NOREEN T.

CLARO

Commissioner of Internal Revenue, Petitioner, v. Central Luzon Drug

Corporation, Respondent, G.R. No. 159647 April 15, 2005.

FACTS.

The Central Luzon Drug Corporation (CLDC) is a domestic corporation

primarily engaged in retailing of medicines and other pharmaceutical products.
In 1997, CLDC filed its Annual Income Tax Return for taxable year 1996
declaring therein that it incurred net losses from its operations.

In 1998, CLDC filed with the Commissioner of Internal Revenue a tax

refund in the amount of ₱904,769.00 allegedly arising from the 20% sales
discount it granted to qualified senior citizens in compliance with R.A.7432.
Unable to obtain affirmative response, CLDC elevated its claim to the Court of
Tax Appeals via a Petition for Review.

At first CTA dismissed the petition ruling that a tax credit is improper.
However upon MR of CLDC, the CTA reversed this previous ruling and declared
that pursuant to Sec.229 of RA 7342, a tax credit is due to CLDC. This decision
by CTA was mainly based on the case of Central Luzon Drug Corporation vs.
Commissioner of Internal Revenue CA G.R. SP No. 60057 wherein it was ruled
that a tax credit is proper for taxes erroneously paid or illegally collected.

The Court of Appeals affirmed the decision of CTA hence the present
recourse by Petitioner CIR.

ISSUE.

Can CLDC, despite incurring a net loss, may still claim the 20 percent
sales discount as a tax credit?

RULING.

Yes.

Section 229 of RA 7342 entitles private establishment a tax credit to claim

the cost of the discount they granted to senior citizens for their purchases of
medicines. The tax credit therefore is not for erroneously paid or illegally
collected taxes.

Meanwhile, a tax credit should be differentiated from tax deduction. For a

tax credit to operate, a tax liability on the part of the taxpayer should be first
established. Tax credit is subtracted directly from one’s total tax liability. A tax
deduction is a mechanism "allowed by law to reduce income prior to the
application of the tax rate to compute the amount of tax which is due”. A tax
deduction takes place before the tax is computed.

As culled from the facts, CLDC filed its Annual Income tax Return for
taxable year 1996 in 1997 and only later on that it availed itself of the tax
credit. Verily, its availment of the tax credit is not premature.