Facts: Pursuant to Republic Act No. 7432, petitioner Mercury Drug Corporation, a retailer of pharmaceutical products, granted a 20% sales discount to qualified senior citizens on their purchases of medicines. For the taxable year April to December 1993 and January to December 1994, the amounts representing the 20% sales discount totalled P3,719,287.68 and P35,500,593.44, respectively, which petitioner claimed as deductions from its gross income.
Realizing that Republic Act No. 7432 allows a tax credit for sales discounts granted to senior citizens, petitioner filed with the CIR claims for refund. CIR failed to act. Petitioner filed a PetRev with the CTA. CTA favored petitioner by declaring that the 20% sales discount should be treated as tax credit rather than a mere deduction from gross income. However, the CTA found some discrepancies and irregularities in the cash slips submitted by petitioner as basis for the tax refund. Hence, it disallowed the claim for taxable year 1994 and some portion of the amount claimed for 1993 by petitioner The conclusion of tax liability instead of tax overpayment pertaining to taxable year 1994 has the effect of negating the tax refund of Petitioner because the basis of such refund is the fact that there is tax credit. Under the circumstances, instead to tax credit, Petitioner has a tax liability of P5,032,113.72, hence the refund for the period must fail.”
CTA also stated that the claim for tax credit must be based on the actual cost of the medicine and not the whole amount of the 20% senior citizens discount. It applied the formula: cost of sales/gross sales x amount of 20% sales discount.
Petitioner moved for partial reconsideration. CTA modified its earlier ruling by increasing the creditable tax. CTA finally granted the claim for refund for the taxable year 1994 on the basis of the cash slips submitted by petitioner.
Petitioner sought a partial modification in the CA of the above resolution raising as legal issue the basis of the computation of tax credit. Petitioner contended that the actual discount granted to the senior citizens, rather than the acquisition cost of the item availed by senior citizens, should be the basis for computation of tax credit. CA sustained the CTA decision and dismissed the petition. Petitioner filed a motion for partial reconsideration but it was denied.
Issue: Whether the 20% discount is a tax credit or a tax deduction.
Held: Tax credit. The burden imposed on private establishments amounts to the taking of private property for public use with just compensation in the form of tax credit.
RA No. 7432 specifically allows the 20% senior citizens’ discount to be claimed by the private establishment as a tax credit and not merely as a tax deduction from gross sales or gross income. The law however is silent as to how the “cost of the discount” as tax credit should be construed.
The most recent case in point is M.E. Holding Corporation which bears a strikingly similar set of facts and issues with the case at bar. Both petitioners filed their respective income tax return initially treating the 20% sales discount to senior citizens as deductions from its gross income. When advised that the discount should be treated as tax credit, they both filed a claim for overpayment. The BIR on both occasions failed to act timely on the claims, hence they appealed before the Court of Tax Appeals. The CTA in M.E. Holding concedes that the 20% sales discount granted to qualified senior citizens should be treated as tax credit but it placed reliance on the CA’s decision in Commissioner of Internal Revenue v. Elmas Drug Corporation where the term “cost of the discount” was interpreted to mean only the direct acquisition cost, excluding administrative and other incremental costs. This was the very same case relied upon by the CA in the present case. We finally affirmed in M.E. Holding that the tax credit should be equivalent to the actual 20% sales discount granted to qualified senior citizens.
It is worthy to mention that Republic Act No. 7432 had undergone two (2) amendments; first in 2003 by Republic Act No. 9257 and most recently in 2010 by Republic Act No. 9994.
The 20% sales discount granted by establishments to qualified senior citizens is now treated as tax deduction and not as tax credit. This case covers the taxable years 1993 and 1994, thus, Republic Act No. 7432 applies.
Petitioner is entitled to a tax credit equivalent to the actual amounts of the 20% sales discount as determined by the CTA.
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