CTA Case No. 6929 (Decision)

REPUBliC OF THE PHiliPPINES coon of Tax Appeals QUEZON CITY SECOND D/11/S/OK ANNO DOMINI DRUG, INC., C.T.A. CASE NO. 6929 Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, JUL 2 0 2006/ R e s p o n d e n t. x--------------------------------------------------------------------------------------------~-----------------x DECI SION UY, d_.: This Petition for Review seeks the refund or issuance of a tax credit certificate in the amount of SEVEN HUNDRED EIGHTY SIX THOUSAND ONE HUNDRED EIGHTEEN AND 88/100 PESOS (Php786, 118.88) representing petitioner's allegedly erroneous treatment of the twenty percent (20%) sales discounts granted to qualified senior citizens on their purchases of medicines covering the taxable years 2001 and 2002 , as deductions from gross income based on Revenue Regulations No. 2-94 instead of as tax credits pursuant to Republic Act No. 7432 or the Senior Citizens Act.

DECISION C.T.A. CASE NO. 6929 Page2of15 The Facts Petitioner, Anno Domini Drug , Inc., is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with business address at J.P. Rizal Street, Laoag City. As a franchisee under the business name and style of "Mercury Drug" , it is duly licensed to operate drug stores by the Department of Trade and Industry, Bureau of Food and Drugs, and the local government unit of Laoag City. On the other hand , respondent Commissioner of Interna' l Revenue is the duly appointed Commissioner of Internal Revenue with office address at BIR National Building , Diliman, Quezon City. On April 15, 2002 and April 15, 2003, petitioner filed its Annual Income Tax Returns under protest for the taxable years 2001 and 2002, respectively, reflecting the following :1 Sales 2001 2002 Less P54,57 6,453.47 P58 ,050,085.13 Cost of Sales 51, 439,142.41 54,799,280.36 p 3,137,311 .06 p 3,250,804.77 Gross Income from Operation 504 .59 49 450.13 Add: Non-Operating & Other Income p 3,137,815 .65 p 3,300,254 .90 Total Gross Income Less 2,961 ,895.29 3,041,969 .54 Dedu ctions E 1Z5 92Q.36 E 258 285 36 Taxable Income 32% 32% Tax Rate p 56,294.52 p 82,651.32 p 62,746 .22 p 65016.10 Income Tax p 62 ,746 .22 p 82,651 .32 MCIT p 39,045 .80 p 60,615.03 Tax Due Less 2 811 .22 5,289 .06 Ta x Credits/Payments Prior Year's Excess Credits Tax Payments for the First Three Quarters Creditable Tax W ith held for the First Th ree Quarters Creditable Tax Withheld for the Fourth Quarter Exhibits "B", Annual Income Tax Return (BIR Form 1702), Rollo, pp. 140-142, and Exhibit "0", 2002 Annual Income Tax Return (BIR Form 1702), Rollo, pp. 157-159.

DECISION C.T.A. CASE NO . 6929 Total Tax Credits/Payments p 41 857 .02 p 65 904 09 Tax Payable/(Overpayment) p 20 889 20 p 16 747 23 On February 19, 2004, petitioner filed its claim for a tax credit or refund in the total amount of P786, 118.88 allegedly representing the twenty percent (20%) discount it granted to qualified senior citizens from their purchases of medicines covering the period from January 1, 2001 to December 31, 2002, as well as, petitioner's alleged overpaid income taxes less income taxes payable, both for the taxable years 2001 and 2002, computed as follows :2 Taxable Year 200 1 Sales , Net P54,576,453 .47 585,408 .69 Add : Cost of 20% Discounts to Senior Citizens P55,161 ,862 .16 Sales, Gross 51,439,142.41 Less: Cost of Sales p 3,722,719.75 Merchandise Inventory, Beginning p 6,005,861 .61 504 .59 p 3,723,224 .34 Purchases 52 ,112,494.51 2 ,961,895 .29 Merchandise Inventory, Ending __{�,�.79,213.71) p 761 329 Q5 Gross Profit p 243,625.30 (62 ,746.22) Add : Other Income (N et of Interest Income Subject to Final Tax) {585,408 .69) Total Income p {404,529.61) Less: Operating Expenses P58,050 ,085.13 561 ,160.69 Net Income Before Income Tax P58 ,611 ,245.82 Income Tax Less: Income Tax Actually Paid 54 ,799,280.36 p 3,811 ,965.46 Cost of 20% Discounts to Senior Citizens Income Tax (Refundable/Creditable) 49 450.13 p 3,861,415.59 Taxable Year 2002 p 6,679 ,213 .71 Sales , Net 54 ,971 ,367.21 3,041 .969.54 Add : Cost of 20% Discounts to Senior Citizens {6,851 ,300.56) Sales, Gross Less: Cost of Sales Merchandise Inventory, Beginning Purchases Merchandise Inventory, Ending Gross Profit Add : Other Income Total Income Less: Operating Expenses Exhibit "Y", Petitioner's Written Claim for Tax Credit Refund addressed to Commissioner of Internal Revenue dated February 19, 2004, Rollo, pp. 175-177

DECISION C.T.A. CASE NO . 6929 Net Income Be fore Income Tax p 819 44fiJ15 Income Tax p 262.222 .74 Less: Income Tax Actually Paid (82,651 .32) Cost of 20% Discounts to Senior Citizens (561.160.69) Income Tax (Refundable/Creditable) p (381 ,589.27) Total Income Tax (Refundable/Creditable) p 1786 118 89\ Before it could be barred by prescription, petitioner deemed it proper to elevate its case to this Court through this instant Petition for Review on April 13, 2004. On May 19, 2004, respondent filed his Answer, raising the following as his Special and Affirmative Defenses, to quote : "4. Revenue Regulations No. 2-94 did not alter, modify or amend the intent of the law to consider the 20% discount granted to qualified senior citizen as deduction from petitioner's gross income and not as credit against its tax liability as petitioner insists; 5. With the accumulation of experience and growth of specialized capabilities by the agency charged with implementing a particular statute, it is now a recognized principle that the construction given to a statute� by an administrative agency charged with the interpretation and application of that statute is entitled to great respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the governing statute or the constitution and other laws (Nestle Philippines , Inc., vs . CA, et.al., 203 SCRA 504); 6. R.A. 7432 allows the discounts granted to senior citizens to be claimed as a tax credit but is silent as to the mechanics of availing the same. For clarification and as a curative measure, Revenue Regulations No. 2-94 was issued defining the term "tax credit" as used in the law and providing therein the manner of claiming the same, wh ich is be deduction from the establishment's gross income and not from its income tax liability. Otherwise an absurdity, not intended by the law, will arise;

DEC IS ION C.T. A. CASE NO. 6929 Page5 ofl5 7. Petitioner's alleged cla im for refund is subject to administrative routinary investigation/examination by the Bureau ; 8. The amount of P786,118.88 being claimed by petitioner as alleged sales discount to senior citizens on their purchases of medicines for taxable years 2001 and 2002 were not properly documented ; 9. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund/credit; 10. Petitioner must show tha t it has complied with the provisions of Sections 204 (C) and 229 of the Tax Code on the prescriptive period for claiming refund/credit; and 11 . Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation."3 After presentation of petitioner's testimonial evidence and the admission of its documentary exhibits, respondent's counsel , Atty. Marice! G. Quilates, manifested that she is not presenting testimonial evidence because the issues raised in the instant petition are purely legal. The parties were thereafter directed to file their respective Memorandum . On March 1, 2006, this case was submitted for decision after the submission of the parties' respective memorandum . THE ISSUES The issues as stipulated by the parties are as follows : "1. Whether or not the claim of petitioner for tax credit/refund was administratively and judicially filed within the two-year statutory period ; 3 Answer, Rollo, pp. 34-35

DEC IS ION C.T.A. CAS E NO. 6929 Page 6 of I5 2. Whether the 20% sales discount granted to qualified senior citizens on their purchases of medicines should be treated as tax credit/refund deductible from the tax due as provided under Republic Act No. 7432 or merely as a deduction from gross income as provided under Revenue Regulations No. 2-94; 3. Whether or not petitioner granted discounts in 2001 and 2002 to qualified senior citizens on their purchases of medicines pursuant to Republic Act No . 7432 in the total amount of One Million One Hundred Forty Six Thousand Five Hundred Sixty Nine and 38/100 Pesos (P1, 146, 569.38) ; and 4. Whether or not the petitioner is entitled to a tax credit/refund in the amount of Seven Hundred Eighty Six Thousand One Hundred Eighteen and 88/100 Pesos (P786,118.88) representing the cost of the twenty (20%) percent discount granted to qual ified senior citizens on their purchases of medicines during the period from January 1, 2001 to December 31 , 2002 and overpaid income taxes less income taxes payable for 2001 and 2002 taxable years. "4 THIS COURT'S RULING The first issue on the timeliness of petitioner's administrative and judicial claims for refund/tax credit is ruled in the affirmative. Petitioner filed its Annual Income Tax Returns on April 15, 2002 and April 15, 2003 for the taxable years 2001 and 2002, respectively, and it had until April 14, 2004 and April 14, 2005 within which to file both its 4 Joint Stipulation of Facts and Issues, Rollo, pp. 55-57.

DEC IS ION C.T. A. CASE NO. 6929 administrative and judicial claim for tax credit/refund , respectively.5 Considering that petitioner's administrative claim was filed on February 19, 2004 and the judicial claim was filed on April 13, 2004, evidently, the requirements provided under the laws have been complied with. The second issue refers to the manner by which the 20% sales discount granted to qualified senior citizens on their purchases of medicines: whether it should be treated as tax credit/refund deductible from the tax due as provided under Republic Act No. 7432 or merely as a deduction from gross income as provided under Revenue Regulations No. 2-94. This issue was resolved by the Supreme Court in the case of Comm issioner of Internal Revenue vs . Central Luzon Drug Corporation in this wise: "section 4 (a) of RA 74326 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in the country . The latter may then claim the cost of the discount as a tax credit. x x X "The 20 percent discount required by law to be given to senior citizens 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 dedu ction , 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 grants are void. Basic is the rule that administrative regulations cannot amend or revoke the law. XXX XXX XXX 5 The taxable yea r 2004 being a leap year 6 Entitled "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for other purposes, " this law took effect in 1992. See Santos, Jr. v. Llamas, 379 Phil. 569, 577, January 20, 2000.

DEC ISION C.T.A. CAS E NO. 6929 Tax Credit versus Tax Deduction Although the term is not specifically defined in our Tax Code, tax credit generally refers to an amount that is "subtracted directly from one's total tax liability." It is an "allowance against the tax itself' or "a deduction from what is owed" by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. Tax cred it should be understood in relation to other tax concepts . One of these is tax deduction - defined as a subtraction "from income for tax purposes," or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount of tax which is due." An example of a tax deduction is any of the allowable deductions enumerated in Section 34 of the Tax Code. A tax cred it 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, reduces the income that is subject to tax in order to arrive at taxable income. To think 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. XXX XXX XXX Laws Not Amended by Regulations Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity"; it cannot prevail. It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is cruciaL Our tax authorities fill in the details that "Congress may not have the opportunity or competence to provide." The regulations these authorities issue are relied upon by taxpayers , who are certain that these will be followed by the courts. Courts, however, will

DECISION C.T.A. CASE NO. 6929 Page 9 of IS not uphold these authorities' interpretations when clearly absurd, erroneous or improper. In the present case , the tax authorities have gi'ven the term tax credit in Sections 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 any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law. XXX XXX XXX Grant of Tax Credit Intended by the Legislature Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to establish a program beneficial to them. These objectives are consonant with the constituti onal policy of making "health x x x services available to all the people at affordable cost" and of giving "priority for the needs of the x x x elderly." Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives. Furthermore, Cong re ss has allowed all private establishments a simple tax credit, not a deduction . In fact, no cash outlay is required from the government for the availment or use of such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income 7" Clearly from the foregoing jurisprudence interpreting pertinent provisions of Republic Act No. 7432, the 20% sales discounts granted to 7 G.R. No. 159647, April 15, 2005

DEC ISION C.T.A. CASE NO . 6929 Page 10 o f 15 qualified senior citizens should be treated as tax credits instead of as mere deductions from gross income. The third issue is a factu al issue, that is, whether or not petitioner granted discounts in 2001 and 2002 to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. 7432 ir. t~e total amount of One Million One Hundred Forty Six Thousand Five Hundred Sixty Nine and 38/100 Pesos (Ph p1, 146,569 .38) . A resolution in the affirmative will likewise favorably resolve the fourth issue as to whether or not the petitioner is entitled to a tax credit/refund in the amou nt of Seven Hundred Eighty Six Thousand One Hundred Eighteen and 88/100 Pesos (Php786,118.88) representing the cost of the twenty (20%) percent discount granted to qualified senior citizens on their purchases of medicines during the period from January 1, 2001 to December 31 , 2002 and overpaid in come taxes less income taxes payable for 2001 and 2002 taxable years . Th us , the third and fourth issues will be resolved jointly. In proving that petitioner actually granted the twenty (20%) percent sales discounts to its qualified sen ior citizen clientele , the following supporting documents were presented by petitioner: a. Various cash slips issued by its entity covering the taxable years 2001 and 2002 (Exhibits "Z-64201 to Z-65100, Z- 66301 to Z-67200, Z-68901 to Z-69900, Z-71401 to Z- 72700, Z- 74501 to Z- 75500, Z-77201 to Z-78000, Z-78501 to Z-78800, Z-79201 to Z-80000, Z-82401 to Z -83000, Z- 64703, 00-83001 to 00-83400, 00-84201 to 00-84300, 00-84 401 to 00-85300, 00-85901 to 00-86300, 00- 86501 to 00-87600, 00-90201 to 00-90500, 00-91101 to 00-91300, 00-9160 1 to 00-91800, 00-92001 to 00- 92100, 00-9230 1 to DD-92400, DD-92701 to DD-92800, DD-92901 to DD-931 00, DD-93301 to 00-93400, DO-

DEC ISION C.T.A. CASE NO. 6929 Page II of 15 93601 to 00-94600, 00-95401 to 00-95600, 00-96201 to 00-97400, 00-99001 to 00-99200, 00-99401 to 00- 99800, and 00-84326") ; b. 2001 and 2002 Summary of Sales and Discounts for Senior Citizens (Exhibits "//, 11-1, JJ, and JJ-1 ') ; c. Special Record Book for the taxable years 2001 and 2002 as required under the implementing rules of Republic Act No . 7432 (Exhibits "AA, AA-3, AA-4, EE, EE-3, and EE-4 '); d. Cash Receipts Book for January 2001 and January 2002 (Exhibits "BB, BB-1 to BB-3, FF, FF-1 to FF-3 "); e. 2001 and 2002 General Ledger (Exhibits "CC, CC- 1 to CC- 3, GG to GG-3"); f. 2001 and 2002 Annual Income Tax Returns (Exhibits " B and 0 ') ; and g. 2001 and 2002 Audited Financial Statements (Exhibits "N and X'). After a thorough examination of the various cash slips, in relation to petitioner's submitted Summary of Sales and Discounts for Senior Citizens and the Special Record Books for 2001 and 2002, the Court finds the Report of the Court-commissioned Independent Certified Public Accountant to be in order. It is stated therein, among others, that the sales discounts given to senior citizens for the taxable years 2001 and 2002, wherein the required details for the issuance of the cash slips are complete , amounted to Php1 ,096,878 .28 . However, despite the existence of the cash slips supporting the 20% sales discounts of Php1 ,096 ,878.28, petitioner's claim for refund/tax credit will nevertheless be denied because it failed to prove that the sales made to senior citizens (net of the 20% sales discounts) were actually declared in

DEC IS ION C.T. A. CASE NO. 6929 petitioner's 2001 and 2002 Annual Income Tax Returns in relation to its Audited Financial Statements for the same taxable years . It must be emphasized that petitioner is claiming tax credits/refunds for the twenty percent (20%) sales discounts it granted to its qualified senior citizens clientele , thus , it is necessary that it be shown that the related eighty percent (80%) sales to senior citizens were indeed reported as part of its taxable income for 2001 and 2002, on the assumption that the 20% sales discounts were indeed originally treated as deductions from its gross income. To illustrate , petitioner rep orted its sales of Php54,576,453.47 for the taxable year 2001 and Php58,050, 085.13 for the taxable year 2002 marked as Exhibits "B-3" and "0 -3", 8 respectively, under item 14' pertaining to "Sales/Revenues/Fees (Sch.1)" of its Annual Income Tax Return for the year 2001 and 2002 (BIR Form No . 1702) . These amounts were likewise reflected on petitioner's Aud ited Financial Statements for the same years .9 In this regard , and to further prove that these amounts correctly included petitioner's sales to its senior citizens (which is net of the mandated 20% sales discounts), petitioner presented in evidence its Cash Receipts Books for the taxable year 2001 and 2002 showing , on certain pages, the transactions for January 200 1 and 2002 ; its Special Records Book as well as its General Ledgers for the same years .10 8 Rollo, pp . 140 and 157, respectively. 9 Exhibits " N-3", Income Statement , For the Year Ended December 31, 2001 , Rollo, p. 156, and Exhibit " X-3", Income Statement For the Year Ended December 31,2002, Rollo, p. 174. 10 Exhibits "CC to CC-2", 2001 General Ledger, Rollo, pp. 183-184, and Exhibits "GG to GG-2", 2002 General Ledg er, Roll o, pp. 190-191.

DEC IS IO N C.T.A. CASE NO. 6929 Unfortunately, petitioner failed to present a detailed breakdown of its daily net sales as reflected in the Cash Receipts Books, to enable this Court to verify or trace whether the daily net sales to senior citizens as recorded in the Special Records Books indeed formed part of the daily net sales amounts in the Cash Rece ipts Books . To il lustrate, petitioner's net sales to its senior citizens clientele for January 26, 2001 was recorded in its 2001 Special Records Book as amounting to Php4,207.04 (where Cash Slip No. 64703 with corresponding net sa les amount of Php697.20 formed part of). For the same date , petitioner's Cash Receipts Book reflected a net sales of Php141 ,518.32 . Without petitioner providing for the details as to the breakdown of the net sales amount, this Court finds it impossible to establish whether the net sales of Php4,207 .04 (as reflected on the Special Receipts Book) was indeed included therein . Considering that petitioner is claiming tax credits for the 20% sales discounts it granted to senior citizens , it is necessary that petitioner proves that the related 80% sales to sen ior citizens were indeed reported as part of its net taxable income for 2001 and 2002 , i.e., on the assumption that the said 20% discounts were ori ginally treated as deductions from gross income. For failure of petitioner to sufficiently prove that its net sales to senior citizens were in fact declared in its 2001 and 2002 income tax returns , the instant petition will not prosper. Settled in the rule that a claim for refund is in the nature of a claim for exemption, hence, should be construed in strictissimi

DEC!SJON C.T.A. CASE NO. 6929 juris against the taxpayer.11 WH EREFORE , in view of the foregoing , the subject Petition for Review is hereby DENI ED for insufficiency of evidence. SO ORDERED. WE CONCUR : ~~A~QUEZ Associate Justice ~~G .a.:t~- ~,\L . ~ ANITa c. CASTANEDA, Jlf. . Associate Justice ATTESTATI ON 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 . ~"ieO . ~~}f, JUANITO C. CASTANEDA, JR. Associate Justice Chairman 11 Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd ., 244 SCRA 332

DECISION C.T.A. CASE NO. 6929 CERTIF ICAT ION Pursuant to Article VIII , Section 13 of the Constitution , and the Division Chairman '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's Division . ~~-~ ERNESTO D. ACOSTA Presiding Justice