Republic of the
SUPREME COURT
THIRD DIVISION
COMMISSIONER OF INTERNAL G.R. No. 148083
REVENUE,
Petitioner, Present:
QUISUMBING,
J., Chairperson,
-
versus - CARPIO,*
CARPIO
MORALES,
TINGA,
and
BICOLANDIA DRUG VELASCO, JR., JJ.
CORPORATION (Formerly known
as ELMAS DRUG CO.), Promulgated:
Respondent. July 21, 2006
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DECISION
VELASCO, JR., J.:
In cases of conflict between the law and the rules and
regulations implementing the law, the law shall always prevail. Should Revenue Regulations deviate from the
law they seek to implement, they will be struck down.
The Facts
In 1992, Republic Act No. 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,”
granted senior citizens several privileges, one of which was obtaining a 20 percent
discount from all establishments relative to the use of transportation
services, hotels and
___________________________________
* On official leave
similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the
country.[1] The law also provided that the private
establishments giving the discount to senior citizens may claim the cost as tax
credit.[2] In compliance with the law, the Bureau of
Internal Revenue issued Revenue Regulations No. 2-94, which defined “tax
credit” as follows:
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, 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.[3]
In 1995, respondent Bicolandia Drug
Corporation, a corporation engaged in the business of retailing pharmaceutical
products under the business style of “Mercury Drug,” granted the 20 percent
sales discount to qualified senior citizens purchasing their medicines in
compliance with R.A. No. 7432.[4] Respondent treated this discount as a
deduction from its gross income in compliance with Revenue Regulations No.
2-94, which implemented R.A. No. 7432.[5] On
On
On
Petitioner maintained that Revenue
Regulations No. 2-94 is valid since the law tasked the Department of Finance,
among other government offices, with the issuance of the necessary rules and
regulations to carry out the objectives of the law.[11]
Ruling of the Court of Tax Appeals
The Court of Tax Appeals declared
that the provisions of R.A. No. 7432 would prevail over Section 2(i) of Revenue
Regulations No. 2-94, whose definition of “tax credit” deviated from the
intendment of the law; and as a result, partially granted the respondent’s
claim for a refund. After examining the
evidence on record, the Court of Tax Appeals reduced the claimed 20 percent
sales discount, thus reducing the refund to be given. It ruled that “Respondent is hereby ORDERED to REFUND in favor of Petitioner the amount of P236,321.52,
representing overpaid income tax for the year 1995.”[12]
Ruling of the Court of Appeals
On appeal, the Court of Appeals
modified the decision of the Court of Tax Appeals as the law provided for a tax
credit, not a tax refund. The fallo of
the Decision states:
WHEREFORE,
premises considered, the present appeal is hereby GRANTED and the Decision of
the Court of Tax Appeals in C.T.A. Case No. 5599 is hereby MODIFIED in the
sense that the award of tax refund is ANNULLED and SET ASIDE. Instead, the petitioner is hereby ORDERED to
issue a tax credit certificate in favor of the respondent in the amount of P
236,321.52.
No
pronouncement as to costs.[13]
The Issue
Petitioner now argues that the Court
of Appeals erred in holding that the 20 percent sales discount granted to qualified
senior citizens by the respondent pursuant to R.A. No. 7432 may be claimed as a
tax credit, instead of a deduction from gross income or gross sales.[14]
The Court’s Ruling
The petition is not meritorious.
Redefining “Tax Credit” as “Tax Deduction”
The problem stems from the issuance
of Revenue Regulations No. 2-94, which was supposed to implement R.A. No. 7432,
and the radical departure it made when it defined the “tax credit” that would
be granted to establishments that give 20 percent discount to senior
citizens. Under Revenue Regulations No.
2-94, the tax credit is “the amount representing the 20 percent discount
granted to a qualified senior citizen by all establishments relative to their
utilization of transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation 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.”[15] It equated “tax credit” with “tax deduction,”
contrary to the definition in Black’s Law Dictionary, which defined tax credit
as:
An amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer’s liability x x x, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed.[16]
The interpretation of an
administrative government agency, which is tasked to implement the statute, is
accorded great respect and ordinarily controls the construction of the courts.[17] Be that as it may, the definition laid down
in the questioned Revenue Regulations can still be subjected to scrutiny. Courts will not hesitate to set aside an executive
interpretation when it is clearly erroneous.
There is no need for interpretation when there is no ambiguity in the
rule, or when the language or words used are clear and plain or readily
understandable to an ordinary reader.[18] The definition of the term “tax credit” is
plain and clear, and the attempt of Revenue Regulations No. 2-94 to define it
differently is the root of the conflict.
Tax Credit is not Tax Refund
Petitioner argues that the tax credit
is in the nature of a tax refund and should be treated as a return for tax
payments erroneously or excessively assessed against a taxpayer, in line with
Section 204(c) of Republic Act No. 8424, or the National Internal Revenue Code
of 1997. Petitioner claims that there
should first be payment of the tax before the tax credit can be claimed. However, in the National Internal Revenue
Code, we see at least one instance where this is not the case. Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a
tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax.[19] It speaks of a tax credit for tax due, so
payment of the tax has not yet been made in that particular example.
The Court of Appeals expressly
recognized the differences between a “tax credit” and a “tax refund,” and
stated that the same are not synonymous with each other, which is why it
modified the ruling of the Court of Tax Appeals.
Revenue Regulations No. 2-94 vs. R.A. No. 7432 and
R.A. No. 7432 vs. the National Internal Revenue Code
Petitioner contends that since R.A.
No. 7432 used the word “may,” the availability of the tax credit to private
establishments is only permissive and not absolute or mandatory. From that starting point, petitioner further
argues that the definition of the term “tax credit” in Revenue Regulations No.
2-94 was validly issued under the authority granted by the law to the
Department of Finance to formulate the needed guidelines. It further explained that Revenue Regulations
No. 2-94 can be harmonized with R.A No. 7432, such that the definition of the
term “tax credit” in Revenue Regulations No. 2-94 is controlling. It claims that to do otherwise would result
in Section 4(a) of R.A. No. 7432 impliedly repealing Section 204 (c) of the National
Internal Revenue Code.
These arguments must also fail.
Revenue Regulations No. 2-94 is still
subordinate to R.A. No. 7432, and in cases of conflict, the implementing rule
will not prevail over the law it seeks to implement. While seemingly conflicting laws must be
harmonized as far as practicable, in this particular case, the conflict cannot
be resolved in the manner the petitioner wishes. There is a great divide separating the idea
of “tax credit” and “tax deduction,” as seen in the definition in Black’s Law
Dictionary.
The claimed absurdity of Section 4(a)
of R.A. No. 7432 impliedly repealing Section 204(c) of the National Internal
Revenue Code could only come about if it is accepted that a tax credit is akin
to a tax refund wherein payment of taxes must be made in order for it to be
claimed. But as shown in Section 112(a)
of the National Internal Revenue Code, it is not always necessary for payment
to be made for a tax credit to be available.
Looking into R.A. No. 7432
Finally, petitioner argues that
should private establishments, which count respondent in their number, be
allowed to claim tax credits for discounts given to senior citizens, they would
be earning and not just be reimbursed for the discounts given.
It cannot be denied that R.A. No.
7432 has a laudable goal. Moreover, it
cannot be argued that it was the intent of lawmakers for private establishments
to be the primary beneficiaries of the law.
However, while the purpose of the law to benefit senior citizens is praiseworthy,
the concerns of the affected private establishments were also considered by the
lawmakers. As in other cases wherein
private property is taken by the State for public use, there must be just
compensation. In this particular case,
it took the form of the tax credit granted to private establishments, purposely
chosen by the lawmakers. In the similar
case of Commissioner of Internal Revenue
v. Central Luzon Drug Corporation,[20] scrutinizing
the deliberations of the Bicameral Conference Committee Meeting on Social
Justice on February 5, 1992 which finalized R.A. No. 7432, the discussions of
the lawmakers clearly showed the intent that the cost of the 20 percent discount
may be claimed by the private establishments as a tax credit. An excerpt from the deliberations is as
follows:
SEN.
ANGARA. In the case of
private hospitals they got the grant of 15% discount, provided that, the
private hospitals can claim the expense as a tax credit.
REP.
AQUINO. Yah could be
allowed as deductions in the preparation of (inaudible) income.
SEN.
ANGARA. I-tax credit na lang natin para walang cash-out?
REP.
AQUINO. Oo, tax credit. Tama. Okay.
Hospitals ba o lahat ng
establishments na covered.
THE
CHAIRMAN. Sa kuwan lang yon, as private hospitals lang.
REP.
AQUINO. Ano ba yung establishments na covered?
SEN.
ANGARA. Restaurant, lodging
houses, recreation centers.
REP. AQUINO. All
establishments covered siguro?
SEN.
ANGARA. From all
establishments. Alisin na natin `yung kuwan kung ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN.
ANGARA. Letter A. To capture that thought, we’ll say the grant
of 20% discount from all establishments et cetera, et cetera, provided that
said establishments may claim the cost as a tax credit. Ganon
ba `yon?
REP. AQUINO. Yah.
SEN.
ANGARA. Dahil kung government, they don’t need
to claim it.
THE CHAIRMAN. Tax credit.
SEN.
ANGARA. As a tax credit
[rather] than a kuwan – deduction, Okay.[21]
It is clear that the lawmakers
intended the grant of a tax credit to complying private establishments like the
respondent.
If the private establishments appear
to benefit more from the tax credit than originally intended, it is not for
petitioner to say that they shouldn’t.
The tax credit may actually have provided greater incentive for the
private establishments to comply with R.A. No. 7432, or quicker relief from the
cut into profits of these businesses.
Revenue Regulations No. 2-94 Null and Void
From
the above discussion, it must be concluded that Revenue Regulations No. 2-94 is
null and void for failing to conform to the law it sought to implement. In case of discrepancy between the basic law
and a rule or regulation issued to implement said law, the basic law prevails
because said rule or regulation cannot go beyond the terms and provisions of
the basic law.[22]
Revenue
Regulations No. 2-94 being null and void, it must be ruled then that under R.A.
No. 7432, which was effective at the time, respondent is entitled to its claim
of a tax credit, and the ruling of the Court of Appeals must be affirmed.
But even as this particular case is
decided in this manner, it must be noted that the concerns of the petitioner
regarding tax credits granted to private establishments giving discounts to
senior citizens have been addressed.
R.A. No. 7432 has been amended by Republic Act No. 9257, the “Expanded
Senior Citizens Act of 2003.” In this,
the term “tax credit” is no longer used.
The 20 percent discount granted by hotels and similar lodging establishments,
restaurants and recreation centers, and in the purchase of medicines in all
establishments for the exclusive use and enjoyment of senior citizens is
treated in the following manner:
The
establishment may claim the discounts granted under (a), (f), (g) and (h) as
tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same taxable year that
the discount is granted. Provided, further, that the total amount
of the claimed tax deduction net of value added tax if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue
Code, as amended.[23]
This time around, there is no
conflict between the law and the implementing Revenue Regulations. Under Revenue Regulations No. 4-2006, “(o)nly
the actual amount of the discount granted or a sales discount not exceeding 20%
of the gross selling price can be deducted from the gross income, net of value
added tax, if applicable, for income tax purposes, and from gross sales or
gross receipts of the business enterprise concerned, for VAT or other
percentage tax purposes.”[24] Under the new law, there is no tax credit to
speak of, only deductions.
Petitioner can find some
vindication in the amendment made to R.A. No. 7432 by R.A. No. 9257, which may
be more in consonance with the principles of taxation, but as it was R.A. No.
7432 in force at the time this case arose, this law controls the result in this
particular case, for which reason the petition must fail.
This
case should remind all heads of executive agencies which are given the power to
promulgate rules and regulations, that they assume the roles of lawmakers. It is well-settled that a regulation should
not conflict with the law it implements.
Thus, those drafting the regulations should study well the laws their
rules will implement, even to the extent of reviewing the minutes of the
deliberations of Congress about its intent when it drafted the law. They may also consult the Secretary of
Justice or the Solicitor General for their opinions on the drafted rules. Administrative rules, regulations and orders
have the efficacy and force of law so long as they do not contravene any
statute or the Constitution.[25] It is then the duty of the agencies to ensure
that their rules do not deviate from or amend acts of Congress, for their
regulations are always subordinate to law.
WHEREFORE, the
Petition is hereby DENIED. The assailed Decision of the Court of Appeals
is AFFIRMED. There is no
pronouncement as to costs.
SO ORDERED.
PRESBITERO
J. VELASCO, JR.
Associate
Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
(On Official Leave)
ANTONIO T.
CARPIO CONCHITA
CARPIO MORALES
Associate
Justice
Associate Justice
DANTE O. TINGA
Associate Justice
A T T E S T A T I O N
I attest that the conclusions in the
above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
C E R T I F I C A T I O N
Pursuant to Section 13, Article VIII of the
Constitution, and the Division Chairperson’s Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.
ARTEMIO
V. PANGANIBAN
Chief Justice
[13]
Conrado M. Vasquez, Jr. and Associate
Justice Eliezer R. Delos Santos).
[17] Melendres, Jr. v. Commission on Elections,
G.R. No. 129958,