CIR v Central Luzon Drug (2008)

FACTS:
Respondent is a domestic corporation engaged in retail of medicines and other pharmaceutical products. In
1997, it operated 8 drugstores under the business name Mercury Drug. Pursuant to RA 7432 and RR 2-94
issued by BIR, respondent granted 20% sales discount to qualified senior citizens on their purchases of
medicines. The sales discount granted to senior citizens totaled P2,798,508.

Respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil income tax liability due to net
loss incurred from business operations of P2,405,140. Respondent filed with CIR a claim for refund/credit of
overpaid income tax for taxable year 1997 in the amount of P2,660,829 alleging that the overpaid tax was a
result of wrongful implementation of RA 7432. Respondent treated the 20% sales discount as a deduction from
gross sales in compliance with RR 2-94, instead of treating it as tax credit under RA 7432.

Respondent filed petition for review with CTA, and reasoned that RR 2-94 is a mere implementing
administrative regulation which cannot modify, alter or amend the clear mandate of RA 7432 thus RR 2-94 is
without force and effect.

CIR stated that the construction given to a statute by a specialized administrative agency like BIR is entitled to
great respect. So when RA 7432 allowed senior citizens discounts to be claimed as tax credit, it was silent as
to the mechanics of availing the same. For clarification, BIR issued RR 2-94 and defined tax credit as a
deduction from the establishments gross income and not from its tax liability, in order to avoid an absurdity that
is not intended by the law.

CTA ordered CIR to issue tax credit certificate in the amount of P2,376,805.63 in favor of respondent. CTA
stated that it has consistently ruled that the 20% senior citizens discount should be treated as a tax credit
instead of a mere deduction from gross income. CA affirmed CTA decision.

Issue: Whether 20% discount to senior citizens granted by taxpayer under the Expanded Senior Citizens Act
or RA 9257 (which amended RA 7432) is in the nature of a tax deduction or tax credit?

Held: TAX DEDUCTION

RA 9257 now specifically provides that all covered establishments may claim the senior citizens discount as a
tax deduction. On February 26, 2004, Expanded Senior Citizens Act of 2003 (RA 9257) was signed into law
and became effective on March 21, 2004. According to Sec. 4 (a) the establishments may claim the discounts
granted as tax deduction. Contrary to provision in RA 7432 where senior citizens discount granted by all
covered establishments can be claimed as tax credit, RA 9257 now specifically provides that this discount
should be treated as a tax deduction.