AND 2001. ()d/

C.T.A. E.B. NO. 80 6 (C.T.A. CASE NO. 6536) DEC ISION On May 20, 2005, We required the respondent to file comment on the petition within ten (1 0) days from notice, and on June 14, 2005 , upon motion for extension to fi le, respondent filed its "Comment (on Petition for Review)" . THE COURT EN BANC'S RULING The petition has no merit. The case at bar focuses on the proper interpretation of the language of RA 7432 , specifically Section 4 (a) which 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 establishments, restaurants and recreation centers and purchase of medicines anywhere in the country; Provided, That private establishments may claim the cost as tax credit ... " (Emphasis supplied) Thus, We are tasked to resolve the issue of whether or not the sales discounts should be deductible from gross income for income tax purposes or as a tax credit deductible from taxes due. Both parties advanced their respective arguments in this~

C.T.A. E.B. NO. 80 7 (C.T.A. CASE NO. 6536) DECISION Respondent contends that since Sec. 4(a) of RA 7432 provides in clear and unequivocal terms that the discounts granted to qualified senior citizens may be claimed as tax credits by the private establishments granting the same, Section 2(i) of RR 2-94, a mere implementing administrative regulation, cannot modify, alter or amend the clear mandate of Section 4(a) of RA 7432. Consequently, Section 2(i) of the Revenue Regulation is illegal, void and without force and effect for being inconsistent with the statute it seeks to implement. On the other hand, petitioner has consistently maintained that the 20% discount granted to senior citizens should be treated as a deduction from gross income and not as a tax credit deductible from the tax due. The foregoing claim finds support in RR 2-94 issued by petitioner pursuant to its rule making function. For clarification and as a curative measure, RR 2-94 was issued defining the term "tax credit" as used in the law and providing therein the manner of claiming the same, which is by deduction from the establishment' s gross income and not from its income tax liability. Moreover, the amount being claimed by the petitioner was not properly documented. ~

C.T.A . E.B . NO. 80 8 (C .T .A . CASE NO . 6536) DECISION Petitioner, further, stressed that the Senior Citizens Law was not intended to benefit the seller of medicines in the form of claiming the cost of the 20% discount as a deduction from tax due but rather than as a deduction from gross income. If treated as a deduction from gross income, the seller would still benefit from the said law in the form of tax shield equivalent to 32% of the 20% discount granted to qualified senior citizens, 32% being the corporate tax rate, as compared to the outright deduction from tax due equivalent to 100% of the 20% discount granted to qualified senior citizens. Finally, petitioner concluded his argument with a convenient statement that RR 2-94 did not alter, modify or amend the intent of the law to consider the 20% discount granted to qualified senior citizens as deduction from gross income and not as credit against tax liability. We are not persuaded. This Court in a long line of cases has repeatedly ruled that the 20% sales discounts granted to qualified senior citizens should be treated as a tax credit instead of as a mere deduction from gross income. ~

C.T.A. E.B. NO. 80 9 (C.T.A. CASE NO. 6536) DECISION Construction Not Availing !{Statute Is Clear and Unambiguous A verbatim reading of Section 4 of RA 7432 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credit by establishments. And it is a well settled rule in statutory construction, that when the language of the law is clear and unequivocal, the law must be taken to mean exactly what it says (Republic vs. Court of Appeals, 299 SCRA 199). Time again, it has been repeatedly declared by the Supreme Court that where the law speaks in clear and categorical language, there is no room for interpretation but only room for application (Cebu Portland Cement Co. v. Municipality of Naga, 24 SCRA 708). The fundamental duty of the court is to apply the law; it may not construe a statute that is clear and free from doubt. Tax Credit; Defined Crucial herein is the proper treatment of the tax credit, thus, the need to define and understand its concept. Petitioner advanced his own version as embodied in RR 2-94, Section 2(i) which defines tax credit as "the amount representing the 20% discount granted to a qualified sen}J:tv

C.T.A . E.B. NO. 80 10 (C.T.A. CASE NO. 6536) DECISION citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cmema 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". We do not agree. The definition given by petitioner is erroneous. It interpreted tax credit as synonymous to tax deduction, a patent contradiction to its ordinary acceptance. Undeniably, there is a clear distinction between the two terms. The Supreme Court had the opportunity to differentiate the two terms in a very instructive case of Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, G.R. No. 159647, April 15, 2005, when it stated: "A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including - whenever applicable - the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other hand, reduces the income that is subject to tax in order to arrive at taxable income. To thi~

C.T.A. E.B . NO. 80 II (C.T.A. CASE NO. 6536) DECISION of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before." Our Tax Code did not specifically provide the definition of a tax credit. Nonetheless, when a statute does not define the word used therein, the courts may consult dictionaries as aid in determining the meaning to be assigned to such word (Kuenzle & Streiff v. Collector of Customs, 32 Phil. 510) . Dictionaries generally define words in their natural, plain and ordinary acceptance and significance. As such, courts may adopt the ordinary meaning of the word as defined therein. Thus, consulting Black 's Law Dictionary, 61h edition, tax credit is defined as "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." This definition coincides with the afore-quoted Supreme Court pronouncement.

C.T.A. E.B. NO. 80 12 (C.T.A. CASE NO. 6536) DECISION Invalidity o[RR 2-94 Incessantly, petitioner asserts the validity of RR 2-94 citing the settled rule that construction given to a statute by an administrative agency charged with the interpretation and application of statute is entitled to great respect and should be accorded great weight by the courts (Nestle Philippines, Inc. v. CA eta!., 203 SCRA 504). For an administrative regulation to be valid, however, it must not be in contravention but rather it should be in conformity to the standards that the law prescribes (Tayug Rural Bank v. Central Bank, 146 SCRA 120). Constructions of sort are neither controlling nor binding upon the court, the duty and power to interpret the law being primarily a judicial function. The court may disregard contemporaneous construction, where there is no ambiguity in the law, where the construction is clearly erroneous, where strong reason to the contrary exists, and where the court has previously given the statute a different interpretation (Statutory Construction 51h Edition, by Ruben E. Agpalo citing the cases of Regalado v. Yulo, 61 Phil. 173; Molina v. Rafferty, 37 Phil. 545; Phil. Long Distance Tel. Co. v. CIR, 90 Phil. 674; Chartered Bank Employees Assn. v. Ople, 138 SCRA 273). ~

C.T.A. E.B . NO. 80 13 (C.T.A. CASE NO . 6536) DECISION In light of the patent discrepancy in the interpretation, the law should reign supreme over subordinate rules and regulations. Clearly, it was an ultra vires act for petitioner to promulgate Revenue Regulations No. 2-94. He cannot change the intention of the law making body by casually promulgating a subordinate regulation in contravention of the statute it seeks to implement (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, supra) Inapplicability o[Republic Act No. 9257 After all the arguments set forth, petitioner suddenly seeks the application of Republic Act No. 9257 (hereafter "RA 9257"), m the instant case. RA 9257, otherwise known as the "Expanded Senior Citizens Act of 2003 ", specifically provides that the discount granted to senior citizens in their purchase of medicines shall be allowed as deduction from gross income, and not as tax credit deductible from tax due, of the establishments which granted the said discount, to wit: "Sec. 4. Privileges for the Senior Citizens - The senior citizens shall be entitled to the following: XXX XXX XXX (}fl./

C.T.A. E.B. NO. 80 14 (C.T.A. CASE NO. 6536) DECISION The establishment may claim the discount granted under (a),(f),(g) and (h) as tax deduction based on the net cost of the goods sold of services rendered: Provided, that the cost of the discount shall be allowed as deduction from gross income of the same taxable year that the discount is granted. xxx" We cannot, however, allow the applicability of RA 9257 in the instant case. The taxable years involved in the instant case were 2000 and 2001 , whereas RA 9257 was approved only on February 26, 2004. It is a well-settled principle in statutory construction that laws operate prospectively, unless the intendment of the legislature to give them a retroactively application is expressly declared or implied from the statute. Such rule is also embodied in Article 4 of the Civil Code, which provides that "laws shall have no retroactive effect, unless the contrary is provided" (R.E Agpalo, Statutory Construction, 51h edition. 2003, page 352). A cursory reading of RA 9257 does not show the intent of the legislature to apply it retroactively. In fact, Section 5 of said law clearly provides for its effectivity, to wit: "This Act shall take effect fifteen (15) days after its complete publication in any two (2) national newspapers of general circulation." Therefore, RA 9257 cannot be applied to the instant case. The twenty (20%) percent discount granted to qualified senior ~

C.T.A. E.B. NO. 80 15 (C.T.A. CASE NO. 6536) DECISION citizens should be treated not merely as a deduction from gross income but as a tax credit, as provided for by RA 7432, the applicable law. Applicable Case Law Finally, to rest all doubts, the Supreme Court made a categorical ruling on the proper treatment of the tax credit in relation to Section 4(a) ofRA 7432, to quote: "The 20 percent discount required by the law to be given to senior citizen is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. x x x (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, supra.) Moreover, the Supreme Court went further to state that: "In the present case, the tax authorities have given the term tax credit in Section 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the legislature. In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law". Conversely, a regulation or~

C.T.A. E.B. NO. 80 16 (C.T.A. CASE NO. 6536) DECISION any portion thereof not adopted pursuant to law is no law and has neither the force nor effect of law." (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, supra.) Tax Credit: Fully Substantiated Having resolved the legal issues, We will now determine whether respondent has presented sufficient evidence to substantiate its claim for refund. After a careful examination and evaluation of the evidence on record, We find no reason to overturn the factual findings of the Second Division of this Court, which in fine states: "To prove that it actually granted 20% sales discount to qualified senior citizens, petitioner submitted in evidence various cash slips (Exhibits V and Z), the 2000 and 2001 Summary of Senior Citizens Discounts (Exhibits DD and EE), Special Record Book for 2000 and 2001 as required under the implementing rules of Republic Act No . 7432 (Exhibits W-3 , AA-3 and AA-4), the 2000 and 2001 Cash Receipts Book (Exhibits X and BB) and General Ledger (Exhibits Y and CC). After conducting a thorough examination of the various cash slips, the Summary of Senior Citizens Discounts, the Special Record Book, the Cash Receipts Book and the General Ledger, WE find the report of the Commissioned Independent CPA (Exhibit FF) to be in order. It should be noted that per Audited Comparative Financial Statements (Exhibit Y) in relation with petitioner's ~

C.T.A. E.B. NO. 80 17 (C.T.A. CASE NO. 6536) DECISION Income Tax Returns for taxable years 2000 and 2001 (Exhibits B and N), it appears that petitioner had sales discounts of P162,862.00 (Exhibit Y-2-b) and P974,342.00 (Exhibit Y-2-e) for 2000 and 2001 , respectively, or in the aggregate sum of P444,448.00. However, based on the findings of the commissioned independent CPA, the sales discounts, which were duly substantiated and which were granted per audit amounted to P165 ,081.70 for taxable year 2000 and P303 ,464.21 for taxable year 2001 , or for a total sum of P468,545.91 which is more than P444,448.00, the amount of sales discount reported by petitioner in its financial statements. Hence, We shall only consider the amount P444,448.00 sales discounts given to senior citizens since this is the amount reported in petitioner's income statement as well as the amount administratively and judicially claimed by petitioner. In computing petitioner's 2000 overpaid income tax, it is necessary to add back to petitioner's net sales of P24,767,191.00 the 20% sales discounts granted to senior citizens in the amount of P162,862.00 which was previously deducted from its gross sales since said discounts are no longer to be treated as deductions from gross income but rather as tax credit. The same procedure shall be done with respect to the computation of petitioner's 2001 overpaid income tax. We shall add back to the net sales of P28,692,052.00 the amount of P281 ,586.00 representing the 20% sales discounts to senior citizens. Consequently, a re-computation of petitioner's 2000 and 2001 income tax liabilities using the substantiated amounts of P162,862.00 and P281 ,586.00, respectively, as allowed tax credits will result to an overpaid income taxes of P159,605.00 and P160,929.00 for 2000 and 2001 ,~

C.T.A. E.B. NO. 80 18 (C.T.A. CASE NO. 6536) DECISION respectively, or a total amount of P320,534.00 overpaid income tax for the two taxable years, as correctly computed by petitioner in its administrative claim for refund (Exhibit U)." In view of the foregoing, We see no reason to reverse the decision of the Second Division . WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and, accordingly, DISMISSED for lack of merit. SO ORDERED. ~1,~ ~?/ OLGA PALANCA-ENRIQUEZ Associate Justice WE CONCUR: ~\Sl. o~ ERNESTO D. ACOSTA Presiding Justice a ~;4 c.~~~~. m ANITo c. cAsTANEDA, JR. '----bl~ Associate Justice Associate Justice

C.T.A. E.B. NO. 80 19 (C.T.A. CASE NO. 6536) DECISION CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, 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. ~~. c~ ERNESTO D. ACOSTA Presiding Justice