TROPICAL HUT FOOD MARKET, INC. v.. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COUl~T OFTAX APPEALS QUEZON CITY FIRST DIVISION TROPICAL HUT FOOD CTA CASE NO. 7174 MARKET, INC., Petit ioner, - versus - Members : Acosta, PJ Bautista, and Casanova, JJ COMMISSIONER OF INTERNAL REVE NUE, Promulgated: Re.\pondent. �. ,., --. .,,.,,H" " ' .'t i l'"'" '] :J~ - - - - -x ~~~ ~ ~ x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION v "' ACOSTA,PJ: The Case The instant Petition is an appeal from the Final Decision on Disputed Assessment issued by the BIR deny.ing petiti oner 's protest against the deficiency minimum corporate inco me tax assessment of P6,2 32,503.00 for the year 2000. 1 The I Petition raised not only the disputed assessment, it likew ise sought the refund or Lissuance of tax credit certificate in the amount o fP 3,3 05,150.04 representing the 20% discount granted to senior citizens pursuant to Repub li c Act No. 7432. 1 Petition; Petitioner's Memorandum . p. 320, Rollo; and Respo ndent' s Memora ndum , p. 338, Rollo. 180

I DE C IS IO N C.T.A. Case No . 7 174 Page 2 of8 The Facts Petitioner is a domestic corporat ion organi zed and ex isting under the laws of I the Philippines with principal address at' l 63 EDSA, Mandaluyong City.2 On the other ha nd, respondent is being sued in her official capac ity. She is holding office at BIR National Office Bui lding. Diliman, Quezon City, where she may be served w ith summons, notices and other legal processes. 3 Petitioner filed its 2000 Income Tax Re turn on A pril 16, 2001 ,4 dec laring therein, among others the following: Sa les 2,28 1,084,932.00 Less: Cost of Sa les 1.989.12 1.501.00 Gross Income From Operation Add : O ther Income 29 1,963,43 I.00 Total Gro ss In co me 60.669.080.00 Less: Dedu cti ons Taxab le In come 352,632,5 11 .00 Tax Rate 333,83 I ,946.00 In co me Tax Minimum Corporate In come Tax (MCIT) 18,800,565.00 32% I ,424,835.00 7,052,650. 00 Inco me Tax Due 7,052,650.00 Less : Total Tax Cred its/Paym ents 5.059.0 15 .00 Tax Payabl e 1.993.635 .00 (Underlines supplied) Petitioner filed its administrative claim for refund representing the discounts granted to senior citizens for taxa ble yea r 2000 on April 14 & 15, 2003. 5 Later, it elevated its claim with this Court on April 15 , 2003. The Petition was docketed as CTA Case No . 6674. 6 Meanwhile, petitioner received from the BIR a Letter of A uthority dated June 30, 2003 authorizing the examination of petitioner' s books of acco unt for all internal 2 Par. I, Joint Stipul ati on of Facts and Iss ues. 3 Par. I, Petition in re lation to item no. I, Answer; and Par. 2, Joint S tipul ati on of Facts and Iss ues. 4 Par. 9, Join t Stipul ati on of Facts and Iss ues; a nd Exhibit B. 5 P.ar. 10, .Joint Stipul ation of Facts a nd Iss ues. P Petitioner's Opposition to Respo nd ent's Motion to resol\ e fir st the iss ue or wheth er or not th e Honorab le Court can ta ke cogn iza nce of th e instant case based o n prescripti on and lack or cause of action, p. I07, Rollo. 18 1.

DECISION C.T.A. Case No. 7 174 revenue taxes from the period from January 1, 2000 to December 31 , 2000. 7 Later, it received a revised Preliminary Assessment Not ice dated November 10, 2004 assessing petitioner for deficiency income tax (MCIT), deficiency withl1olding tax-wages , deficiency expanded withho lding tax, defici ency value added tax and deficiency documentary stamp tax. 8 In a letter dated November 16, 2004, petitioner requested for a reconsideration of the said Preliminary Assessment Notice. 9 Petitioner received a Formal Letter of Demand dated November 25, 2004 assessing it of deficiency income tax in the amoun t of P6,232,5 03.99. The other taxes, namely: withholding tax, expanded w ithholding tax, value added tax, documentary stamp tax were no longer in c lud ~d in th e assess ment notice. 10 The said deficiency income tax (MCIT) assessment was computed as follows: 11 Sa les p 1,770,436,868.00 P2,28 1,084,932 .00 Less: OSCA as Sa les Discount 2 18,684.633.00 3,635,665.04 Net Sales Less: Cost of Sales ?2,277,449,266.96 Direct Cost Gross Income From Operation p 1,989, 121,501.00 Add: Other Income 288,327,765.96 Tota l Gross Income 60,669,080.00 p 348 92..6_ 845 96 Tax Due p 6,979,936.92 Less: Creditable Tax Wit hh eld p 1,42 1,639.0 1 Tax Paid Per Return I 993.635.00 3 415 274.0 1 Deficiency Tax p 3,564,662.9 1 Add: 20% Interest up to 12-3 1-04 (.74 14 ) 2,642,84 1.08 Compromi se Pena lty 25 000 .00 TOTAL AMOUNT DUE .e______Q.232 503 .2.2 Petitioner protested and contested the assess ment of deficiency income tax, reiterating its argument that the BIR 's treatment of discounts to senior citizens as sales 7 Par. 3, Joi nt Stipulatio n of Facts a nd Issues; and Exhibit H. 8 Par. 4, Joint Stipulation o f Facts and Iss ues; and F2-xhibit I. 9 Exhibit J. 10 P ar.~, Joint Stipulatio n of Facts and Iss ues. II Exh ibi t K. 18 2

DECISION "' C.T.A. Case No. 7174 discounts instead of as tax credit is not in accordance with law and jurisprudence and requested for reconsideration and reinvesti gation of audit results/assessment notice. 12 Petitioner received the Final Decision on Disputed Assessment denying for lack of legal basis petitioner's protest against the assessed deficiency income tax for the year 2000. 13 On March 22, 2005, petitioner filed the instant Petition before this Court praying that the BIR's final decision �on the disputed assessment be reversed and set aside; it be declared entitled to a tax credit/refund in the amount ofP3,305,150.04; and the respondent be ordered to refund the said amount. In her Answer 'filed on May 17, 2005, the Commissioner prayed for the dismissal of the petition for lack of merit and for a judgment ordering the petitioner to 'pay P6,232,5 03.99 for the year 2000 as deficiency minimum corporate income tax, inclusive of increments, plus 25% surcharge for late payment and 20% mmual interest from December 31, 2004 until fully paid pursuant to Sections 248 and 249 of the Tax Code. This case was submitted for decision on December 23, 2008 taking into consideration petitioner's Memorandum filed on December 9, 2008 and respondent's Memorandum filed on December 15, 2008 . The Issues Submitted for this Court's resolution are the following issues jointly agreed up,on by tI1e parti.es,14 to wt.t: 1. Whether or not the Honorable Court can take cognizance of the instant case based on the following grounds: 1.1. The pleading asserting the claim states no cause of action (Section 1 (g), Rule 16 ofthe R~vised Rules ofCowi). 1.2. Assuming the claim states a cause of action, the cause of action is barred by the statute of limitations (Section I(f), Rule 16 of the Revised Rules of Com1) or by prescription . � 12 Par. 6, Joint Stipulation of Facts and Issues; and Exhibit L. 13 Par. 7, Joint Stipulation of Facts and Issues; and Exhibit M. 14 Joint Stipulation of Facts and Issues. 18 3

. . ' DECISION C.T.A. Case No. 7174 2. Whether or not during the taxable year 2000, petitioner granted discounts to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. 7432 in the total amount of P3,305, 150.04. 3. Whether the 20% sal~s discounts alleged granted to qualified senior citizens on their purchases of medicines should be treated as tax credit deductible from the tax due or as a deduction from gross income. 4. Whether or not the Petitioner' s claim for tax credit of alleged overpaid income tax for taxable year 2000 is substantiated by documentary evidence. 5. Whether the reported gross sa les and other income is accurate and whether the claimed deductions comply with the requisites for its deductibi li ty as required by law. ; . �� . � Whether or not Petitioner is er'iti tled to a refund in the amount of 6. P3,305,150.04 representing alleged sales discounts granted to senior citizens on their I purchases of medicines for taxable year 2000. 7. Whether or not Petitioner is li ab le to the MCIT covering the taxable year 2000 in the amount of P6 ,232,5 03 .99. The Court's Ruling Considering that petitioner's petition for refund or Issuance of tax credit cetiificate in the amount of P3,305 ,150.04, representing the alleged 20% sales discount granted to qualified senior citizens purs~1ant to R.A. 7432 for taxable year 2000 has been decided already by this Court in a separate case (CTA Case No. 6674) rendered on April 26, 2006, this Comi will therefore tackle only the issues relative to the disputed assessment. The issue of whether this Court can take cognizance of thi.s case has already been resolved in the January 19, 2006 Resolution ,15 viz: "In this instant case, it is unarguable that petitioner received respondent's Formal Letter of Demand dated November 25, 2004 assessing it of deficiency income taxes for the calendar year 2000. And in reply to petitioner's protest to the said assessment notice, respondent issued a Fina l Decision on Disputed Assessment against petitioner denying its protest on the formal assessment of deficiency in come taxes for the calendar year 2000. Petitioner, after it received the Fina l Decision on February 22, 2005, has a period of thi1ty days or until March 24, 2005 within which to file this instant petition with this Court pursuant to Section 228 of the National Internal Revenue Code of 1997. XXX XXX XXX 15 pp.126-130, Roflo. 184

DECISION C.T.A. Case No. 7174 Thus, when petitioner filed thi s Petition for Review with this Court on March 22, 2005, such filing was within the period all owed by law pursuant to Section 228 of the Nationallnternal Revenue Code of 1997." Resolving now the merit of the case. The discounts granted by petitioner to semor citizens for taxable year 2000 became the so le basis of the respondent to assess petitioner of deficiency income tax (MCIT) for the same year, 16 viz: "OSCA as Sa les Discount (P3,635,665 .04) - Pursuant to Sec. 4(A) of Republic Act No. 7432, otherw ise known as the "Senior Citizen Act", sen ior citi zens are entitled to twenty percent (20%) di sco unt from all estab lishments relative to utilization of transportation services, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, that private establishments may claim the cost as "tax credit". However, Sec. 2(i) of Revenue Regulation No. 2-94, which implements Sec. 4(a) of RA 7432, interpreted �" tax credit" as the amount representing the 20% discount granted to q\mlified senior citizen by all establishments relative to their utili zation of transp01tation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses and �amu seme nt, w hi ch discount shall be deducted by the said estab li shments from their gross income for income tax purposes and from their gross sales for valu e-added lax and other percentage tax purposes. In thi s instant case, the 20% discount is treated as deduction from the taxpayer's gross income for income tax purposes." It is apparent that the disputed assessment under rev1ew stems from respondent's treatment of the 20% discounts granted to qualified senior citizens as deduction from petitioner's gross income pursuant to Sec. 2(i) of Revenue Regulations No. 2-94, implementing Sec. 4(a) of Republic Act (RA) No. 7432. Therefore, the so le issue to be considered in thi s case is the proper treatment of the aforesaid 20% discounts granted to qualified senior citizens pursuant to RA 7432, in order to properly rule on the disputed assessment. The issue of whether the 20% sa les discount granted to qualified senior citizens pmsuant to Sec. 4(a) ofRA No. 7432 may be claimed as a tax credit or as a deduction from gross sa les in accordance with Sec. 2(1) of Revenue Regulations No. 2-94 had already been settled in Commissioner of Internal Revenue vs. Central Luzon Drug Corporation 17 where in the Supreme Court declared that: � 16 Exhibits K and M . 17 GR No. 159647, Apri l 15, 2005. 185

... DECISION "� C.T.A. Case No. 717 4 "The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sales of the establishment concemed. 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. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke th e law. " In Bicolandia Drug Corporation vs. Commissioner of Internal Revenue, 18 the ' Supreme Court held that the term cost in Sec. 4 (a) of RA 7432 refers to the amount of the 20% discount. This amount shall be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. In Commissioner of Internal R-evenue ys. Central Luzon Drug Corporation, 19 the Supreme Court ruled that the discounts given under RA No. 7432 should be .. treated as tax credits, not deductions from income, and when claimed shall be treated as a reduction from any tax liability. Pertinent portion of the ruling of the High Court in the said case is hereunder reproduced: " It is fundamental rule in statutory cons tru ction that the legislative intent may be determined from the language .of the statTite itself especially when the words and phrases therein are clear and unequivocal�. The statue in such a case must be taken to mean exactly what it says. Its litera l meaning should be followed; to depart from the meaning expressed by the words is to aIter the statute . The above provision explicitly employed the word " tax credit." Nothing in the provision suggests for it to mean a "dedu ction from gross sales. To construe it otherwise would be a departme from the clear mandate of the law. Thus, the 20% discount required by the Act to be given to senior citizens is a tax credit, not a deduction fi�o m the gross sales of the establishment concerned. As a corollary to this, the definition of 'tax credit' found in Section 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as the amount representing the 20% discount that "shall be ded ucted by th e sa id establishment from their gross sales for value added tax and other percentage tax purposes." This definition is contrary to what our lawmakers had envisioned with regard to the treatment of the discount granted to senior citizens. Accordingly, when the law says that the cost of the discount may be claimed as a tax credit, it means the amount- When claimed - shall be treated as a reduction from any tax liability. The law cannot be amended by a mere regulation . The administrative agencies issuing these regul ation s may not enlarge, alter or restrict the provisions of the law they administer. In fact,a regu lation that "operates to create a rule out of harmony with the statute is a mere nullity." 18 GR No. 142299, June 22,2006. 19 GR No. 148512, June 26, 2006. 18G

DECISION C.T.A. Case No . 7174 Since the existence of the 20% di sco unts amounting to P3 ,635,665 .04 which were granted by petitioner to qualifi ed senior citi zens pursuant to Republic Act No . 7432 is recognized by the BIR as sales discount in the Preliminary Assessment I Notice, Formal Letter of Demand, and Fina l D ec ision on Disputed Assessment20 and since the jurisprudence cited dictates that such treatment is erroneous; therefore, judicial affirmation ofthe deficiency income tax (MCIT) assessment is improper. \\THEREFORE , the instant Petition to reverse and set aside the Final Decision on Disputed Assessment is hereby GRANTED ; and therefore, the deficiency income tax (MCIJ) assessment for taxable year 2000 is hereby CANCELLED. SO ORDERED:� G-~~ ERNESTO D. ACOSTA Presiding Justice CAESAR A. CASANOVA Associate Justice 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. ~--c ~.~ ERNESTO D. ACOSTA Presiding Justice 20 Exhibits I, K and M. 187