Tropical Hut Food Market, Inc., et al. vs. Comm Issioner of Internal Revenue

DECISION

This is a petition seeking for the refund or issuance of a tax credit certi ficatc in the amount of P677,764.00 allegedly representing overpaid corporate income tax for the year 1995.

The facts of the case are as fo llows:

Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines (Exh. A). It "operates several branches as a retailer of pharmaceuticai products and fast food stores that sell hamburgers, beverages and other food items under the business name and style of "Tropical Hut" and as such, it is duly licensed to operate drug and h1st food stores by the Bureau of Food and Drugs, the local government units where the drugs and fast food stores are located, the Bureau of Internal Revenue and the Department ofTrade and Industry" (CTA Resolution, 11123/98, p. 198, CTA records). During the calendar year 1995, Petitioner granted 20% discount totalling PI ,042,714.00 to qualified senior citizens on the latter's purchases of medicines from its drugstores and dine-in purchases of food and beverages from its fa stfood stores/coffee 211

J

I

l shops, pursuant to the provisions of Republic Act (RA) 7432, otherwise known as "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes." Under Section 4(a) of the said law, the senior citizens shall be entitled to "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;" x x x On April 15, 1996, Petitioner filed its Corporation Annual Income Tax Return for the calendar year ended December 3 I, 1995 (Exh. C), claiming the discount granted to senior citizens as a deduction from its gross income, but this time in accordance with Revenue Regulations No. 2-94, implementing Sec. 4 of RA 7432, to state: " 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, recreatim centers, theaters, cinema 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." (underscoring supplied) According to Petitioner, it was only forced to claim the discount as a deduction from its gross income -for it believed that the above-quoted implementing regulation is erroneous. Thus, on the same day it filed its income tax return, it filed a claim for tax refund or credit of its overpaid income tax for the taxable year 1995 in the amount of P677,764.00 (Exh. D) computed as follows:

SALES, net Add: Cost of 20% discount

to Senior Citizen

SALES, gross 212 PI, 714,906,095

I 042 714

p 1,715,948,809 '

COST OF SALES:

Inventory, beg.

Purchases

Inventory, end

GROSS PROFIT

Miscellaneous Income

TOTAL INCOME

Operating Expenses

p 177.107,269 1,3 71 ,630,56 1 -173,729,008

NET INCOME BEFORE INCOM E TAX

Income Tax Payable

Less: Tax Credit (Cost of20% Discount

toScniorCitizcns)

P

1,042,7 14

Tax Actually Paid

14,489,895

TAX REFUNDABLE

_l,375,008,822 p 340,939,987 66,245,184 p 407,185,171 364,742,758 p 42,442,413 14,854,845 15,532,609 p -677 764 On December 27, 1996, Petitioner filed agam a similar letter-request for the refund/credit of its overpaid income tax (Exh. E). As there was no action on the part of herein Respondent and the two-year prescriptive period was about to lapse, the instant petition was filed on April 6, 1998.

In his Answer filed through registered mai l on May 27, 1998, Respondent raised the following Special and Affirmative Defenses:

"6.

In an action for refund, the taxpayer has the burden to show that the taxes paid were erroneously or illegally collected and failure to do so is fatal to the action;

7.

Claims for tax refund arc strictly construed against the taxpayer. Petitioner has no cause of action."

The sole issue presented by both parties for our consideration is whether or not the 20% sales discount given to qualified senior citizens on their purchases of medicines and/or food items from the Petitioner should be treated as a tax credit deductible from the 21 3

I

CT I\ CASE NO. 5600 tax due pursuant to RA No. 7432 or merely as a deduction from gross income for income tax purposes under Revenue Regulations No. 2-94.

ln its Memorandum, Petitioner asserts that Respondent's definition of the term "tax credit" in paragraph (i) of Revenue Regulations No. 2-94 is contrary to Section 4, par. (a) of Republic Act No. 7432; that the intent of Congress is to treat the sales discounts granted to senior citizens as tax credit instead of a mere deduction from gross income and that Sec. 2, par. (i) of Revenue Regulations No. 2-94, a mere im plementing administrative regulation, cannot modify, alter or amenrl the clear mandate of Section 4 of Republic Act No. 7432 which it seeks to implement. On his part, Respondent argues that the provision under Republic Act 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 taxes. Respondent further contended that the legal provision in question (Sec. 4 of RA 7432) employs the word "may" in the clause "PROVIDED, that private establishments may claim the cost as tax credit" implying that the availability of the remedy of tax credit is not absolute and mandator_, , it does not confer an absolute right on the taxpayer to avail of the tax credit scheme if it so chooses neither docs it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer (citing BIR Ruling 0667-95 dated April 11, 1995).

Lastly, Respondent maintains that in Statutory Construction, in cases of ambiguities, the principle that the contemporaneous construction of a statute given by executive officers of the government whose duty is to execute it, is entitled to great respect and should ordinarily control the construction. 214 (

We find for the Petitioner.

The issue presented has already been addressed by this Court in a number of analogous cases elevated before Us, the latest of which is CTA Case No. 5612 entitled Mercury Drug Corporation vs. Commissioner of Internal Revenue, promulgated Janumy

9. 2000. where We ruled: "A cursory review of the wordings of Section 4 of Republic Act No. 7432 would reveal that the law literally intended the cost of the 20% discount to be claimed as tax credit by private establishments. We could not see any plausible reason for the 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 utilized instead as a deduction from gross income and from gross sales as what is provided in RR No. 2-94.

To be valid, an administrative regulation must not be in contravention but should conform to the standards that the law prescribes. (Tayug Rural Bank vs. Cenlml Bank 1-16 SCRA 120).

Its promulgation must be authorized by the legislature.

(Philippine Administrative Law, Cruz, 1994 ed., p. 32) RR No. 2-94 which engraved a new mtaning to the phrase "tax credit" as referring 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.

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 claim 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 •o 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 nature." (citing Del Rosario Drug Corpor·ation vs. CIR, CTA Case No. 5357, Ap1·il 6, 199 w 215 Vas Salus Drug Corporation vs. CIR, CTA Case No. 5509, Nov. 26, 1999, Baliuag Drug Corporation vs. CIR, CTA Case No. 5365, May 13, 1998, M.E. Holding Corporation vs. CIR, CTA Case No. 5314, Aug. 17, 1998, and Trinity Franchising and Management Corp. vs. CIR, CTA Case No. 5313, Aug. 18, 1998).

In fact, the Court of Appeals has affirmed said ruling in the case of Commissioner of internal Revenue versus £/mas Drug Corporation, CA-G.R. SP No. ./9946 promulgated last October 19, 1999:

"Where the Jaw is very clear, there is no room for interpretation. Section 4 of Republic Act 7432 clearly provides that the cost of the 20% discount may be claimed by Respondent as tax credit and there is nothing more to interpret.

The Court of Tax Appeals, in its decision dated August 27, 1998 correctly ruled that the direct cost or the cost of sales of the 20% discount given to senior citizens is deductible as tax credit." In the said case, however, the Court of Appeals passed upon the question of what should be given as tax credit: the full amount of the 20% discount or the cost of the 20% discount, thus:

"Petitioner further argued that Section 4(a) of RA 7432 provides that private establishments may claim the cost of the 20% discount as tax credit. However, if the "real intention" of our legislators was to treat the full amount of the 20% discount as tax credit, it could have done so. Sadly, the final wordings of RA 7432 still mention the term "cost" as tax credit.

Thus, the cost of the 20% discount represents the actual amount spent by drug corporations in complying with the mandate of RA 7432. Working on this premise, it could not have been the intention of the lawmakers to grant these companies the full amount of the 20% discount as this would be extending to them more than what they actually sacrificed when they gave the 20% discount to senior citizens. In this regard, WE AGREE with the Petitioner.

XXX

XXX

XXX

216

Perusal of the provisions of the law provides for the term "cost" without any distinction and therefore, shall be interpreted as such. As a general rule, the intent of the legislature to be ascertained and thereafter given etTect is th~ intent expressed in the langotage of the statute. If a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. Section 4 (a) of R.A. 7432 clearly provides that private establishments, like the respondent in the case may claim the cost of the 20% discount as tax credit. If indeed the real intention of the legislators was to treat the full amount of the 20% discount as tax credit as argued by the Respondent, why then would the final wordings of the law be "Provided, that private establishments may claim the COST as tax credit." (underscoring supplied).

We, therefore, proceed to the amount to which Petitioner is entitled on the basis of the evidence presented.

The auditing firm, Vicente E. Reyes and Associates, through its Partner, Mr. Rene Amby Reyes, was commissioned by this Court pursuant to CTA Circular 1-95, as amended, to verify the accuracy of Petitioner's claim for refund. In its first and second reports dated July 9, 1999 and September 9, 1999, respectively, (Exhs. M & P, including sub-markings) the auditing firm certified that out of the total amount of 20% sales discounts to senior citizens of P861 ,351.76 shown in Petitioner's "1995 Summary of Senior Citizens' Discounts" (Exh. N) only the amount of P852,235.78 was properly supported by cash slips broken clown as follows:

20% Sales Disc.

20% Sales Disc. to Sr. Citizens w/ Cash Slips

to Senior Citizens

Per Vicente E. Reyes & Asso. Verification

Per Petitioner's

1

51 Report

2na Report

Total Amount

Summary (Exh. N) (Exh. M) (Exh. P) w/ Cash Slips

Supermarket Division

p 726,011 .88 p 627,951.91 p 93,906.68 p 721,858.59

Coffee Shop Division

135,339.88 130,377.19 130,377.19

Total:

p 861,351.76 p 758,329.10 p 93,906.68 p 852,235.78 217

However, an examination of the said reporls together with Petitioner's 1995 Summary of Senior Citizens' Sales Discounts (Exh. N) and cash slips (Exh. 0 including sub-markings) reveals that the amount of P7,948.49 (detailed per Annexes A & B) should be disallowed from the said auditing firm's verified amount of P852,235.78. Thus, only the resulting amount of P844,287.29 (see Annex A, p. 12) represents valid 20% sales discounts given by Petitioner to senior citizens for the year 1995 which shall become the basis for computing its 1995 allowable tax credit.

Records show that Petitioner was able to establish that it deducted from its 1995 gross sales the amount of Pl,042.714.00 representing 20% sales discounts to senior citizens resulting to a net sales of PI, 714,906.095.00.

The latter amount is indicated in Petitioner's 1995 audited financial statements as "Sales, Net" (Exh. B-1: TSN, October 20, 1998, pages 14 & 15) and in Section C, Schedule I of its 1995 annual income tax return as "Gross Sales During The Year" (Ex h. C-2; TSN, October 20, 1998, pages 16 & 17). As a result of said deduction, Petitioner paid an income tax due of P 14,489,895.00 on taxable income of P41 ,399,699.00. The Iarmer amount represents the sum of its: a) 1995 tirst three quarterly income tax payments of P2,907,042. 14; b) creditable taxes withheld during 1995 of PI ,300,096.42; and c) final income tax payment of Pl0,282,756.44 (Exh. C).

ln computing Petitioner's 1995 overpaid income tax, the total 20% sales discounts to senior citizens of PI ,042,714.00 previously deducted by Petitioner from its gross sales shall be added back to its net sales of P1,714,906,095.00. This is necessary because the 20% sales discounts to senior citizens is no longer to be treated as a deduction from gross income but rather as a tax credit. However, since only the direct cost of the 20% s~des

21R

discounts to senior citizens may be allowed as tax credit and not the entire amount of the discount granted, it follows that Petitioner may claim only the amount of P676,536.77 as tax credit, representing the cost of the substantiated amount of P844,287.29 (see Annex A, p. 12), detailed as follows:

Net Sales

Add: 20% Sales Discounts to Senior Citizens

Gross Sales

Cost of Sales

Divided by Gross Sales

Percentage of Cost of Sales to Gross Sales

p 1,714,906,095.00 1 042 714.00 E_l, 715 948 809.00 p 1,375,008,822.00 p 1 715 948,809.00 80.1311097% Multiplied by amount of 20% Sales Discounts to Senior Citizens for 1995 duly substantiated by cash slips (Annex B)

P

Allowable Tax Credit

p 844 287.29 676.536.77 A re-computation, therefore, of Petitioner's 1995 income tax liability using the above figure of P676,536. 77 representing cost of tht 20% sales discounts to senior citizens as tax credit shows that Petitioner actually overpaid its 1995 income tax by P311 ,586.77 as shown below:

Net Sales

Add:

20% Sales Discount to Senior Citizens

Gross Sales

Less: Cost of Sales

Merchandise inventory, beginning

Purchases

Total merchandise available for sale Less: Merchandise inventory, end

Gross Profit

Add

Miscellaneous Income

Total Income

Less:

Operating Expenses

Net Income before Income Tax

Income Tax Due

Less:

Tax Credits/Payments

p 177,107,269.00 1,371 ,630,561.00 p 1,548,737,830.00 p 1,714,906,095.00 1,042,714.00 p 1,715,948,809.00 173,729,008.00 1,375,008,822.00 p 340,939,987.00 66,245,184.00 p 407,185,171 .00 364,742,758.00 p 42,442,413.00 p 14,854,845.00 21n

PAGE IO

1.) 151 , 2nd & 3'd quarterly payments 2.) Creditable taxes withheld 3.) Final income tax payment 4.) Cost of 20% sales discounts to senior citizens

Income Tax Refundable

p 2,907,042.14 1,300,096.42 10,282,756.44 676,536.77 15,166,431 .77 p (311 ,586. 77)

WHEREFORE, in the light of the foregoing, this Court finds the instant petition meritorious and in accordance with law. Accordingly, Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Petitioner in the amount ofP311 ,586. 77 representing overpaid corporate income tax for the year 1995.

WE CONCUR:

(Dissenting)

AMANCIO Q. SAGA ssociate Judge/ .

~b.~ ERNESTO D. A COST A

Presiding Judge

~w' ~y~ RAMON 0. DE

RA

Associate Jud -

/

I

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 V1Il of the Constitution.

220 ~\fL._ c.~ ERNESTO D. A COST A

Presiding Judge