CIR v. Professional Services, Inc

8/3/2019 CIR v. Professional Services, Inc.

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REPUBLIC OF THE PHILIPPINESCOURT OFTAX APPEALS

QUEZON CITYENBANC

COMMISSIONER O F INTERNALREVENUE,

Petitioner,

-versus-

PROFESSIONAL SERVICES, INC.,Respondent.

C.T.A. EB No. 409(C.T.A. Case No. 7381)

Present:Acosta, P.J.Castaneda, Jr.Bautista,Uy,Casanova, andPalanca-Enriquez, JJ.

Promulgated:. JAN 0 8 2009 t J J / .. /l , ( : ~x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ : ! . " Z j : ! f . ! J : : : _ _______________X

DECIS ION

BAUTISTA, [. :The Cqse

Before Us is a Petition for Review1 filed on August 14, 2008, prayingfor the reversal of:

' ,. .1 Rollo, C.T.A. EB No. 409 (C.T.A. Case No . 7381), pp. 7-16 with Ann exes.

~ ... - ' 1


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DECISIONCTA EB No . 409 (CT A Case No. 7381)Page 2 of 19

1. the Decision dated March 17, 2008 of the Second,,Division of the Court ("Court in Division") in C.T.A.Case No. 7381, withdrawing and canceling theassessment for deficiency income and va lue-addedtaxes CVAT") for the taxable year 2001 against hereinresponden t; and

2. the Resolution dated July 11, 2008, denying the "Motionfor Reconsideration" of herein petitioner.

AntecedentFactsAs recapitulated by the Court in Division, the following facts are

undisputed:"Professional Services, Inc. (petitioner)2 is a corporation

whose primary purposes are ' [t] o establish, operate, manage, ow nand maintain a hospital or hospitals, medical an d chemical clinicsor laboratories and such other enterprises w hich may have similaror analogous undertakings or dedicated services in connectiontherewith, and to do any and all things and to enter into any and allkinds of hansactions that will achieve the purposes so n1.entioned,provided that pui-ely professional n1edical or surgical services inconnection therewith shall be performed by duly qualifiedphysicians or surgeons who may or ma y not be connected with thecorporation and who shall be freely and individually conhacted bypatients.'

Pe titioner owns and operates the New Med ical City hospilal;a licensed tertiary hospital located at The Medical City Complex,Ortigas Avenue, Pasig City.

2 Herein Respondent . I- - - .: 2


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DECISIONO "A EB No . 409 (C f A Case No . 7381)Page 3 of 19

On March 4, 2005, petitioner received from respondent3 aPreliminary Assessment Notice (PAN) for deficiency income an dvalue-added taxes for the taxable year 2001, computed as follows:

Kind of Tax Basic Surcharge Interes t Compromise To talIncome Tax 4,468,700.22 000 2,568,584 .40 25,000.00 7,062,284.62Va lu e Added Tax 20,326,211 .80 0.00 12,574,407.19 25,000.00 32,925,618.99TOTAL 24,794,912.02 0.00 15,142,991 .59 50,000.00 39,987,903.61

On March 18, 2005, respondent received petitioner's letterprotest dated March 17, 2005, to the PA N for the taxable year 2001.

On April 15, 2005, petitioner r ece ived from respondent aFormal Letter of Demand dated March 17, 2005, demandingpayment of deficiency income and value-added taxes computed asfollows :

Income TaxBasic Tax Due (unsuppo rt ed CWT per audi t)Add : 20% Int erest

Co mpromise Pena ltyTotal Amount Still DueValue Add ed TaxTaxable sa les per auditOu tput tax du eLess: Creditable input tax

Tax withhe ld / paid per returnBasic Tax DueAdd : 20% Interest

Co mpromise Pena ltyTotal Amount Still DueTOTAL

P2,867,313.9525,000.00

00 00.00

13,933,200.5325 000. 00

P4,468,700 .222,892,313 .957,361,014.17

203,262,118.00-20 ,326,211 .80

0.0020,326,:m .8o13,958,200.5334,284,412.3341.645,426.50

Further, in tw o Audit Result/ Assessn}ent Notices INC No.01-000144 and VT No. 01-000165, both dated April 15, 2005,respondent informed petitioner of its deficiency income tax in theamount of P7,361,014.17 arising from the tax credits granted tosenior citizens under Section 4 of Republic Act (RA) 7432 andRevenue Regulations (RR) 2-94 and deficiency value-added tax inthe amount of P34,284,412.33 arising from its sales of pharmacymedicines under RR No . 10-94.

Petitioner filed its Formal Protest to the Final DemandLetter, with supporting documents, to strengthen its claim that it isnot liable for any deficiency tax assessment.

As the one hundred eighty (180)-day period within which torender decision on the protest expired on November 9, 2005,

3Herein Petitioner.


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DECISIONC fA EB No. 409 (CfA Case No. 7381) Page4o f19

petitioner filed before this Court t h ~ present Petition on December9, 2005.

Respondent raised the following counterarguments in hisAnswer:

1. The assessment issued by respondent has becom efinal an d executory;

2. The term ' tax credit' as u sed in RA 7432 is not theli tera l ' ta x credit' as used in the National In ternalRevenue Code; and

3. The sale of drugs to in-patients is subject to VATon sales of goods.

Trial proceeded and only petitioner presented its tes timonialand documentary evidence after the Court declared respondent tohave waived his ri ght to present evidence. The case was submittedfor decision on July 4, 2007 after bo th parties filed their respectiveMemorandum .

4 Rollo, pp . 28- 31.

The issues as stipula ted by the parties are as follows:'1. Whether or not the Fo r111 al Protest to tire Final Denmnd

Leiter was filed on lime by Petitioner via regis teredmail on May 13, 2005. Corollary there to, w he ther or no tthe assessment has become final, executory, anddemandable.

2. Whethe r or not 'the sa le of pnarmacy drugs / med icineto in-patients are VAT-able receipts; or s tatedotherwise, whether or not the sa le of pharmacydrugs/ medicine to in-patients fa ll w ithin th e purviewof Sec tion 109(1) of the Nationa l Interna l Rev enu eCo de (NIRC), as amended.

3. Whether or no t the 20% dis count on purchase ofmedicine granted by Pe titioner in year 2001 to seniorcitizens should be treated as a deduction from grosssa les/ income as interpre ted in ~ e v e n Regulation No.2-94, or as a tax credi t unde r Republic Act 7432 a nd asdefined un der the NIRC."' (C itations onJilled)


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DEC ISION. CfA EB No . 409 (CfA Case No . 7381)Page 5 of 19

The Ruling of the Court in DivisionAt first, the Court in Division resolved the issue of whether or not

the "Protest on the Formal Letter of Demand" of herein respondent wastimely filed. Citing the case of Gold Line Tran sit: Inc. v. Luisa Ramos, 5 andapplying the pertinent provisions of the Revised Rules of Court ("ROC"),particularly Section 3 of Rule 13, and Section 3(v) of Rule 131, the Court inDivision found that: fI

"Basic is the rule that when a mail matter was received byregistered mail, there exists a presumption that it was received inthe regular course of mail as provided in Section 3(v), Rule 131 ofthe Revised Rules of Court. And in order to raise this presumption,it must be proven that: (1) the letter was properly addressed withpostage prepaid; and , (2) it was mailed.

To prove that it filed a protest within the reglementaryperiod, petitione:r6presented the following exhibits:

I

1. Exhibit 'K ' Affidavit of Mr. June B. Rojas, paralegal ofThe Bengzon Law Firm, stating that he filedthe Protes t on the Formal Letter of Demand byregistered mail, with Registry Receipt No .22224, on Ma y 13, 2005 at the MakatiCenhal Post Office;

2. Exhibi t ' L' Affidav it of Ms . Candelaria A.Ponciano, employee of petitioner, statir1gthat she received cop y of the Protest on theFormal Letter ofDemand on May 12, 2005;

3. Exhibit T Makati CenLTal Post Office Regishy ReceiptNo . 22224; and4. Exhibit 'J' Makati CenLTal Post Office Certification,

dated April 11, 2006, with an atlachedInquiry Form on Domestic Recorded Mail.

s G.R. No. 144813, Augus t 15, 2001, 363 SCRA 262.6 Herein Respond ent. I


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DECISIONCfA EB No . 409 (C fA Case No. 7381)Page 6 of 19

The Certification issued by Ms . Emily A. Gianan, Chief ofthe Administrative Unit of the Philippine Postal Corporation, andthe Inquiry Form on Domestic Recorded Mail show that thecounsel for petitioner sent a letter to the Bureau of Internal Revenue(BIR) by registered mail on May 13, 2005. Petitioner's witness, Mr.June B. Rojas, at tes ted to the fa cts that the letter-protest was filed byregistered mail before t h ~ lapse of the prescribed period an d thatno return card was received.

As the Revised Rules of Court shall app ly by analogy or in asuppleto ry character, the date of the mailing of pleadings, motions,and other papers, as shown by the post office stam p on theenvelope or th e registry receipt, sha ll be considered as the date oftheir filing and the envelope shall be attached to the record of thecase. Hence, the Protest OIL the Formal Letter of De mand was de emedto have been filed on May 13, 2005.

In Gold Line Transit, Inc. v. Luisa Ramos, the SupremeCourt ru led that 'xxx postal officials enjoy the presumption,without clear and convincin g ev idence to the conhary, to ha veregularly performed their official duty and that they have acted ingood faith . 0 111nia praesumuntur rite et sole111niter esse actrz doneeprobetur in contrarium. All things are presumed to have been donecorrectly and with due formality until the contrary is proved . Foranother reason, mails are presumed to have been properlydelivered and received by the addressee "in the regu lar course ofthe mail." These juris trzntum presumptions stand even against themost well-reasoned allegations 1 pointing to so me possibleirregularity or anomaly.' 1

As the presumption exis ts in favor of petitioner, respondent?has the burden of proving that petitioner's protes t to the FAN wasactually mailed after the prescriptive period by presenting the mailenvelope u sed by petitioner duly stamped by the Philippine PostalCorporation showing the date when the protes t was sent byregistered mail. And , thi s Court finds that respondent failed todischar ge the burden as there appears to be no conhovertingevidence to prove his assertion that petitione r failed to file itsprotes t on time ."S

7 Herein Petitioner.B Rollo, pp. 33 - 35. I


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DECISIONCTA EB No . 409 (CTA Case No. 7381)

' Page 7 of 19

The Court in Division then proceeded to determine whether the saleof pharmacy drugs/medicines to in-patients falls within the purview ofSection 109 (I) of the National Internal Revenue Code of 1997 ("NIRC"),which exempts medical, dental, hospitaJ and veterinary services subject tothe provisions of Section 17 of Republic Act No. 7716, as amended, fromthe payment of VAT.

In the case of St. Luke's Medical Cen ter, In c. v. Court of Tax Appeals andThe Commissioner of Interna l Revenue,9 the Court of Appeals construed thephrase "hospital services" to include the sale of pharmaceutical items toin-patients. Finding no reason to depart from this interpretation, the Courtin Division ruled that the sale of medicines, drugs and pharmaceutica litems to in-patients is part of the "hospital service", and thus, exempt fromVAT, as provided by Section 109 (I) of the NIRC, as amended.1o

Finally, in keeping with the prevailing jurisprudence, the Court inDivision declared that the 20% sales discounts granted to qualified seniorcitizens must be treated as tax credi ts pursuant to Republic Act No. 7432("RA 7432"), not deductions from gross income. as provided in RevenueRegulations No. 2-94 ("RR 2-94").11

In view of the foregoing, the Cour t in Division disposed of the casein this wise:9 CA-G.R. SP No . 45892, Ma rch 13,1998.10 Rollo, p. 37.11 !d., p. 40.

"' . - ...!


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DECISIONCT A EB No. 409 (C fA Case No. 7381)

Page 8 of 19

"WHEREFORE, petitioner's Petition for Review is herebyGRANTED . Accordingly, the assessmen t for deficiency incomeand value-added taxes for the taxable year 2001 against petitioner ishereby WITHDRAWN and CANCELLED.

SO ORDERED."12On April 9, 2008, herein petitioner filed a "Mo tion for

Reconsideration" I3 to which herein respondent filed an Opposition.14On July 11, 2008, the Court in Division denied the "Motion for

Reconsidera tion" for lack of merit.15

The IssuesHence, the instant Petition anchored upon the following grounds:

" I.THE SECOND DIVISION OF THE HONORABLE CTA

ERR ED WHEN IT HELD THAT THE PROTEST OF RESPONDENTTO THE ASSESSMENT WAS FILED ON TIME.

II.THE SECOND DIVISION OF THE HONORABLE CTA

ER RED WHEN IT HELD THAT THE TERM 'TAX CREDIT' ASUSED IN REPUBLIC ACT NO. 7432 SHOULD BE LITERALLYCONSTRUED AS A 'TAX CREDIT' AS USED IN THE NIRC OF1997.

III.THE SECOND DIVISION OF THE HONORABLE CTAERRED WHEN IT HELD THAT THE SALE OF PHARMACY

DRUGS/ MEDICINE TO IN-PATIENTS IS COVERED BY THEEXEMPTION FROM VAT UNDER SECTiON 109 (L) OF THE

12 Rollo , p. 40.13 Reco rd s, C.T.A. Case No . 7381, pp. 264- 2S2.14 lrl., pp . 289- 295.15 Rollo, pp . 42-43. I

8


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DECISIONC f A EB No. 409 (CTA Case No. 7381) Page 9 of ]9

NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF1997)."16

The Ruling of the Court En BaneThe Petition must fail as all the grounds raised by petitioner are

bereft of merit. We shall discuss each one of them in the order they arepresented.The Protest on the Formal Letter o fDemand was filed on time

Petitioner contends that respondent failed to prove the timely filingof its "Protest on the Formal Letter of Demand." He reasons that thepresumption under Section 3 (v), Rule 131 of the ROC, used by the Courtin Division is inapplicable, as it pertains to situations where receipt of mailmatters coursed through the official post is denied. In this case, petitionerdoes no t deny receipt of the protest but only that it was filed out of time.Hence, petitioner claims that what should exist is a burden on therespondent to prove by independent a!ld competent evidence, the timelyfiling of its protest by registered mail. Petitioner insists that the bestevidence to prove the date of filing is the Return Card of the registeredmail. Furthermore, petitioner avers that the Certification,}? issu ed by theMakati Central Post Office and submi tted as ev idence by respondent, is' " I6 Rollo, pp . 9 -10.17 Record s, p. 165, Exhibit"]."


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inadmissible, given tha t no witness was presented to properly identify thesaid letter.

In its Comment,1s responden t coun:ter-argues that under Section 13,Rule 13 of the ROC, if service is made by registered mail, proof shall bemade by such affidavit and the registry receipt issued by the mailingoffice. Also in the case of Domingo v. De Leorz,19 if service is made by mail,proof of service of a pleading shall consist of the affidavit of the personserving, together with the registry receipt, if registered.

Thus, respondent ma intains that the Registry Receipt No. 2222420issued by the Maka ti Central Post Office and the Affidavi t executed by Mr.June B. Rojas21 , a paralegal of respondent's counsel, are sufficient to provethat respondent timeiy filed its protest on May 13, 2005.

'As to the Certification issued lDy the Makati Cen tral Post Office,respondent asserts that it is an official public document and, therefore,considered as prima facie evidence of the facts sta ted therein . Accordingly,there is no need for the person who issued the Certification to testify inCourt.

Moreover, respondent points ou t that since petitioner refuses topresent the envelope containing the "Protest on the Formal Letter of

1s Ro/lo, pp . 50 - 63.19 G.R. No. L-17686, Novem be r 29, 1961, 3 SCJ{A 586.2o Record s, p. 70, and Ex hibit 'T ' of du p lica te docke t.21 Ed., pp. 168 -1 69, Exhibit "K"

10


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Demand" to show the date of filing, it is presumed that the date stampedon the envelope is adverse to the case of petitioner based on Section 3 (e),Rule 131 of the ROC, which provides that evidence willfully suppressedwould be adverse if produced.

As We see it then, the crux of the controversy is the date of filing ofthe "Protest on the Formal Letter of Demand."

Section 228 of the NIRC states that:"SEC. 228. Protesting of Assessment. When theCommissioner or his duly authorized representative finds that

proper taxes should be assessed, he shall first notify the taxpayer ofhis findings: Provided, however, That a preassessment notice shallnot be required in the following cases:

XXX XXX XXX

The taxpayers shall be informed in writing of the law andthe facts on which the assessment is made; otherwise, theassessment shall be void.

Within a period to be prescribed by implement ing rules andregulations , the taxpayer shall be required to respond to saidnotice. If the taxpayer fails to respond, the Commissioner or hisdul y authorized representative shall issue an assessment based onhis findin gs. :

Such assessment may be protested administratively byfiling a request for reconsideration or reinvestigation withinthirty (30) days from receipt of the assessment in such form an dmanner as may be prescribed by implementing rules andregulations. Within sixty (60) days from filing of the protest, allrelevant supporting documents shall have been submitted;otherwise, the assessment shall become final.

I f the protest is denied in whole or in part, or is no t actedupon within one hundred eighty (180) days from submission ofdocuments, the taxpayer adversely affected by the decision orinaction may appeal to the Court of Tax Appeals within thirty (30)

l l


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DECISIONCTA EB No. 409 (CT A Case No. 7381)Page 12 of 19

days from receipt of the said decision, or from the lapse of the onehundred eighty (180)-day period; otherwise, the decision shallbecome final, executory and demandable." (Emphnsis supplied)

Applying suppletorily the provisions of the RQC,22 particularlySection 3, Rule 13 of the ROC, if the pxotest is filed by registered mail, thedate of the mailing as shown by the post office stamp on the envelope orthe registry receipt shall be considered as the date of its filing. As proof ofservice, Section 13 of the same Rule states that, if service is made by

registered mail, proof shall be made by the registry receipt issued by thel , . ~ mailing office.

In the instant case, respondent is resolute in saying that it filed itsprotest by registered mail on May 13, 2005. To prove its claim, respondentpresented the following:

1. Affidavit of Mr. June B. Rojas, paralegal of The Bengzon LawFirm, stating that he filed the "Protes t on the Formal Letterof Demand" by registered mail, with Registry Rece ip t No.22224, on May 13, 2005 at the Makati Central Post Office(Exhibit "K");

2. Affidavit of Ms. Candelaria A. Ponciano, employee ofrespondent stating that she received a copy of the "Protes ton the Formal Letter of Demand" on May 12, 2005 (Exhibiti/L");

3. Makati Central Post Offiqe Registry Receip t No. 22224(Exhibit " I"); and4. Makati Central Post Office Certification, dated April 11,

2006, with an attached Inquiry Form on Domestic RecordedMail (Exhibit '']").

22 Sec tion 4, Rule 1 of the Revised Rul es of Court.


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DECISIONCT'A EB No . 409 (CT'A Case No . 7381)Page 13 of19

Petitioner, on the other hand, alleges that respondent filed its protestonly on May 25, 2005 or after a lapse of forty (40) days from receipt of theFinal Assessment Notice and Formal Letter of Demand. No evidence waspresented by petitioner to prove his claim.

As between the two, We are inclined to rule that the evidencepreponderates in favor of the respondent.

Contrary to the view of petitioner, the Certification issued by theMakati Central Post Office is admissible in evidence. Having been issuedby a government office, and certified to by an authorized personnelclothed with authority and duty to issue such Certification, it is anexception to the hearsay r u l ~ as p r o v i d ~ d in Section 44, Rule 13023 of theROC, which should be read in conjunction with Section 23, Rule 13224 ofthe same Rules. Simply put, a certification, without the testimony of theperson giving the certification, is sufficient and competent evidence. 25

Furthermore, it is well settled that the evidentiary nature of publicdocuments must be sustained in the absence of strong, complete, andconclusive proof of its nullity.26 In this case, petitioner did not present anyevidence to show that the contents of the Certification issued by the23 SEC. 44 . Entries in official reco rds.-E ntri es in o ffi cial reco rds mad e in the perform ance of hi s du ty by apublic officer of the Philippines, or by a person in the p erformance of a duty specially enj oined by la w, arepri 111a aci e ev idence of the fa cts therein s ta ted . (38 )24 SEC. 23. Public dow /Ients as evide 11 ce. - DLK um ents consistin g of entries in public reco rd s made in theperformance of a duty by a public o ffi cer are prilllrt .{tl cie evidence of the facts therein sta ted . A ll other publicdocuments are evidence, even against a third person, ot the fac t which gave rise to their executi on and of thedate of the Ia tter. (24a) 125 Escobar v. Luna, G.R. No . 169204, March 23, 2007, 51 9 SCRA 1.26 Si erra v. Court of App eals, e t. a!., G.R. No. '.!0270, July 2-, 1992, 211 SCRA 785.

13


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DECISIONCTA EB No. 409 (CT A Case No. 7381)Page14of19

Makati Central Post Office are false . Neither did petitioner present anyevidence to prove that the person who issued the Certification was notauthorized to do so, nor did he present evidence to show that the personwho issued the same acted beyond her authority.

Under the circumstances, We find Registry Receipt No. 22224, theaffidavit of Mr. June B. Rojas, and the Certification issued by the MakatiCentra l Post Office sufficient to show that the "Pro test on the FormalLetter of Demand" was timely filed.The 20% discount on purchase of -.medicines granted by respondent tosenior citizens in the year 2001should be treated as a tax credit

Petitioner is of the view that the term "tax credit" under RA 7432means a deduction from the establishment's gross income and not from itsincome tax liability pursuai1t to RR '2-94. To support his position,petitioner alludes to the enac tment of Republic Act No. 9257 ("RA 9257"),w hich amended RA 7432. Under Section 4 of the new law, anes tablishment may claim the discounts granted as " tax deductions" basedon the net cost of the goods sold or services rendered; provided that, thecos t of the discount shall be allowed as deduction from gross income forthe same taxable year that the discount is granted. In view of thisdevelopment, petitioner believes that there is a need to revisit thejurisprudence ci ted by Court in Division in its Decision.


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DECISIONCT A EB No . 409 (CT A Case No. 7381)Page 15 of 19

We are not persuaded.Indeed, with the effectivity of RA 9257 on 21 March 2004, there is

now a new tax treatment of senior citizens' discount granted by all coveredestablishments. The discount is now considered as a deductible expensefrom gross income and no longer as a tax credit.27 However, since thepresent case covers the taxable year 2001, the old law (RA 7432) should

Iapply and not RA 9257, as it cannot be applied retroactively.Section 4 (a) of the old law states that:

"SECTION 4. Privileges for the Senior Citizens. - Thesenior citizens shall be entitled to the following:

a) the grant of twenty percent (20rYo ) discount from allestablishments relative to utilization of transportation services,hotels and similar lodging es tablishment, restaurants andrecrea tion cen ters and purchase of medicine anywhere in thecountry: Provided, That private establishments may claim the costas tax credit;" (Emp!Jnsis supplied)It is clear from the wordings of the law that the 20% discount

required by the RA 7432 to be given to senior citizens is a tax credit, not adeduction from the gross sales of the establishment concerned as petitionerwants it to be. RR 2-94 from which petitioner draws its definition of theterm "tax credit" may not prevail over the clear provision of the law. In astring of cases,28 the Supreme Court has declared RR 2-94, which considers

27 Commissioner of Intern al Revenue v. Ce,ntra l Luzon Drv,g Corporation, G.R. No. 159610, June 12, 2008,554 SCRA 398.28 Commissioner of Interna l Revenu e v. Central Luzo n Drug Corporat ion, supra, at note 27; M.E. HoldingCorporation v. Court of Appeals, G.R. No. 160193, Ma rch 3, 2008, 547 SCRA 389; Commissioner of InternalRev enu e v. Bicolandia Drug Corp orati on, G.R. No. 148083, Jul y 21 , 2006, 496 SCRA 176; Commi ssioner ofInternal Revenue v. Cent ral Lu zon Drug Corp ora tion, G.R. No. 1485 12, June 26, 2006, 492 SCRA 575; an d

1S


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DECISIONC f A EB No . 409 (CfA Case No . 7381)Page 16 of1 9

such discount as mere deductions to the taxpayer's gross income or grosssales, null and void for failing to conform to the law it sou ght toimplement.

To quote the Supreme Court, " If the words of the law are clear,plain, and free of ambigui ty, it must be given its literal meaning andapplied wi thout any interpretation. Hence, the senior citizens' discountmay be claimed as a tax credi t and not as a refund." 29

Premises considered , We affirm the ruling of the Court in Divisiontha t the 20% sales di scounts granted to qu alified senior citizens should betreated as tax credits and not as mere tax deductions from gross income .3The sale of phannacydntgs/medicines to in-patients isexempt from VAT under Section 109(l ) of the NIRC

IIPetitioner is adamant that the sale of drugs and medicines to in-

patients is not exempt from VAT because said transaction does not fallunder the phrase "hospital services."

Relying on Section 106 (A) (1) of the NIRC, petitioner argues thatdrugs are considered goods and not services, as they are tangible itemssubject to pecuniary estima tion. For this reason, the sale of pharmacydrugs/medicines to in-pa tients should not be included in the exemption

Co mmissioner of Internal Revenu e v. Centra l Lu:wn Drug Corpora tion, G. R. No. 159647, Apri l l 5, 2005, 456SCRA414.29 Commi ssioner of Interna l Reve nu e v. Centr al Luzon Drug Co rpora tion, ,;uprn, at note 27.30 Rollo, p. 38.

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DECISIONCfA EB No . 409 (C fA Case No . 7381)Page 17 of 19

provided for in Section 109 (l) of the NIRC as this pertains to "hospitalservices" only.

In response to this argumen t, respondent cites BIR Ruling datedApril 6, 2005,31 issued by then BIR Commissioner Jose Mario Bufiag, thedispositive portion of which rea ds :

"WHEREFORE, in view of the foregoing, th is Office holds thatthe pharmacy sales by PSI to in-patients are exempt from VATpursuant to Section 109 (l) of the Tax Code of 1997. Accordingly,being a VAT exemp t transaction, PSI need no t reflect in its VATreturn the aforesaid sales to in-patients. But the same shouldnevertheless be properly accounted for and declared as part ofpatients' services inc01ne in computing the income tax of PSI and inthe preparation of its audited financial sta tements."The said ruling cited the decision of the Court of Appeals in S t.

Luke's Medical Center v . Court of Tax Appeals and Commissioner of InternalRevenue.32 In that case, the Court of Appeals r u ~ e d that the item "hospitalservices" in Section 103 (1)33 should include the sa le of drugs to in-patientsof the hospital because the maintenance and operation of a pharmacy ordrugstore by a hospital is a necessary and essen tial service or facilityIrendered by any hospital for its patients. The Court of Appeals furtherexplained that, "a person who resorts to the hospital for medical treatmentcan reasonably expect that the hospital would make available to itspatients immediate and prompt access not only to the services of doctors,nurses and allied medical personnel, but also to necessary laboratory3 1 Records, pp. 159- 161 , Exhibit "G. "32 Sup ra, at note 9.33 Presentl y Section 109 (!) of the NIRC.

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DECISIONCT A EB No. 409 (C TA Case No . 7381 )Page 18 of 19

services as well as medicines, drugs and pharmaceutical items which ared ispensable aids in practically any form of medical treatment and care ofpatien ts." I t went on to say that, "the sale of drugs or pharmaceuticalitems to in-patients of the hospital should be exempted from VAT becauseunlike the sale of retailing of drugs or .medicines by drugstores in general,the procuremen t of medicines an d pharmaceutical items from the hospitaldrugs tore or pharmacy amounts to t_he availment of service rendered ormade available by the hospital for its in-patients and no t simply thebuying of such goods."

Based on the foregoing disquisition, We hold that the sale ofpharmacy drugs/medicines to in-patients is included in the phrase"hospital service," and thus, exempt from VAT pursuant to Section 109 (I)of the NIRC, as amended.

All told, We find no reversible error that can be ascribed to the Courtin Division.

WHEREFORE, the instant Peti tion for Review IS herebyDISMISSED . Accordingly, the Decision dated March 17, 2008 and the

Resolution da ted July 11, 2008 are hereby A F F I ~ SO ORDERED .

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DECISIONCT A EB No. 409 (CTA Case No. 73.81)Pag e 19 of 19

WE CONCUR:

\ ~ ERNESTO D. ACOSTAPresiding Justice

Q ~ f ' : ; c . ~ ~ ~ S)..Cj'UANITO C. CASTANEDA;fR.Associate Justice

CAESAR A. CASANOVAAssociate Justice

'E ~ ~ . UAss ustice~ l ~ ~ OLGA PALANCA-ENRIQUEZ

Associate Justice

CERT I F I CAT ION: ,. .

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certifiedthat the above Decision has been reached in consultation w ith theInembers of the Court En Bnnc before the case was assigned to the writer ofthe opinion of this Court.

G - ,., L'(._.........._ " ' t"ERNESTO D. ACOSTAPresiding Justice

Documents

CIR v. Professional Services, Inc