CTA Case No. 6663 (Decision)

REPUBLIC OF THE PHILIPPINES Court OfTax Appeals QUEZON CITY SECOND DIVISION MERCURY DRUG C.T.A. CASE NO. 6663 CORPORATION, Petitioner, Members: -versus- CASTANEDA, JR., Chairman UY, and PALANCA-ENRIQUEZ, JJ. Promulgated: COMMISSIONER OF INTERNAL MAR 2 7 ZOO& / REVENUE, \\? Respondent. X ------------------------------------------------------------------------------------ X DECISION PALANCA-ENRIQUEZ, J.: The 20 percent discount required by law to be given to senior citizens under Republic Act No. 7432 (hereafter "R.A. No. 7432") is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned (Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, 456 SCRA 423). THE CASE This is a Petition For Review filed by Mercury Drug Corporation r (hereafter "petitioner") praying for a refund or tax credit in the amount of

C.T.A. CASE NO. 6663 2 DECISION P686,250,617.92, representing the twenty percent (20%) sales discounts granted to qualified senior citizens on their purchases of medicines during the taxable year 2000, pursuant to R.A. No. 7432. THE FACTS The facts as stipulated by the parties are as follows: Petitioner Mercury Drug Corporation is a domestic corporation organized and existing under the laws of the Philippines, with principal office address at No.7 Mercury Avenue, Bagumbayan, Quezon City. Petitioner is a retailer of medicines and other pharmaceutical products and operates several drugstores nationwide under the business name and style of "Mercury Drug" and as such the drugstores are duly licensed to operate by the Bureau of Food and Drugs, the Bureau of Internal Revenue and the local government units where the drugstores are located. On various dates during the period from January to December 2000, petitioner granted twenty percent (20%) sales discounts to qualified senior citizens on their purchases of medicines from petitioner in compliance with R.A. No. 7432 and its Implementing Rules and ~ Regulations.

C.T.A. CASE NO. 6663 3 DECISION On April 14, 2003, petitioner filed with respondent a request for the issuance of a tax credit certificate in the amount of Six Hundred Eighty Six Million Two Hundred Fifty Thousand Six Hundred Seventeen Pesos and 92/100 (P686,250,617.92). On the same date, petitioner filed the instant Petition For Review in order to toll the running of the two-year prescriptive period, pursuant to Section 229 ofthe NIRC of1997, as amended. As of the date of the filing of this petition, respondent has not granted petitioner's request for a tax credit certificate and is not expected to issue said certificate since the Bureau of Internal Revenue (hereafter "BIR") has appealed to the Court of Appeals and the Supreme Court several decisions of this Honorable Court ruling that the sales discounts to senior citizens should be granted as tax credit. In his answer, respondent alleged, by way of special and affirmative defenses, that the claim for refund is still under examination by respondent' s Bureau; that the burden of proof is upon the petitioner to prove that it is entitled to the claim for refund; that the correct interpretation and enforcement of the provision on the tax credits of R.A. No. 7432 is contained in Section 2, paragraph (i) ofRevenue Regulations

C.T.A. CASE NO. 6663 4 DECISION No. 2-94 (hereafter "R.R. No. 2-94"); and that the provision under R.A. No. 7432, which states that the 20% sales discounts on purchases of medicines by senior citizens be treated as a tax credit is a misnomer as it runs counter to the solemn duty of the government to collect all taxes. Petitioner presented Jesus P. Mangrobang, Alfonso Katigbac, Jovita Arlene Martinez and Felipe Jabonita, as witnesses, and submitted its Formal Offer of Evidence, which was admitted by the Court. On the other hand, at the hearing on June 6, 2005, respondent manifested that the administrative claim has not been resolved and he is submitting the case for decision, and moved that he be given thirty (30) days therefrom within which to file his memorandum, which the Court granted. Petitioner was given twenty (20) days from notice within which to file its memorandum. Only petitioner has complied thereto, and the case was deemed submitted for decision on January 16, 2006. THE ISSUES As agreed upon by the parties in their Joint stipulation of Facts and Issues, the following are the issues for this Court's consideration: (}JV

C.T.A. CASE NO. 6663 5 DECISION I WHETHER THE 20% SALES DISCOUNTS GRANTED TO SENIOR CITIZENS ON THEIR PURCHASES OF MEDICINES SHOULD BE TREATED AS TAX CREDIT DEDUCTIBLE FROM THE TAX DUE AS PROVIDED UNDER R.A. 7432 OR MERELY AS A DEDUCTION FROM GROSS INCOME AS PROVIDED UNDER REVENUE REGULATIONS NO. 2-94. II WHETHER OR NOT PETITIONER ACTUALLY GRANTED A TOTAL AMOUNT OF P686,250,617.92 SALES REPRESENTING THE DISCOUNTS IT GRANTED TO SENIOR CITIZENS ON THEIR PURCHASES OF MEDICINES IN THE YEAR 2000. III WHETHER OR NOT THE PETITIONER IS ENTITLED TO BE GRANTED ITS ALLEGED TAX CREDIT IN THE AMOUNT OF P686,250,617.92 FOR THE TAXABLE YEAR ENDED 2000. THE COURT'S RULING The stipulated issues boil down to the principal issue of whether or not petitioner is entitled to a refund or tax credit in the amount of P686,250,617.92, representing the cost of the twenty percent (20%) sales discounts given to qualified senior citizens. ~

C.T.A. CASE NO. 6663 6 DECISION It is the submission of the petitioner that under Section 4(a) ofR.A. No. 7432, the discounts granted to senior citizens may be claimed as tax credit by the private establishments granting such discounts. Subsequently, the Department of Finance and the Bureau of Internal Revenue issued R.R. No. 2-94 to implement R.A. No. 7432. However, the said regulation is a clear contradiction of R.A. No. 7432. Section 2, paragraph (i) of R.R. No. 2-94 defines the term "tax credit" to mean as follows: "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 and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross sales for value-added tax and other percentage tax purposes." It maintains that Section 2(i) of R.R. No. 2-94 is erroneous considering that Section 4(a) ofR.A. No. 7432 provides that "the cost of the twenty percent (20%) sales discounts to senior citizens may be claimed as tax credit" and not as mere deduction from gross income. v On the other hand, respondent contends that the twenty percent (20%) sales discounts granted to senior citizens should be treated as

C.T.A. CASE NO. 6663 7 DECISION deduction from gross income and not as tax credit deductible from the tax due. The principal issue raised in the present petition is not novel as the Supreme Court, in the aforecited case of Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, supra, had already resolved said issue. In said case, the Supreme Court ruled that the 20% sales discounts granted to qualified senior citizens under R.A. No. 7432 should be treated as a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. Thus: "What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to a sales discount. To a senior Citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount. However, to a private establishment, the effect is different from a simple reduction in price that results from such discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated as a tax deduction. ~

C.T.A. CASE NO. 6663 8 DECISION To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like a sales discount. Ubi lex non distinguit, nee nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax. When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount - when claimed - shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount - which is not even identical to the discount privilege that is granted by law - does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down." (Commissioner ofInternal Revenue vs. Central Luzon Drug Corporation, supra)~

C.T.A. CASE NO. 6663 9 DECISION Pursuant to the aforequoted ruling of the Supreme Court, the 20% sales discounts granted to qualified senior citizens under R.A. No. 7432 should, therefore, be treated as a tax credit. We now proceed to the question of whether or not petitioner is in fact entitled to recover, by way of tax credit, the sum ofP686,250,617.92, representing the 20% sales discounts granted to qualified senior citizens for the year 2000. In order to prove the 20% sales discounts granted to senior citizens upon purchase of their medicines, petitioner presented the various cash slips (Exhibit "!"), and the Summaries of Sales Discounts to Senior Citizens/Register of Senior Citizens transaction for the months of January 2000 up to December 2000 (Exhibits "H", "H-1" to "H-11 "). In addition, petitioner submitted to this Court the report of the commissioned independent CPA dated March 25, 2004 (Exhibit "G"). According to the commissioned CPA, Mr. Alfonso P. Katigbac, out of the amount of P686, 104,888.15 20% sales discounts, the sum of P6,754,258.43 was disallowed because the cash slips have no names or y signatures, or ID numbers of the senior citizens and some were not legible. Hence, the discounts given wherein the required details for

C.T.A. CASE NO. 6663 10 DECISION Issuance of cash slips had been duly substantiated, amounts only to P679,350,629.72, detailed as follows: January Total per Total per Variance February Summary Audit March p 148,466 .94 April P48 ,668 ,892.03 P48 ,520,425.09 366,877 .85 May 50,426 ,879.37 50,060,001 .52 308,053 .99 June 55 ,621 ,978 .77 55 ,313,924.78 200 ,644 .23 July 52,452,198 .35 52 ,251 ,554.12 169,775 .91 August 55 ,677 ,177.64 55 ,507,401.73 139,595 .85 September 56 ,112 ,568 .92 55 ,972,973.07 240,407 .08 October 58,826,652 .06 58 ,586,244.98 865,016 .60 November 60 ,760,510 .69 59 ,895,494.09 412 ,710 .14 December 60 ,076,791.44 59 ,664 ,081 .30 Total 63 ,026 ,369 .91 60 ,069 ,199.89 2,957 ' 170.02 59 ,214 ,090.57 58 ,602 ,432.21 611 ,658 .36 65,240 ,778.40 64 ,906 ,896.94 333,881.46 ~686 ,1 0~ 1 8 88 .1 5 ~6Z9 ,35 0 ,6 29 . Z2 ~6 Z5~1 25B .~J Therefore, petitioner may only be entitled to a reduced amount of P679,3 50,629.72 representing the 20% sales discounts granted to senior citizens. However, a careful examination of petitioner' s annual income tax return for taxable year 2001 ((Annex "A ", Petition For Review, C.T.A . Case No. 6935) shows that a portion of the amount being sought for was applied to petitioner' s 2001 income tax liability. To elaborate, pertinent portions of the 2000 and 2001 annual income tax returns are reproduced below: Year 2000 Sales P28 ,693,900,880.00 Less: Cost of Sales 24 , 385 , 764,973~

C.T.A. CASE NO . 6663 11 DEC ISION Gross Income from Operation p 4,308,135,907.00 Add : Non-Operating Income & Other Income 235,481.002.00 Total Gross Income Less: Deductions p 4,543,616,909.00 Taxable Income 3.729 .688.928.00 Tax Due p 813 927 981 00 Less: Tax Credits/Payments p 260 ,456 ,954.00 Prior Year's Excess Credits Creditable Tax Withheld for the First Three Quarters p 384,811 ,161 .26 Total Tax Credits/Payments 701,252,095.88 Overpayment p 1,086,063,257.14 p 825.606.303,14 (Exhibit "C '') Year 2001 Sales P32,961 ,639,178.00 Less: Cost of Sales 28.033.748.901 .00 Gross Income from Operation Add : Non-Operating Income & Other Income p 4,927 ,890,277 .00 Total Gross Income 289,663 ,908 .00 Less: Deductions Taxable Income p 5,217 ,554,185.00 4,345 .300 .191 .00 p 872 253 994 00 Tax Due p 279,121,278 .00 Less: Tax Credits/Payments Prior Year's Excess Credits p 825,606,303.14 Cred itable Tax Withheld for the First Three Quarters 899.426,965.46 Total Tax Credits/Payments p 11725,033,268 .60 Overpayment p 1.445.91 1,990 ,60 (Annex "A", Petition For Review, C.T.A. Case No. 6935) In the 2000 annual income tax return, petitioner has total tax credits in the amount of Pl ,086,063 ,257.00 consisting of Prior Year's Excess Credits of P384,811 ,161.26 and Creditable Taxes Withheld for the first three quarters of2000 in the amount ofP701,252,095.87 (Exhibit "C"). Included in the sum of P701 ,252,095.87 is the amount of ~

C.T.A. CASE NO. 6663 12 DECISION P686,250,617.92, representing the 20% sales discounts given to senior citizens for the year 2000 (Petitioner 's Memorandum, dated November 24, 2005, p . 3). Likewise, petitioner' s 2001 Annual Income Tax Return reveals that the amount of P825 ,606,303.14, inclusive of the amount of P686,250,617.92, representing petitioner' s 2000 excess tax credits, was indicated as Prior Year' s Excess Credit (Annex "A ", Petition For Review, C. T.A. Case No. 6935). A fraction of the prior year' s excess credit was utilized to offset petitioner' s income tax liability for the year 2001 amounting to P279,121 ,278.00, and the balance thereof formed part of petitioner' s tax overpayment for the year 2001. In other words, part of the amount being sought for has been utilized. Although only a portion of the sum of P686,250,617.92 representing the 20% sales discounts given to qualified senior citizens was utilized to offset petitioner' s income tax liability for the year 2001 , still We cannot grant the unutilized portion. Petitioner did not present to this Court the annual income tax returns of the succeeding taxable years to prove that it never applied the 20% sales discounts to its income tax ~

C.T.A. CASE NO. 6663 13 DECISION liabilities. Thus, the Court cannot ascertain whether the amount subject of the present claim has not been fully utilized. Conformably to settled jurisprudence, petitioner, as claimant, has the burden of proof to establish the factual basis of its claim for tax credit or refund. Having failed to discharge the burden in this regard, petitioner' s claim must, necessarily, fail. WHEREFORE, premises considered, the instant petition 1s hereby DENIED DUE COURSE, and accordingly, DISMISSED. SO ORDERED. ~~� OLGA PALANCA- RIQUEZ Associate Justice WE CONCUR: 9,..,.. __,"';fo Q -~~ Q . .fuANrrO C. CASTANEDifJR. Associate Justice

C.T.A. CASE NO . 6663 14 DECISION ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court's Division. ~~~ . ~~aea.,~. CfuANITO C. CASTANEDA, JR. Associate Justice Chairman, Second Division CERTIFICATION 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 cases were assigned to the writer ofthe opinion of the Court' s Division. ~)z.(L_ ERNESTO D. ACOSTA Presiding Justice