G.R. No. 142299 ; June 22, 2006
BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG CORPORATION), Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Petitioner Bicolandia Drug Corporation, a retail pharmaceutical business, granted a 20% sales discount to qualified senior citizens on medicine purchases from July 1993 to December 1994, pursuant to Republic Act (R.A.) No. 7432 (the Senior Citizens Act). In its annual income tax returns for 1993 and 1994, petitioner treated these discounts as deductions from its gross income. Subsequently, petitioner filed a claim for refund, contending it erred in treating the discounts as deductions. It argued that under Section 4 of R.A. No. 7432 , the discounts should be treated as a tax credit, which provides a greater tax benefit. Petitioner computed its claimed overpayment by applying a 65% differential between the full value of a tax credit and the benefit of a deduction.
The Commissioner of Internal Revenue opposed the claim, asserting that Revenue Regulations No. 2-94, which implemented R.A. No. 7432 , validly treated the discount as a deduction from gross sales for tax purposes. The Commissioner argued that the law’s use of the permissive term “may” did not confer an absolute right to a tax credit and that the implementing regulation’s contemporaneous construction deserved respect. The Court of Tax Appeals (CTA) initially ruled in favor of petitioner, holding that the law’s provision for a “tax credit” prevailed over the contradictory regulation, but it only allowed a credit based on properly documented discounts, computing specific amounts.

ISSUE

Whether the 20% sales discount granted to senior citizens under R.A. No. 7432 should be treated as a tax credit deductible from the tax due, as petitioner contends, or as a deduction from gross sales/income, as the Commissioner asserts under Revenue Regulations No. 2-94.

RULING

The Supreme Court ruled in favor of the petitioner regarding the proper treatment of the discount but denied the claim for a cash refund. The Court held that the clear and unambiguous language of Section 4 of R.A. No. 7432 states that the discount “may be claimed as a tax credit.” The term “tax credit” has a settled meaning in law: it is an amount subtracted directly from the tax liability to arrive at the total tax due. Revenue Regulations No. 2-94, which interpreted this as a deduction from gross sales, effectively amended the law, which it cannot do. An implementing regulation cannot alter, modify, or contradict the provisions of the statute it seeks to implement.
Therefore, the discount must be treated as a tax credit. The “cost” referred to in the law is the actual amount of the 20% discount granted, which shall be applied against the taxpayer’s income tax liability. If the credit exceeds the current tax due or if the establishment incurs a net loss, the excess may be carried over to the succeeding taxable years. However, the Court emphasized that the law provides for a tax credit, not a tax refund. Since the petitioner prayed for a cash refund, that specific plea was denied. The proper remedy is the issuance of a tax credit certificate, as originally directed by the CTA. The Court thus reinstated the CTA’s resolution ordering the issuance of tax credit certificates for the computed amounts.