G.R. No. 164050; July 20, 2011
MERCURY DRUG CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Pursuant to Republic Act No. 7432 (the Senior Citizens Act), 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 years April to December 1993 and calendar year 1994, the total amounts of the discounts granted were ₱3,719,287.68 and ₱35,500,593.44, respectively. Petitioner claimed these amounts as deductions from its gross income. Subsequently, realizing that the law allowed a tax credit for such discounts, petitioner filed claims for refund with the Commissioner of Internal Revenue (CIR) for ₱2,417,536.00 for 1993 and ₱23,075,386.00 for 1994. The CIR failed to act on the claims, prompting petitioner to file a petition for review with the Court of Tax Appeals (CTA). The CTA partially granted the petition, declaring that the discount should be treated as a tax credit, not a mere deduction. However, it found evidentiary discrepancies and, applying a formula from a Court of Appeals decision, computed the allowable tax credit based on the “cost” of the discount, not its full face value. The formula used was: (Cost of Sales / Gross Sales) x Amount of 20% Discount. This resulted in a reduced refundable amount for 1993 and a finding of a tax liability for 1994, thus denying the 1994 claim. The CTA later modified its ruling, increasing the total creditable amount for both years. The Court of Appeals affirmed the CTA’s modified decision. Petitioner elevated the case to the Supreme Court, arguing primarily that the full amount of the discount granted should be treated as a tax credit.

ISSUE

Whether the term “cost” in Section 4(a) of Republic Act No. 7432, which allows the “cost” of the discount granted to senior citizens to be treated as a tax credit, refers to the full amount of the sales discount given or only to the actual cost incurred by the seller (i.e., the cost of goods sold component of the discount).

RULING

The Supreme Court DENIED the petition and AFFIRMED the decision of the Court of Appeals. The Court held that the term “cost” in Section 4(a) of R.A. No. 7432 refers to the actual cost incurred by the establishment, not the total amount of the sales discount given. The tax credit is limited to the net cost of the discount, which is the actual expense or loss shouldered by the establishment, excluding the mark-up or profit component. The Court adopted the formula used by the CTA, derived from the Court of Appeals decision in CIR v. Elmas Drug Corporation, which calculates the creditable cost as: (Cost of Sales / Gross Sales) x Amount of 20% Discount. This formula accurately reflects the establishment’s actual cost of the sold goods to which the discount was applied. The Court cited the principle of stare decisis and its own subsequent rulings in CIR v. Central Luzon Drug Corporation and CIR v. Phil. Phosphate Fertilizer Corp., which consistently upheld this interpretation. The tax credit mechanism is intended to compensate establishments for the actual cost incurred in complying with the law, not to provide a windfall or reimburse them for the profit they would have earned on the discounted sale.