Hermano (SAN) Miguel Febres Cordero Medical Education Foundation De la Salle-Health Sciences Institute, et al. vs. Commissioner of Internal Revenue

AMENDED DECISION

COTANGCO-MANALASTAS, !..:_:

This resolves

the Motion for Reconsideration

1 fi led by respondent Commissioner of Internal Revenue, by coun sel, on January 27, 2012. Respondent prays th at th e Pet ition for Revi ew be dismissed for lack of merit and judgment be rendered orderin g petit ioner t o pay t he amount of P2,607,933.07 as deficiency va lue-added tax (VAT) for th e calendar year 2006 and 20% deficiency and y

Hermano (San) Miguel Febres Cordero Medical Education Foundation vs. CIR delinquency interest from February 4, 2010 (due date indicated in the Formal Letter of Demand) and compromise penalty until fully paid pursuant to Sections 248 and 249 (B) of the 1997 National Internal Revenue Code (NIRC), as amended. In said Motion, respondent alleges that:

THE

HONORABLE

COURT

ERRED

IN

GRANTING

PETITIONER'S

PETITION

AND

CANCELLING

OF

THE

ASSESSMENT

AGAINST

PETITIONER

In support of the aforementioned allegation, respondent interposes the following arguments/discussions:

I.

The sa le of pharmacy drugs/medicine to in-patients is not covered by the exemption from VAT under Section 109 (L) [now Section 109 {G)} of the NIRC of 1997, as amended; and II.

Petitioner is liable for Deficiency VAT assessments for its failure submit sufficient documents to prove their exemption. On the first argument, respondent contends that since the drugs being sold by petitioner are tangible and capable of pecuniary estimation, drugs are considered 'goods' which when sold is subject to VAT under Section 106 (A)(¹) of the NIRC of 1997. Respondent pointed out that petitioner's exemption based on Section 109 (G) of the NIRC of 1997, as amended, pertains to services. Anent the second argument, respondent manifests that the Bureau of Internal Revenue (BIR) Ruling No. DA-122-2005 being cited by petitioner is only for applicants who have submitted the proper documents for the BIR to determineV

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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whether they are deserving of such exemption. Respondent avers that in this case petitioner did not submit sufficient documents to prove their exemption. In response, petitioner filed its Comment/Opposition (to the Motion for Reconsideration dated 27 January 2012} February 23, 2012. Petitioner maintains th at its pharm acy sales to in-patients are exempt from VAT con sidering that th ey are included in the term 'hospital services' in Section 109 (G) ofthe NIRC of 1997, as am ended, as interpret ed by t his Cou rt in the case of Perpetual Succour Hospital, Inc., et a/., vs. Commissioner of Internal Revenue, CTA Case No. 7304, December 1, 2010.

Also, petitioner asserts t hat its reliance on BIR Rule No. DA-122-2005 is in order as t he facts and issues of the instant case are similar to th at discussed in t he BIR ruling.

Involved in the subject BIR rulin g is a hospital which operates a pharmacy providing medicine to its in-patients and th e issue th erein is wheth er or not pharm acy sales to in-patients are subject to VAT. Petition er likewise cited the case of Dumaguete Cathedral Credit Cooperative vs. Commissioner of Internal Revenue, G.R. No. 182722, January 22, 2010, to emphasize its position th at parties are allowed to invoke doctrines enunciated in a BIR ruling even though th e said ruling was not issued particularly to that party invoking it.

THE COURT'S RULING

After a judicious evaluation of t he arguments of both part ies, and a second hard look on the evidence on record and jurisprud ence applicable in t his case, t he~

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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Court is constrained to reconsider the findings in the assailed Decision with respect to the issue on sa le of drugs or pharmaceutical items by petitioner.

Whether

the sale of pharmacy drugs/medicine to in-patients is not covered by the exemption from VAT under Section 109 (G) of the NIRC of 1997, as amended.

The first argument advanced by respondent in her Motion for Reconsideration is that the sa le of pharmacy drugs/medicine to in-patients is not covered by the exemption from VAT under Section 109 (G) of the NIRC of 1997, as amended. On this point, We do not agree.

Section 109 (G) of the NIRC of 1997, as amended, provides: "SEC. 109. Exempt Transactions. - (1) Subject to the provisions of subsection

(²) hereof, the following transactions shall be exempt from the value-added tax:

XXX

XXX

XXX

"(G) Medical, dental, hospital and veterinary services except those rendered by professionals;

XXX

XXX

xxx" The Court stands by its pronouncement that sale of drugs or pharmaceutical items to in-patients of the hospital is considered part of the term ~~hospital services" covered by th e exemption from VAT under Section 109 (G) of the NIRC of 1997, as amended, 'because the maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essentia l service or facility rendered by any hospital for~

Hermano (San) Miguel Febres Cordero Medical Education Foundation vs. CIR

Page 5 or 13

its patients' 7. To recapitulate, reproduced hereunder are the pertinent cases that guided this Court in rendering the above pronouncem ent : Perpetual Succour Hospital, Inc., et a!., vs. Commissioner of

Internal Revenue³ :

"Pursuant to the above Supreme Court decision, taxpayers engaged in hospital services are exempt from VAT. Republic Act No. 4226 defines hospital as a place devoted primarily to the maintenance and operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2 (a) thereof). In other words, a hospital is a place where persons are given medical or surgical treatment. Hence, hospital services includes not only the services of the doctors, nurses and allied medical personnel, but also the necessary laboratory services, and making available the medicines, drugs and pharmaceutical items that are necessary in the diagnosis, treatment and care of patients. Sale of drugs or pharmaceutical items to in-patients of the hospital are (sic), therefore, considered part of the hospital services covered by Section 109 (I) of the NIRC of 1997, as amended."

Commissioner of Internal Revenue vs. Professional Services, "The said ruling cited the decision of the Court of Appeals in St. Luke's Medica l Center v. Court of Tax Appeals and Commissioner of Internal Revenue. 32 In that case, the Court of Appeals ruled that the item "hospital services" in Section 103 (I) 33 should include the sale of drugs to in- patients of the hospital because the maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients. The Court of Appeals further explained that, "a person who resorts to the hospital for medical treatment can reasonably expect that the hospital would make available to its patients immediate and prompt access not only to the services of doctors, nurses and allied medical personnel, but also to necessary laboratory services as well as medicines, drugs and pharmaceutical items which are dispensable aids in practically any form of medical treatment and care of patients". It went on to say that, "the V

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR sale of drugs or pharmaceutical items to in-patients of the hospital should be exempted from VAT because unlike the sale of retailing of drugs or medicines by drugstores in general, the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy amounts to the availment of service rendered or made available by the hospital for its in-patients and not simply the buying of such goods".

Whether petitioner is liable for Deficiency VAT assessments for its failure submit sufficient documents to prove their exemption.

P<Jge 6 of 13

For her second argument, respondent reasoned that petitioner did not submit sufficient documents in order to fully thresh out the details and prove that petitioner is truly deserving of such exemption .

It is on this second argument that We found strong reasons for this Court to humbly yield and reconsider the findings in the assailed Decision of this Court with respect to the issue on sale of drugs or pharmaceutical items by petitioner. First, petitioner Hermano (San) Miguel Febres Cordero Medical Education

Foundation (De La Salle -

Health Institute) failed to establish by competent evidence that it is an entity that operates a hospital. The above finding was arrived at after due consideration of the following notable precepts in this jurisdiction:

(1) Under Section 109 (G) of the NIRC of 1997, as amended, those contemplated to be exempt from VAT are taxpayers engaged in the performance of medical, dental, hospital and veterinary services; and V

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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(2) In line with th e foregoing, it is now well-est ablished that the sale of drugs or pharmaceutica l items to in-patients of the hospital is considered part of the t erm 'hospit al services' covered by the VAT exem ption under Section 109 (G) of the NIRC of 1997, as amended. This is so "because th e maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or faci lity rendered by any hospital for its patients " ~ ; and also because "unlike the sa le of retailing of drugs or medicines by drugstores in general, the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy amounts to the availment of service rendered or made available by the hospital for its in-patients and not simply t he buying of such goods" 6.

Clearly, before a t axpayer may claim that its sale of drugs or pharmaceutical items is classified as 'hospital services' exempt from VAT under Section 109 (G) of the NIRC of 1997, as amended, the following must be est ablished: (i) that the taxpayer operates a hospital; (ii) th at th e said hospital has a pharmacy or drugstore; and (ii) that the sa le of drugs - claimed to be exempt from VAT - was made by the said hospital drugstore or pharmacy to in-patients of the hospital being operated by the t axpayer;

Now, in this case, since petitioner is claiming t hat its sale of drugs and pharmacy items to in-pat ients is part ofthe term 'hospital services' exempt from VAT V 5 Commissioner of Internal Revenue vs. Professional Services, Inc., CTi\ m no. 409, January 8, 2009. 6 Supra, Note 5.

Hermano (San) Miguel Febres Cordero M edico/ Education Foundation vs. CIR under Section 109 (G) of the NIRC of 1997, as amended, it is essential for the petitioner to first establish that it operates a hospital. Records show that petitioner utterly failed to discharge this duty.

No

substantial evidence was presented to prove that petitioner actually operates a hospital or is engaged in the operation of a hospital as defined under Republic Act No. 4226. Under RA No. 4226, 'hospital' means a place devoted primarily to the maintenance and operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2 (a) thereof). A perusal of petitioner's Articles of Incorporation ' reveals that, essentially, petitioner is a non-stock, non-profit educational corporation, formed to provide institutional medium for financing programs dedicated to the establishment, maintenance, operation and management of educational facility in the field of medical and physical sciences; to organize, conduct and carry on the operation of health science, educational institutions such as Medicine, Dentistry, Nursing, Midwifery, Pharmacy, Physical Medicine and other health and medical sciences; to promote for the scientific development of the institution of medicine; to conduct applied researches and development activities and studies; to function and operate on private science and research foundation; to provide financial support, within the Philippines and abroad for the studies of selected students and for the attendance at scientific influences by qualified and competent scholars; to receive and/or give grants, gifts, legacies, donations, contributions endowments and financial aids or~

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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loans from any source; to establish, maintain and operate medical research centers, technological, vocational and manpower development schools; to establish scholarship and professional chairs in the social, medical and physical sciences; and to do any and all things which may be reasonably necessary for the due carrying on of the purposes of the corporation .

Further, petitioner itself made the representation in its Petition for Review which states that "HERMANO is a non-stock, non-profit educational corporation duly organized and existing under the laws of the Philippines, with principal office address at xxx" [Emphasis supplied]. Likewise, an examination of the Joint Stipulation of Facts and lssues8 reveals that the parties have not agreed or stipulated on the information that petitioner operates a hospital.

Petitioner alleges that it is engaged in providing medical and hospital services including the operation of a pharmacy in its hospital9, however, although its Articles of Incorporation could have implied the operation of a hospital, the records of this case and the evidence offered before this Court does not indicate so. There is nowhere in the records or in the documents formally offered by petitioner from which this Court can at the very least infer the fact that petitioner actually operates a hospital or is engaged in the operation of a hospital as defined under Republic Act No. 4226.

"The offer of evidence is necessary because it is the duty of the court to rest its findings of fact and its judgment only and strictly upon the evidence offered by the parties. Unless and until admitted by the court in evidence for the purpose or~

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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purposes for which such document is offered, the same is merely a scrap of paper barren of probative weight."10 Thus, considering that petitioner failed to establish by competent evidence that it operates a hospital, its alleged sale of drugs or pharmaceutical items cannot be considered as part of the term 'hospital services' exempt from VAT under Section 109 (G) of the NIRC of 1997, as amended; thereby making the alleged sale of drugs or pharmaceutical items by petitioner an appropriate subject of the deficiency VAT assessment.

Second, even if petitioner is able to prove that it operates a hospital, the denial of its petition for cancellation of deficiency VAT assessment is still in order, this is because petitioner likewise failed to fully account for and substantiate by competent evidence its stance that the NET discrepancy in the deficiency VAT assessment consists of {1} sales of pharmacy items to its in-patients and/or special units such as operating and delivery rooms during medical procedures, which are exempt from VAT under Section 109 {G) of the NIRC of 1997, as amended; [2} items which are no longer sold or passed on to patients or clients such as equipment and supplies; and thus not subject to VAT.

To support its stance, petitioner offered in evidence an Itemized Summary

and Comparative Table

11 for its VAT returns for the year 2006, and the Monthly Value-Added Tax Returns12 for the period of January to December 2006. However,~ 10 Westmont Investment Corporation vs. Amos P. Francia, Jr. et at., G.R. No. 194128, December 7, 2011 citing Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc., G.R. No. 146428, J<Jnu<Jry 19, 2009, 576 SCR/\ 137, 145.

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

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We find that the truth in petitioner's stance cannot be verified solely by examining the above-mentioned documents.

The hands of this Court are tied from giving credence to the Itemized Summary and Comparative Table13 and the Monthly Value-Added Tax Returns 1 ~ in view of the fact that the source documents (e.g. receipts, invoices, financial statement of income for services to patients, inventory) where the inputs in the itemized summary and tax returns were taken were not offered as evidence for the petitioner; consequently these documents cannot stand to support petitioner's claim .

In view of the fact that the records of this case is wanting in competent evidence, the Court cannot verify if there were indeed sales of pharmacy items to in-patients and items not sold to clients; as well as identify the actual portion or amount of the NET discrepancy that pertains to sales of pharmacy items to in- patients and/or special units such as operating and delivery rooms during medical procedures, and the actual portion or amount of the NET discrepancy attributable to items which are no longer sold or passed on to patients or clients such as equipment and supplies.

Hence, for petitioner's failure to substantiate by competent evidence its claim that the NET discrepancy in the assessment pertains to sales of pharmacy items to in-patients and/or special units such as operating and delivery rooms during medical procedures, and items which are no longer sold or passed on to patients or clients such as equipment and supplies; this Court has no other recourse V

Hermano (San) Miguel Febres Cordero M edical Education Foundation vs. CIR but to reconsider th e findin gs in th e assailed Decision and uphold respondent's assessment for defici ency VAT against petition er.

WHEREFORE, finding merit in respondent's Motion for Reconsideration, th e same is hereby GRANTED. Accordingly, th e Decision dated January 9, 2012 is hereby MODIFIED with respect to th e issue on sale of drugs or pharmaceut ical items by petit ioner.

Petitioner Hermano (San) Miguel Febres Cordero M edical Education Foundation is hereby ORDERED to PAY respondent Commissioner of Intern al Revenue t he amount of TWO MILLION SIX HUNDRED SEVEN THOUSAND NINE HUNDRED THIRTY THREE AND 07/100 PESOS (P2,607,933.07) representing deficiency valu e added t ax for t axable year 2006, and 20% deficiency interest per annum from th e date prescrib ed for it s payment unt il t he full paym ent t hereof, pursuant t o Sect ion 249 (B) of th e NIRC of 1997, as amended.

WE CONCUR:

L

AMELIA R. COTANGCO- MANALASTAS

Associate Justice

~ ic~;;;_t?;RIQtJEZ

Associate Justice

Hermono (Son) Miguel Febres Cordero Medical Education Foundation vs. CIR

ATTESTATION

I attest th at th e conclu sions in th e above Am ended Decision w ere reached in consultation before th e case w as assigned to th e writer of th e opin ion of th e Court's Division.

CERTIFICATION

Pursuant to Section 13, Article VIII of th e Constitution and th e Division Chairperson's Attest at ion, it is hereby certifi ed th at th e conclusions in th e above Am ended Decision w ere reached in consultation before th e case w as assigned t o th e writer of th e opinion of th e Court.

~ . ~-~ ERNEST~ D. ACOSTA

Presiding Justice