BICOLANDIA DRUG CORPORATION, petitioner vs.

COMMISSIONER OF INTERNAL REVENUE,

respondent. G.R. No. 142299, June 22, 2006

Petitioner claimed the 20% discount granted to senior citizens as a deduction from its gross
income thereby giving it a tax relief equivalent to 35% (corporate income tax rate) of the deduction. Later
if filed a claim for refund of overpaid income tax due to the error in computation of its tax liability
maintaining the position that the discounts should have been treated pursuant to R.A. No. 7432.

The CTA ordered the refund but on lesser amount. The CTA made a recomputation of the income
tax liability of the petitioner by allowing as tax credit the “cost of the discount” only which is computed by
getting the percentage of cost of sales to total sales and multiplying it with total discounts granted. This
ruling was affirmed by the CA.

Issues: What is the amount allowed as tax credit? b) Can the discount be claimed by the taxpayer as a
tax refund?

A. Reading of the provisions of Section 4(a) of R.A. No. 7432, is as follows:

“Sec. 4. Privilege for the Senior Citizens – The senior citizens shall be entitled to the
following:

a) The grant of twenty percent (20%) discount from all establishments relative to
utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreations centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax credit.”

The term “cost” when applied to the discounts granted, is susceptible to various interpretations.
The BIR by virtue of RR No. 2-94 interpreted it to mean the tax cost which is the very reason why it was
treated as a deduction from gross income. The economic effect of this treatment is the same as allowing
35% (tax cost) of the discount as tax credit.

The CTA, on the other hand, interpreted it to be the cost of the goods sold corresponding to the
discounts to the extent that they could have increased the sales if no discounts were granted. Said in
another way, were it not for the discounts there could have been additional sales in the same amount as
the discounts, so the cost is the cost of goods sold corresponding to these additional sales were it not for
the discount. The CTA, in determining the amount allowed as a tax credit, came out with this formula, viz:

Total Cost of Goods Sold x Total discounts granted = Cost of Discount

Total Sales

The SC is not convinced with either of the two interpretations advances. The SC ruled that the
entity granting the discount is entitled to claim the entire amount of discount. The “cost” referred to in
Section 4(a) of R.A. No. 7432 refers to the amount of the 20% discount extended to senior citizens in their
purchase of medicines. This amount shall be applied as a tax credit, and may be deducted from the tax
liability of the entity concerned. If there is no current tax due, of the establishment reports a net loss for
the period, the credit may be carried over to the succeeding taxable year. (CIR vs. Central Drug Corp.
April 15, 2005, 456 SCRA 414)

Anent the second issue, the SC ruled that the remedy of refund is not available. The law
expressly provides that the discount given to senior citizens may be claimed as a tax credit, and not a
refund. Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its
literal meaning and applied without attempted interpretation. (Fianza vs. People’s Law Enforcement
Board, G.R. No. 109638, March 31, 1995, 243 SCRA 165). Accordingly, the SC directed issuance of tax
credit certificates to petitioner instead of the refund prayed for. arellano law

This bring us to the issue of whether what is being asked to be refunded is the “discount” or the
overpaid income tax. Which is to be applied first in paying the income tax liability of the petitioner, the tax
credit or the amount of money tendered? It must be born in mind that there was an overpayment of the
tax because of the re-computation that was made, treating this time the discount as tax credit instead of
treating of it as deduction from gross income. The amount of the tax credit however, is not sufficient to
offset petitioner’s income tax hence, a substantial amount was also paid for the years covered. Were it
not for wrong treatment of the discount, there could have been no overpayment made. Will the
overpayment not constitute an erroneously paid tax thereby giving the taxpayer the right to file a claim for
refund under Section 204 and 229 of the NIRC?

Another important point in this case is – if the discount is not allowed to be refunded but it is
allowed to be refunded but it is allowed to be granted as a tax credit certificate, as in this case, then there
seems to be a circumvention of the rule laid down in Central Drug (2005). This is because a tax credit
certificate can not be used for payment of other tax liabilities or at the option of the owner can sale the
same. Will his not be equivalent to the grant of cold cash to the taxpayer and therefore the effect is the
same as that of a refund. What is not allowed directly should not be allowed indirectly. Or it might be that
the SC is of the impression that tax credit certificate issued will only be used for future income tax liability
which seems to be the inclination in the succeeding case.