MERCURY DRUG CORPORATION v.

COMMISSIONER OF INTERNAL REVENUE (CIR)

G.R. No. 164050 July 20, 2011

 Republic Act (RA) No. 7432 is a piece of social legislation aimed to grant benefits and
privileges to senior citizens. Among the highlights of this Act is the grant of 20% sales
discounts on the purchase of medicines to senior citizens. The burden imposed on private
establishments amounts to the taking of private property for public use with just
compensation in the form of a tax credit.

 RA No. 7432 had undergone two (2) amendments; first in 2003 by RA No. 9257 and most
recently in 2010 by RA No. 9994. The 20% sales discount granted by establishments to
qualified senior citizens is now treated as tax deduction and not as tax credit. The
present case covers the taxable years 1993 and 1994, thus, RA No. 7432 applies.

Facts:
Pursuant to RA 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 were claimed by
petitioner as deductions from its gross income.

Realizing that RA 7432 allows a tax credit for sales discounts granted to senior citizens,
petitioner filed with the CIR claims for refund. When the CIR failed to act upon petitioner’s
claims, the latter filed a petition for review with the CTA.

The CTA favored petitioner by declaring that the 20% sales discount should be treated as
tax credit rather than a mere deduction from gross income. The CTA however found some
discrepancies in the cash slips submitted by petitioner; hence, it disallowed the claim for
taxable year 1994 and some portion of the amount claimed for 1993. The CTA 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. The CTA modified its earlier ruling by
increasing the creditable tax amount and granted the claim for refund for the taxable year
1994 on the basis of the cash slips submitted by petitioner.

Petitioner elevated the case to the CA and sought a partial modification of the CTA
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.
The CA sustained the CTA resolution. Citing the CA cases of CIR v. Elmas Drug Corporation
and Trinity Franchising and Management Corp. v. CIR, the appellate court interpreted the
term “cost” as used in Section 4(a) of RA No. 7432 to mean the acquisition cost of the
medicines sold to senior citizens. The CA denied motion for partial reconsideration filed by
the petitioner; hence, this petition.

Issue:
Should the claim for tax credit be based on the full amount of the 20% senior citizens’
discount or the acquisition cost of the merchandise sold?

Held:
The claim for tax credit should be based on the full amount of the 20% senior citizens’
discount.

Preliminarily, Republic Act (RA) No. 7432 is a piece of social legislation aimed to grant
benefits and privileges to senior citizens. Section 4(a) of RA No. 7432 provides that senior
citizens shall be entitled to the grant of 20% discount from all establishments relative to
the utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the country;
provided, that private establishments may claim the cost as 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 a tax credit.

The foregoing proviso 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.

In Bicolandia Drug Corporation (Formerly Elmas Drug Corporation) v. CIR, the Supreme
Court construed the term “cost” as referring to the amount of the 20% discount
extended by a private establishment to senior citizens in their purchase of medicines. The
CA’s decision in CIR v. Elmas Drug Corporation dated 19 October 1999 was relied upon by
the CA as basis for its interpretation of the term “cost” when it decided the instant case in
20 October 2003. As correctly pointed out by the OSG, said case had been elevated to the
Supreme Court and had been eventually resolved with finality on 22 June 2006 in the case
entitled Bicolandia Drug Corporation v. Commissioner of Internal Revenue.

The Supreme Court reiterated this ruling in the 2008 case of Cagayan Valley Drug
Corporation v. CIR, by holding that petitioner therein is entitled to a tax credit for the full
20% sales discounts it extended to qualified senior citizens. This holds true despite the fact
that petitioner suffered a net loss for that taxable year.
The most recent case in point is M.E. Holding Corporation v. CA which bears a strikingly
similar set of facts and issues with the case at bar. 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 CIR 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. The Supreme Court 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 RA 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. As the Supreme Court have likewise declared in CIR v.
Central Luzon Drug Corporation, this case covers the taxable years 1993 and 1994,
thus, RA No. 7432 applies.

The petition is granted. The assailed CA decision and resolution were reversed and set
aside.