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COMMISSIONER OF INTERNAL G.R. No. 159647REVENUE,

Petitioner, Present:

Panganiban, J .,Chairman,

Sandoval-Gutierrez,- versus - Corona,

Carpio Morales, andGarcia, JJ

CENTRAL LUZON DRUG Promulgated:CORPORATION,

Respondent. April 15, 2005x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J. :

he 20 percent discount required by the law to be given to senior citizens is a taxcredit, not merely a tax deduction from the gross income or gross sale of theestablishment concerned. A tax creditis used by a private establishment only afterthe tax has been computed; a tax deduction, before the tax is computed. RA 7432unconditionally grants a tax creditto all covered entities. Thus, the provisions of therevenue regulation that withdraw or modify such grant are void. Basic is the rule thatadministrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1]under Rule 45 of the Rules of Court,seeking to set aside the August 29, 2002 Decision

[2]and the August 11, 2003

Resolution

[3]

of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailedDecision reads as follows:

WHEREFORE, premises considered, the Resolutionappealed from is AFFIRMEDin toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation primarily engaged inretailing of medicines and other pharmaceutical products. In 1996,

it operated six (6) drugstores under the business name and styleMercury Drug.

From January to December 1996, respondent grantedtwenty (20%) percent sales discount to qualified senior citizens ontheir purchases of medicines pursuant to Republic Act No. [R.A.]7432 and its Implementing Rules and Regulations. For the saidperiod, the amount allegedly representing the 20% sales discountgranted by respondent to qualified senior citizens

totaled P904,769.00.

On April 15, 1997, respondent filed its Annual Income TaxReturn for taxable year 1996 declaring therein that it incurred netlosses from its operations.

On January 16, 1998, respondent filed with petitioner aclaim for tax refund/credit in the amount of P904,769.00 allegedlyarising from the 20% sales discount granted by respondent toqualified senior citizens in compliance with [R.A.] 7432. Unable toobtain affirmative response from petitioner, respondent elevated itsclaim to the Court of Tax Appeals [(CTA or Tax Court)] via aPetition for Review.

On February 12, 2001, the Tax Court rendereda Decision

[5]dismissing respondents Petition for lack of merit. Insaid decision, the [CTA] justified its ruling with the followingratiocination:

x xx, if no tax has been paid to thegovernment, erroneously or illegally, or if noamount is due and collectible from the taxpayer,tax refund or tax credit is unavailing. Moreover,whether the recovery of the tax is made bymeans of a claim for refund or tax credit, beforerecovery is allowed[,] it must be first establishedthat there was an actual collection and receipt by

the government of the tax sought to berecovered. x xx.x xx xxx xxx

Prescinding from the above, it couldlogically be deduced that tax credit is premisedon the existence of tax liability on the part oftaxpayer. In other words, if there is no taxliability, tax credit is not available.

Respondent lodged a Motion for Reconsideration. The[CTA], in its assailed resolution,[6]granted respondents motion forreconsideration and ordered herein petitioner to issue a Tax CreditCertificate in favor of respondent citing the decision of the then

Special Fourth Division of [the CA] in CA G.R. SP No. 60057

T

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entitled Central [Luzon] Drug Corporation vs. Commissioner ofInternal Revenuepromulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not applyin the instant case because the tax sought to berefunded or credited by petitioner was noterroneously paid or illegally collected. We takeexception to the CTAs sweeping but unfoundedstatement that both tax refund and tax credit are

modes of recovering taxes which are eithererroneously or illegally paid to the government.Tax refunds or credits do not exclusively pertainto illegally collected or erroneously paid taxes asthey may be other circumstances where a refundis warranted. The tax refund provided underSection 229 deals exclusively with illegallycollected or erroneously paid taxes but there areother possible situations, such as the refund ofexcess estimated corporate quarterly income taxpaid, or that of excess input tax paid by a VAT-registered person, or that of excise tax paid ongoods locally produced or manufactured butactually exported. The standards and mechanics

for the grant of a refund or credit under thesesituations are different from that under Sec. 229.Sec. 4[.a)] of R.A. 7432, is yet another instanceof a tax credit and it does not in any way refer toillegally collected or erroneously paid taxes, x xx.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA)ordering petitioner to issue a tax credit certificate in favor of respondent in thereduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432required neither a tax liability nor a payment of taxes by private establishments priorto the availment of a tax credit. Moreover, such credit is not tantamount to anunintended benefit from the law, but rather a just compensation for the taking ofprivate property for public use.

Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondentmay claim the 20% sales discount as a tax credit instead of as adeduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent isentitled to a refund.[9]

These two issues may be summed up in only one: whether respondent, despite

incurring a net loss, may still claim the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:Claim of 20 Percent Sales Discount

asTax Credit DespiteNet Loss

Section 4a) of RA 7432[10]

grants to senior citizens the privilege of obtaining a20 percent discount on their purchase of medicine from any private establishment in

the country.[11] The latter may then claim the cost of the discount as a tax credit.[12]But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versusTax Deduction

Although the term is not specifically defined in our Tax Code,[13]taxcreditgenerally refers to an amount that is subtracted directly from ones total taxliability.[14] It is an allowance against the tax itself[15]or a deduction from what isowed[16]by a taxpayer to the government. Examples oftax credits are withheldtaxes, payments of estimated tax, and investment tax credits.

[17]

Tax creditshould be understood in relation to other tax concepts. One of theseis tax deduction -- defined as a subtraction from income for tax purposes,[18]or anamount that is allowed by law to reduce income prior to [the] application of the taxrate to compute the amount of tax which is due.[19]An example of a tax deduction isany of the allowable deductions enumerated in Section 34

[20]of the Tax Code.

A tax creditdiffers from a tax deduction. On the one hand, a tax creditreducesthe tax due, including -- whenever applicable -- the income taxthat is determinedafter applying the corresponding tax rates to taxable income.

[21] A tax deduction, onthe other, reduces the income that is subject to tax

[22]in order to arrive at taxable

income.[23]

To think of the former as the latter is to avoid, if not entirely confuse, theissue. A tax creditis used only afterthe tax has been computed; a taxdeduction, before.

Tax Liability Required

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fo rTax Credit

Since a tax creditis used to reduce directly the tax that is due, there ought tobe a tax liability before the tax creditcan be applied. Without that liability, any taxcreditapplication will be useless. There will be no reason for deducting the latterwhen there is, to begin with, no existing obligation to the government. However, aswill be presented shortly, the existence of a tax credit or its grantby law is not thesame as the availmentoruse of such credit. While the grant is mandatory, theavailment or use is not.

If a net loss is reported by, and no other taxes are currently due from, abusiness establishment, there will obviously be no tax liability against which any taxcreditcan be applied.

[24] For the establishment to choose the immediate availment of

a tax creditwill be premature and impracticable. Nevertheless, the irrefutable factremains that, under RA 7432, Congress has granted without conditions a taxcreditbenefit to all covered establishments.

Although this tax creditbenefit is available, it need not be used by losingventures, since there is no tax liability that calls for its application. Neither can it bereduced to nil by the quick yet callow stroke of an administrative pen, simply becauseno reduction of taxes can instantly be effected. By its nature, the tax creditmay stillbe deducted from a future, not apresent, tax liability, without which it does not haveany use. In the meantime, it need not move. But it breathes.

Prior Tax Payments NotRequired forTax Credit

While a tax liability is essential to the availment or use of any tax credit, priortax payments are not. On the contrary, for the existence or grantsolely of suchcredit, neither a tax liability nor a prior tax payment is needed. The Tax Code is infact replete with provisions granting or allowing tax credits, even though no taxeshave been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a taxcredit-- subject to certain limitations -- for estate taxes paid to a foreign country. Alsofound in Section 101(C) is a similar provision for donors taxes -- again when paid to a

foreign country -- in computing for the donors tax due. The tax credits in bothinstances allude to the prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging intransactions -- whether or not subject to the VAT -- is also allowed a tax creditthatincludes a ratable portion of any input tax not directly attributable to either activity.This input tax may eitherbe the VAT on the purchase or importation of goods orservices that is merely due from -- not necessarily paid by -- such VAT-registeredperson in the course of trade or business; orthe transitional input tax determined inaccordance with Section 111(A). The latter type may in fact be an amount equivalentto only eight percent of the value of a VAT-registered persons beginning inventory ofgoods, materials and supplies, when such amount -- as computed -- is higher thanthe actual VAT paid on the said items.[25] Clearly from this provision, the taxcreditrefers to an input tax that is either due only or given a value by mere

comparison with the VAT actually paid -- then later prorated. No tax is actually paidprior to the availment of such credit.

In Section 111(B), a one and a half percent input tax creditthat is merelypresumptive is allowed. For the purchase of primary agricultural products used asinputs -- either in the processing of sardines, mackerel and milk, or in themanufacture of refined sugar and cooking oil -- and for the contract price of publicwork contracts entered into with the government, again, no prior tax payments areneeded for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or

effectively zero-rated may, under Section 112(A), apply for the issuance of a taxcreditcertificate for the amount of creditable input taxes merely due -- again notnecessarily paid to -- the government and attributable to such sales, to the extent thatthe input taxes have not been applied against output taxes.

[26] Where a taxpayer is

engaged in zero-rated or effectively zero-rated sales and also in taxable or exemptsales, the amount of creditable input taxes due that are not directly and entirelyattributable to any one of these transactions shall be proportionately allocated on thebasis of the volume of sales. Indeed, in availing of such tax creditfor VAT purposes,this provision -- as well as the one earlier mentioned -- shows that the prior paymentof taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustrationof a tax creditallowed, even though no prior tax payments are not required.Specifically, in this provision, the imposition of a final withholding tax rate on cash

and/or property dividends received by a nonresident foreign corporation from adomestic corporation is subjected to the condition that a foreign tax creditwill begiven by the domiciliary country in an amount equivalent to taxes that are merelydeemed paid.

[27] Although true, this provision actually refers to the tax creditas

a condition only for the imposition of a lower tax rate, not as a deduction from thecorresponding tax liability. Besides, it is not our government but the domiciliarycountry that credits against the income tax payable to the latter by the foreigncorporation, the tax to be foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categoricallyallows as credits, against the income tax imposable under Title II, the amount ofincome taxes merely incurred -- not necessarily paid -- by a domestic corporationduring a taxable year in any foreign country. Moreover, Section 34(C)(5) provides

that for such taxes incurred but not paid, a tax creditmay be allowed, subject to thecondition precedent that the taxpayer shall simply give a bond with suretiessatisfactory to and approved by petitioner, in such sum as may be required; andfurther conditioned upon payment by the taxpayer of any tax found due, uponpetitioners redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also taxtreaties and special laws that grant or allow tax credits, even though no prior taxpayments have been made.

Under the treaties in which the tax creditmethod is used as a relief to avoiddouble taxation, income that is taxed in the state of source is also taxable in the stateof residence, but the tax paid in the former is merely allowed as a credit against thetax levied in the latter.

[29] Apparently, payment is made to the state of source, not

the state of residence. No tax, therefore, has beenpreviouslypaid to the latter.

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Under special laws that particularly affect businesses, there can also be taxcreditincentives. To illustrate, the incentives provided for in Article 48 of PresidentialDecree No. (PD) 1789, as amended by Batas PambansaBlg. (BP) 391, include taxcredits equivalent to either five percent of the net value earned, or five or ten percentof the net local content of exports.[30] In order to avail of such credits under the saidlaw and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are notindispensable to the availment of a tax credit. Thus, the CA correctly held that the

availment under RA 7432 did not require prior tax payments by privateestablishments concerned.[31] However, we do not agree with its finding[32]that thecarry-over oftax credits under the said special law to succeeding taxable periods, andeven their application against internal revenue taxes, did not necessitate theexistence of a tax liability.

The examples above show that a tax liability is certainly important inthe availment or use, not the existence or grant, of a tax credit. Regarding thismatter, a private establishment reporting a net loss in its financial statements is nodifferent from another that presents a net income. Both are entitled to the taxcreditprovided for under RA 7432, since the law itself accords that unconditionalbenefit. However, for the losing establishment to immediately apply such credit,where no tax is due, will be an improvident usance.

Sections 2.i and 4 of RevenueRegulations No . 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credittheamount of discounts they grant.

[33] In turn, the Implementing Rules and Regulations,

issued pursuant thereto, provide the procedures for its availment.[34]

To deny suchcredit, despite the plain mandate of the law and the regulations carrying out thatmandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax creditas theamount representing the 20 percent discount that shall be de ducted by the saidestablishments from theirgross income for income tax purposes and from theirgrosssales for value-added tax or other percentage tax purposes.[35] In ordinary business

language, the tax creditrepresents the amount of such discount. However, themanner by which the discount shall be credited against taxes has not been clarifiedby the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made fromthe gross amount or value of anything.[36] To be more precise, it is in businessparlance a deduction or lowering of an amount of money;[37]or a reduction from thefull amount or value of something, especially a price.[38] In business there are manykinds of discount, the most common of which is that affecting the incomestatement

[39]or financial report upon which the income taxis based.

Business DiscountsDeducted fromGross Sales

A cash discount, for example, is one granted by business establishmentsto credit customers for their prompt payment.

[40] It is a reduction in price offered to

the purchaser if payment is made within a shorter period of time than the maximumtime specified.[41] Also referred to as a sales discounton the part of the seller andapurchase discounton the part of the buyer, it may be expressed in such terms as5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for purchasesmade in large quantities, justified by savings in packaging, shipping, andhandling.[43] It is also called a volume orbulk discount.[44]

A percentage reduction from the list price x xx allowed by manufacturers towholesalers and by wholesalers to retailers[45]is known as a trade discount. Noentry for it need be made in the manual or computerized books of accounts, since thepurchase or sale is already valued at the net price actually charged the buyer.

[46] The

purpose for the discount is to encourage trading or increase sales, and the prices atwhich the purchased goods may be resold are also suggested.[47] Even a chaindiscount-- a series of discounts from one list price -- is recorded at net.

[48]

Finally, akin to a trade discountis a functional discount. It is a suppliers pricediscount given to a purchaser based on the [latters] role in the [formers] distributionsystem.[49] This role usually involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discountispeculiar. Applying generally accepted accounting principles (GAAP) in the country,

this type of discount is reflected in the income statement[50]as a line item deducted --along with returns, allowances, rebates and other similar expenses -- from grosssales to arrive at net sales.

[51] This type of presentation is resorted to, becausethe accounts receivable and sales figures that arise from sales discounts, -- as wellas from quantity, volume orbulk discounts-- are recorded in the manual andcomputerized books of accounts and reflected in the financial statements at the grossamounts of the invoices.

[52] This manner of recording credit sales -- known as

the gross method-- is most widely used, because it is simple, more convenient toapply than the net method, and produces no material errors over time.

[53]

However, under the net methodused in recording trade, chain orfunctionaldiscounts, only the net amounts of the invoices -- after the discounts have beendeducted -- are recorded in the books of accounts

[54]and reflected in the financial

statements. A separate line item cannot be shown,

[55]

because the transactionsthemselves involving bothaccounts receivable and sales have already been enteredinto, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but oneprovision adverts to amounts whose sum -- along with salesreturns, allowances and cost of goods sold

[56]-- is deducted from gross sales to comeup with the gross income,profitormargin

[57]derived from business.

[58] In another

provision therein, sales discounts that are granted and indicated in the invoices at thetime of sale -- and that do not depend upon the happening of any future event -- maybe excluded from the gross sales within the same quarter they were given.

[59] While

determinative only of the VAT, the latter provision also appears as a suitablereference point for income tax purposes already embraced in the former. After all,these two provisions affirm that sales discounts are amounts that are always

deductible from gross sales.

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Reason for the Senior Cit izen Discount:The Law, Not Prompt Paym ent

A distinguishing feature of the implementing rules of RA 7432 is the privateestablishments outright deduction of the discount from the invoice price of themedicine sold to the senior citizen.

[60] It is, therefore, expected that for each retail

sale made under this law, the discount period lasts no more than a day, becausesuch discount is given -- and the net amount thereof collected -- immediately uponperfection of the sale.

[61] Although prompt payment is made for an arms-length

transaction by the senior citizen, the real and compelling reason for the privateestablishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a salesdiscountor any of the above discounts in particular. Prompt payment is not thereason for (although a necessary consequence of) such grant. To be sure, theprivilege enjoyed by the senior citizen must be equivalent to the tax creditbenefitenjoyed by the private establishment granting the discount. Yet, under the revenueregulations promulgated by our tax authorities, this benefit has been erroneouslylikened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same asthat resulting from a sales discount. However, to a private establishment, the effect isdifferent from a simple reduction in price that results from such discount. In other

words, the tax creditbenefit is not the same as a sales discount. To repeat from ourearlier discourse, this benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discounton the income statementand incometax return of an establishment covered by RA 7432 is different from that resulting fromtheavailmentoruse of its tax creditbenefit. While the former is a deduction before,the latter is a deduction after, the income taxis computed. As mentioned earlier, adiscount is not necessarily a sales discount, and a tax creditfor a simple discountprivilege should not be automatically treated like a sales discount. Ubilex nondistinguit, necnosdistingueredebemus. Where the law does not distinguish, we oughtnot to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax creditas

the 20 percent discount deductible from gross income forincome taxpurposes, orfrom gross sales for VAT or other percentage tax purposes. In effect, the taxcreditbenefit under RA 7432 is related to a sales discount. This contrived definition isimproper, considering that the latter has to be deducted from gross sales in order tocompute the gross income in the income statementand 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 anytax liability, plain and simple. The option to avail of the tax creditbenefit dependsupon the existence of a tax liability, but to limit the benefit to a sales discount-- whichis not even identical to the discount privilege that is granted by law -- does not defineit at all and serves no useful purpose. The definition must, therefore, be strickendown.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulationthat operates to create a rule out of harmony with the statute is a mere nullity;[62]itcannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneousconstruction placed upon a statute by the executive officers whose duty it is toenforce it x x x.[63] In the scheme of judicial tax administration, the need for certaintyand predictability in the implementation of tax laws is crucial.

[64] Our tax authorities fill

in the details that Congress may not have the opportunity or competence toprovide.[65] The regulations these authorities issue are relied upon by taxpayers, whoare certain that these will be followed by the courts.

[66] Courts, however, will not

uphold these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term taxcreditin Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432provides. Their interpretation has muddled up the intent of Congress in granting amere discount privilege, not a sales discount. The administrative agency issuingthese regulations may not enlarge, alter or restrict the provisions of the law itadministers; it cannot engraft additional requirements not contemplated by thelegislature.

[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant tolaw is law.[69] Conversely, a regulation or any portion thereof not adopted pursuant tolaw is no law and has neither the force nor the effect of law.

[70]

Avai lment ofTaxCredit Voluntary

Third, the word mayin the text of the statute[71]

implies that the availability ofthe tax creditbenefit is neither unrestricted nor mandatory.

[72] There is no absoluteright conferred upon respondent, or any similar taxpayer, to avail itself of the taxcreditremedy whenever it chooses; neither does it impose a duty on the part of thegovernment to sit back and allow an important facet of tax collection to be at the solecontrol and discretion of the taxpayer.[73] For the tax authorities to compel

respondent to deduct the 20 percent discount from either its gross income or its grosssales[74]

is, therefore, not only to make an imposition without basis in law, but also toblatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax creditbenefit is merelypermissive, not imperative. Respondent is given two options -- either to claim or notto claim the cost of the discounts as a tax credit. In fact, it may even ignore the creditand simply consider the gesture as an act of beneficence, an expression of its socialconscience.

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Granting that there is a tax liability and respondent claims such cost as a taxcredit, then the tax creditcan easily be applied. If there is none, the credit cannot beused and will just have to be carried over and revalidated

[75]accordingly. If, however,

the business continues to operate at a loss and no other taxes are due, thuscompelling it to close shop, the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determineswhether the cost of the discounts can be used as a tax credit. RA 7432 does not giverespondent the unfettered right to avail itself of the credit whenever it pleases.Neither does it allow our tax administrators to expand or contract the legislativemandate. The plain meaning rule orverbalegis in statutory construction is thusapplicable x xx. Where the words of a statute are clear, plain and free fromambiguity, it must be given its literal meaning and applied without attemptedinterpretation.[76]

Tax Credit BenefitDeemedJust Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of itspower of eminent domain. Be it stressed that the privilege enjoyed by senior citizensdoes not come directlyfrom the State, but rather from the private establishmentsconcerned. Accordingly, the tax creditbenefit granted to these establishments can bedeemed as theirjust compensation for private property taken by the State for public

use.[77]

The concept ofpublic use is no longer confined to the traditional notion ofuseby the public, but held synonymous withpublic interest,public benefit,public welfare,andpublic convenience.

[78] The discount privilege to which our senior citizens areentitled is actually a benefit enjoyed by the general public to which these citizensbelong. The discounts given would have entered the coffers and formed part ofthe gross sales of the private establishments concerned, were it not for RA 7432.The permanent reduction in their total revenues is a forced subsidy corresponding tothe taking of private property forpublic use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondentbecomes entitled to ajust compensation. This term refers not only to the issuance of

a tax creditcertificate indicating the correct amount of the discounts given, but also tothe promptness in its release. Equivalent to the payment of property taken by theState, such issuance -- when not done within a reasonable time from the grant of thediscounts -- cannot be considered asjust compensation. In effect, respondent ismade to suffer the consequences of being immediately deprived of its revenues whileawaiting actual receipt, through the certificate, of the equivalent amount it needs tocope with the reduction in its revenues.

[79]

Besides, the taxation power can also be used as an implement for the exerciseof the power of eminent domain.

[80] Tax measures are but enforced contributions

exacted on pain of penal sanctions[81]and clearly imposed for a public purpose.[82]In recent years, the power to tax has indeed become a most effective tool to realizesocial justice,public welfare, and the equitable distribution of wealth.

[83]

While it is a declared commitment under Section 1 of RA 7432, social justicecannot be invoked to trample on the rights of property owners who under our

Constitution and laws are also entitled to protection. The social justice consecrated inour [C]onstitution [is] not intended to take away rights from a person and give them toanother who is not entitled thereto.[84] For this reason, a just compensation forincome that is taken away from respondent becomes necessary. It is in the taxcreditthat our legislators find support to realize social justice, and no administrativebody can alter that fact.

To put it differently, a private establishment that merely breaks even [85]--without the discounts yet -- will surely start to incur losses because of suchdiscounts. The same effect is expected if its mark-up is less than 20 percent, and ifall its sales come from retail purchases by senior citizens. Aside from the observationwe have already raised earlier, it will also be grossly unfair to an establishment if thediscounts will be treated merely as deductions from either its gross income orits gross sales. Operating at a loss through no fault of its own, it will realize thatthe tax creditlimitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves oftaxcredits denied those that are losing, because no taxes are due from the latter.

Grant ofTax CreditIntended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens areassisted by the community as a whole and to establish a program beneficial to

them.[86] These objectives are consonant with the constitutional policy of makinghealth x xx services available to all the people at affordable cost[87]and of givingpriority for the needs of the x xx elderly.[88] Sections 2.i and 4 of RR 2-94, however,contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple taxcredit, not a deduction. In fact, no cash outlay is required from the government fortheavailmentoruse of such credit. The deliberations on February 5, 1992 of theBicameral Conference Committee Meeting on Social Justice, which finalized RA7432, disclose the true intent of our legislators to treat the sales discounts as a taxcredit, rather than as a deduction from gross income. We quote from thosedeliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano,about deductions from taxable income. Ithink we incorporated there a provisionna - on the responsibility of the privatehospitals and drugstores, hindiba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in alsoa provision here about the deductionsfrom taxable income of that privatehospitals, di baganon 'yan?

MS. ADVENTO. Kaya langpo sir, and mga discounts ponila

affecting government and publicinstitutions, so,

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puwedenaponatinghindiisamayungmgaless deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwedena.Yung about theprivate hospitals.Yung isiningitnatin?

MS. ADVENTO. Singitnapobayung 15% on credit. (inaudible/didnot use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa banaisamanatin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal niSenator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got thegrant of 15% discount, provided that, theprivate hospitals can claim the expenseas a tax credit.

REP. AQUINO. Yah could be allowed as deductions in theperpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit nalangnatinparawalang cash-outano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba olahatng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sakuwanlang yon, as privatehospitals lang.

REP. AQUINO. Anobayung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments.Alisinnanatin 'Yungkuwan kung ganon. Can we go back toSection 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say thegrant of 20% discount from allestablishments et cetera, et cetera,

provided that said establishments -provided that private establishments

may claim the cost as a tax credit.Ganonba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahilkung government, they don't need to claimit.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan -deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style nalangsa LetterA".

[89]

Special LawOver General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -

- a general law. x xx [T]he rule is that on a specific matter the special law shallprevail over the general law, which shall be resorted to only to supply deficiencies inthe former.[90] In addition, [w]here there are two statutes, the earlier special and thelater general -- the terms of the general broad enough to include the matter providedfor in the special -- the fact that one is special and the other is general creates apresumption that the special is to be considered as remaining an exception to thegeneral,

[91]one as a general law of the land, the other as the law of a particular

case.[92] It is a canon of statutory construction that a laterstatute, general in itsterms and not expressly repealing aprior specialstatute, will ordinarily not affect thespecial provisions of such earlier statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains anexception to, the Tax Code -- a later law. When the former states that a tax

creditmay be claimed, then the requirement of prior tax payments under certainprovisions of the latter, as discussed above, cannot be made to apply. Neither canthe instances of or references to a tax deduction under the Tax Code

[94]be made torestrict RA 7432. No provision of any revenue regulation can supplant or modify theacts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision andResolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

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COMMISSIONER OF INTERNAL G.R. No. 148512REVENUE,

Petitioner, Present:

PUNO, J., Chairperson,- versus SANDOVAL-GUTIERREZ,

CORONA,AZCUNA, andGARCIA, JJ.

CENTRAL LUZON DRUGCORPORATION, Promulgated:

Respondent.June 26, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

AZCUNA, J .:

This is a petition for review under Rule 45 of the Rules of Court seeking thenullification of the Decision, dated May 31, 2001, of the Court of Appeals (CA) in CA-

G.R. SP No. 60057, entitled Central Luzon Drug Corporation v. Commissioner ofInternal Revenue, granting herein respondent Central Luzon Drug Corporationsclaim for tax credit equal to the amount of the 20% discount that it extended to seniorcitizens on the latters purchase of medicines pursuant to Section 4(a) of Republic Act(R.A.) No. 7432, entitled An Act to Maximize the Contribution of Senior Citizens toNation Building, Grant Benefits and Special Privileges and for other Purposesotherwise known as the Senior Citizens Act.

The antecedents are as follows:

Central Luzon Drug Corporation has been a retailer of medicines and otherpharmaceutical products since December 19, 1994. In 1995, it opened three (3)drugstores as a franchisee under the business name and style of Mercury Drug.

For the period January 1995 to December 1995, in conformity to themandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the saleof medicines to qualified senior citizens amounting to P219,778.

Pursuant to Revenue Regulations No. 2-94[1]

implementing R.A. No. 7432,which states that the discount given to senior citizens shall be deducted by theestablishment from its gross sales for value-added tax and other percentage taxpurposes, respondent deducted the total amount of P219,778 from its gross incomefor the taxable year 1995. For said taxable period, respondent reported a net lossof P20,963 in its corporate income tax return. As a consequence, respondent did notpay income tax for 1995.

Subsequently, on December 27, 1996, claiming that according to Sec. 4(a)

of R.A. No. 7432, the amount of P219,778 should be applied as a tax credit,respondent filed a claim for refund in the amount of P150,193, thus:

Net Sales P 37,014,807.00Add: Cost of 20% Discount

to SeniorCitizens 219,778.00

Gross Sales P 37,234,585.00Less: Cost of Sales

Merchandise Inventory, beg P 1,232,740.00Purchases 41,145,138.00Merchandise Inventory,

end 8,521,557.00 33,856,621.00Gross Profit P 3,377,964.00

Miscellaneous Income 39,014.00Total

Income 3,416,978.00Operating

Expenses 3,199,230.00Net Income Before

Tax P 217,748.00Income Tax

(35%) 69,585.00Less: Tax Credit

(Cost of 20% Discountto Senior

Citizens) 219,778.00Income Tax

Payable (P 150,193.00)Income Tax Actually Paid -0-

Tax Refundable/Overpaid Income Tax (P 150,193.00)

As shown above, the amount of P150,193 claimed as a refund represents thetax credit allegedly due to respondent under R.A. No. 7432. Since the Commissionerof Internal Revenue was not able to decide the claim for refund ontime,[2]respondent filed a Petition for Review with the Court of Tax Appeals (CTA)on March 18, 1998.

On April 24, 2000, the CTA dismissed the petition, declaring that even if thelaw treats the 20% sales discounts granted to senior citizens as a tax credit, the samecannot apply when there is no tax liability or the amount of the tax credit is greaterthan the tax due. In the latter case, the tax credit will only be to the extent of the taxliability.[3]Also, no refund can be granted as no tax was erroneously, illegally andactually collected based on the provisions of Section 230, now Section 229, of theTax Code. Furthermore, the law does not state that a refund can be claimed by theprivate establishment concerned as an alternative to the tax credit.

Thus, respondent filed with the CA a Petition for Review on August 3, 2000.

On May 31, 2001, the CA rendered a Decision stating that Section 229 of theTax Code does not apply in this case. It concluded that the 20% discount given tosenior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No. 7432is considered just compensation and, as such, may be carried over to the next

taxable period if there is no current tax liability. In view of this, the CA held:

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WHEREFORE, the instant petition is hereby GRANTED andthe decision of the CTA dated 24 April 2000 and its resolutiondated 06 July 2000 are SET ASIDE. A new one is entered grantingpetitioners claim for tax credit in the amount of Php: 150,193.00.No costs.

SO ORDERED.[4]

Hence, this petition raising the sole issue of whether the 20% sales discountgranted by respondent to qualified senior citizens pursuant to Sec. 4(a) of R.A. No.7432 may be claimed as a tax credit or as a deduction from gross sales inaccordance with Sec. 2(1) of Revenue Regulations No. 2-94.

Sec. 4(a) of R.A. No. 7432 provides:

Sec. 4. Privileges for the Senior citizens. The seniorcitizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discountfrom all establishments relative to utilization oftransportations services, hotels and similar

lodging establishments, restaurants andrecreation centers and purchase of medicinesanywhere in the country: Provided, That privateestablishments may claim the cost as tax credit.

The CA and the CTA correctly ruled that based on the plain wording of thelaw discounts given under R.A. No. 7432 should be treated as tax credits, notdeductions from income.

It is a fundamental rule in statutory construction that the legislative intentmust be determined from the language of the statute itself especially when the wordsand phrases therein are clear and unequivocal. The statute in such a case must betaken to mean exactly what it says.

[5]Its literal meaning should be followed;

[6]to

depart from the meaning expressed by the words is to alter the statute.

[7]

The above provision explicitly employed the word tax credit. Nothing in theprovision suggests for it to mean a deduction from gross sales. To construe itotherwise would be a departure from the clear mandate of the law.

Thus, the 20% discount required by the Act to be given to senior citizens is atax credit, not a deduction from the gross sales of the establishment concerned. As acorollary to this, the definition of tax credit found in Section 2(1) of RevenueRegulations No. 2-94 is erroneous as it refers to tax creditas the amountrepresenting the 20% discount that shall be deducted by the said establishmentfrom their gross sales for value added tax and other percenta ge tax purposes. Thisdefinition is contrary to what our lawmakers had envisioned with regard to thetreatment of the discount granted to senior citizens.

Accordingly, when the law says that the cost of the discount may be claimedas a tax credit, it means that the amount -- when claimed shall be treated as areduction from any tax liability.

[8] The law cannot be amended by a mere regulation.

The administrative agencies issuing these regulations may not enlarge, alter orrestrict the provisions of the law they administer.[9]In fact, a regulation that operatesto create a rule out of harmony with the statute is a mere nullity.[10]

Finally, for purposes of clarity, Sec. 229[11]of the Tax Code does not apply tocases that fall under Sec. 4 of R.A. No. 7432 because the former provision governsexclusively all kinds of refund or credit of internal revenue taxes that were erroneouslyor illegally imposed and collected pursuant to the Tax Code while the latter extendsthe tax credit benefit to the private establishments concerned even before taxpayments have been made. The tax credit that is contemplated under the Act is aform of just compensation, not a remedy for taxes that were erroneously or illegallyassessed and collected. In the same vein, prior payment of any tax liability is not aprecondition before a taxable entity can benefit from the tax credit. The credit may beavailed of upon payment of the tax due, if any. Where there is no tax liability or wherea private establishment reports a net loss for the period, the tax credit can be availedof and carried over to the next taxable year.

It must also be stressed that unlike in Sec. 229 of the Tax Code wherein theremedy of refund is available to the taxpayer, Sec. 4 of the law speaks only of a taxcredit, not a refund.

As earlier mentioned, the tax credit benefit granted to the establishmentscan be deemed as their just compensation for private property taken by the State forpublic use. The privilege enjoyed by the senior citizens does not come directly fromthe State, but rather from the private establishments concerned.

[12]

WHEREFORE, the petition is DENIED. The Decision of the Court of Appealsin CA-G.R. SP No. 60057, dated May 31, 2001, is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

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BICOLANDIA DRUG CORPORATION G.R. No. 142299(FORMERLY ELMAS DRUGCOPRORATION), Present:

Petitioner,

PUNO, J., Chairperson,- versus - SANDOVAL-GUTIERREZ,

CORONA,AZCUNA, andGARCIA, JJ.

COMMISSIONER OF INTERNALREVENUE, Promulgated:

Respondent.June 22, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

AZCUNA, J .:

This is a petition for review[1]

by Bicolandia Drug Corporation, formerly knownas Elmas Drug Corporation, seeking the nullification of the Decision and Resolution of

the Court of Appeals, dated October 19, 1999 and February 18, 2000, respectively, inCA-G.R SP No. 49946 entitled Commissioner of Internal Revenue v. Elmas DrugCorporation.

The controversy primarily involves the proper interpretation of the term costin Section 4 of Republic Act (R.A.) No. 7432, otherwise known as An Act to Maximizethe Contribution of Senior Citizens to Nation

Building, Grant Benefits and Special Privileges and for Other Purposes.

The facts[2]of the case are as follows:

Petitioner Bicolandia Drug Corporation is a domestic corporation principally

engaged in the retail of pharmaceutical products. Petitioner has a drugstore locatedin Naga City under the name and business style of Mercury Drug.

Pursuant to the provisions of R.A. No. 7432, entitled An Act to Maximize t heContribution of Senior Citizens to Nation Building, Grant Benefits and SpecialPrivileges and for Other Purposes, also known as the Senior Citizens Act, andRevenue Regulations No. 2-94, petitioner granted to qualified senior citizens a 20%sales discount on their purchase of medicines covering the period from July 19, 1993to December 31, 1994.

When petitioner filed its corresponding corporate annual income tax returns fortaxable years 1993 and 1994, it claimed as a deduction from its gross income therespective amounts of P80,330 and P515,000 representing the 20% sales discount itgranted to senior citizens.

On March 28, 1995, however, alleging error in the computation and claimingthat the aforementioned 20% sales discount should have been treated as a tax creditpursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner filed aclaim for refund or credit of overpaid income tax for 1993 and 1994, amountingto P52,215 and P334,750, respectively. Petitioner computed the overpayment asfollows:

Income tax benefit of tax credit 100%Income tax benefit of tax deduction 35%Differential 65%

For 199320% discount granted in 1993 P80,330Multiply by 65% x 65%Overpaid corporate income tax P52,215

For 199420% discount granted in 1993 P515,000Multiply by 65% x 65%Overpaid corporate income tax P334,750

On December 29, 1995, petitioner filed a Petition for Review with the Court ofTax Appeals (CTA) in order to toll the running of the two-year prescriptive period forclaiming for a tax refund under Section 230, now Section 229, of the Tax Code.

It contended that Section 4 of R.A. No. 7432 provides in clear and unequivocallanguage that discounts granted to senior citizens may be claimed as a taxcredit. Revenue Regulations No. 2-94, therefore, which is merely an implementingregulation cannot modify, alter or depart from the clear mandate of Section 4 of R.A.No. 7432, and, thus, is null and void for being inconsistent with the very statute itseeks to implement.

The Commissioner of Internal Revenue, on the other hand, maintained that theaforesaid section providing for a 20% sales discount to senior citizens is a misnomer

as it runs counter to the solemn duty of the government to collect taxes. TheCommissioner likewise pointed out that the provision in question employs the wordmay, thereby implying that the availability of the remedy of tax credit is not absoluteand mandatory and it does not confer an absolute right on the taxpayer to avail of thetax credit scheme if he so chooses. The Commissioner further stated that in statutoryconstruction, the contemporaneous construction of a statute by executive officers ofthe government whose duty is to execute it is entitled to great respect and shouldordinarily control in its interpretation.

Thus, addressing the matter of the proper construction of Section 4(a) of R.A.No. 7432 regarding the treatment of the 20% sales discount given to senior citizenson their medicine purchases, the CTA ruled on the issue of whether or not thediscount should be deductible from gross sales of value-added tax or otherpercentage tax purposes as prescribed under Revenue Regulations No. 2-94 or as a

tax credit deductible from the tax due.

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In its Decision, dated August 27, 1998, the CTA declared that:

x xx

Revenue Regulations No. 2-94 gave a new meaning to thephrase tax credit, interpreting it to mean that the 20% discountgranted to qualified senior citizens is an amount deductible from theestablishments gross sales, which is completely contradictory tothe literal or widely accepted meaning of the said phrase, as anamount subtracted from an individuals or entitys tax liability toarrive at the total tax liability (Blacks Law Dictionary).

In view of such apparent discrepancy in the interpretationof the term tax credit, the provisions of the law under R.A. 7432should prevail over the subordinate regulation issued by therespondent under Revenue Regulation No. 2-94. x xx

Having settled the legal issue involved in the case at bar,We are now tasked to resolve the factual issues of whether or notpetitioner is entitled to the claim for refund of its overpaid incometaxes for the years 1993 and 1994 based on the evidence at hand.

Contrary to the findings of the independent CPA, aside

from the unverifiable 20% sales discounts in the amountof P18,653.70 (Exh. R-3), the Court noted some materialdiscrepancies. Not all the details listed in the 1994 Summary ofSales and Discounts Given to Senior Citizens correspond with thecash slips presented. There are various sales discounts grantedwhich were not properly computed and there were also some cashslips left unsigned by the buyers.

x xx

After a careful scrutiny of the documents presented, theCourt, allows only the amount of sales discounts duly supported bythe pre-marked cash slips x xx.

Hence, only the above amounts which are properlydocumented can be used as base in computing for the cost of 20%discount as tax credit. The overpaid income tax therefore iscomputed as follows: [3]

For 1993

NetSales P31,080,508.00

Add: 20% Discount to SeniorCitizens 80,330.00Gross

Sales P31,160,838.00

Less: Cost of SalesMerchandise Inventory, beg. P 4,226,588.00

Add Purchases 29,234,361.00Total Goods available for Sale P33,460,947.00Less: Merchandise Inventory, End P 4,875.944.00 P28,585,003.00

GrossIncome P 2,575,835.00Less: OperatingExpenses 1,706,491.00Net Operating Income P 869,344.00Add: MiscellaneousIncome 72,680.00Net Income P 942,024.00Less: Interest Income Subject to FinalTax 21,140.00Net Taxable Income P 920,884.00

Tax Due (P920,884 x 35%) P 322,309.40Less: 1) Tax Credit (Cost of 20% Discount)

[(28,585,003.00/31,160,838.00)x 80,330.34] P 73,690.03

2) Income Tax Payment for the Year 294,194.00 P 367,884.03

AMOUNTREFUNDABLE P 45,574.63

For 1994

NetSales P 29,904,734.00

Add: 20% Discount to Senior Citizens 515,000.00GrossSales P 30,419,734.00Less: Cost of Sales

Merchandise Inventory, beg. P 4,875,944.00Add Purchases 28,138,103.00Total Goods available for Sales P 33,014,047.00Less: Merchandise Inventory,

End 5,036.117.00 27,977,930.00

GrossIncome P 2,441,804.00Less: OperatingExpenses 1,880,153.00Net Operating Income P 561,651.00

Add: Miscellaneous Income 82,207.00Net Income P 643,858.00Less: Interest Income Subject to Final

Tax 30,618.00Net Taxable Income P 613,240.00

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Tax Due (613,240 x 35%) P 214,634.00Less: 1) Tax Credit (Cost of 20% Discount)

[(28,585,003.00/31,160,838.00) x80,330.34] P316,156.482) Income Tax Payment for the Year 34,384.00 P 350,540.48

AMOUNT REFUNDABLE P 135,906.48

WHEREFORE, in view of all the foregoing, petitionersclaim for refund is hereby partially GRANTED. Respondent ishereby ORDERED to REFUND, or in the alternative, to ISSUE atax credit certificate in favor of the petitioner the amounts ofP45,574.63 and P135,906.48, representing overpaid income tax forthe years 1993 and 1994, respectively.

SO ORDERED.[4]

Both the Commissioner and petitioner moved for a reconsideration of theabove decision. Petitioner, in its Motion for Partial Reconsideration, claimed that thecost that private establishments may claim as tax credit under Section 4 of R.A. No.7432 should be construed to mean the full amount of the 20% sales discount grantedto senior citizens instead of the formula --[Tax Credit = Cost of Sales/Gross Sales x

20% discount] used by the CTA in computing for the amount of the tax credit. Inview of this, petitioner prayed for the refund of the amount of income tax it allegedlyoverpaid in the aggregate amount of P45,574.63 and P135,906.48, respectively, forthe taxable years 1993 and 1994 as a result of treating the sales discount of 20% asa tax deduction rather than as a tax credit.

The Commissioner, on the other hand, moved for a re-computation ofpetitioners tax liability averring that the sales discount of 20% should be deductedfrom gross income to arrive at the taxable income. Such discount cannot beconsidered a tax credit because the latter, being in the nature of a tax refund, istreated as a return of tax payments erroneously or excessively

assessed and collected as provided under Section 204(3) of the Tax Code, to wit:

(3) x xx No credit or refund of taxes or penalties shallbe allowed unless the taxpayer files in writing with theCommissioner a claim for credit or refund within two (2) years afterthe payment of the tax or penalty.

In its Resolution, dated December 7, 1998, the CTA modified its earlierdecision, thus:

ACCORDINGLY, the petitioners Motion for PartialReconsideration is hereby GRANTED. Respondent is herebyORDERED to ISSUE tax credit certificates in favor of petitioner [in]the amounts ofP45,574.63 and P135,906.48 representing overpaid

income tax for the years 1993 and 1994, as prayed for in its motion.

On the other hand, the Respondents Motion for Reconsideration isDENIED for lack of merit.

SO ORDERED.[5]

Consequently, the Commissioner filed a pe