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

Perez, J. Facts: This case involves the interpretation of the word cost as found under Section 4(a) of Republic Act (RA) No. 7432 An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for other purposes. Petitioner Mercury Drug Corporation (MDC) is a retailer of pharmaceutical products which extended twenty percent (20%) sales discounts to qualified senior citizens, pursuant to RA No. 7432. From April to December 1993 and January to December 1994, MDCs 20% sales discounts amounted to P3,719,287,68 and P35,500,593.44, respectively. Said amounts were claimed by MDC as deductions from its gross income. Petitioner filed with the Commissioner of Internal Revenue (CIR) claims for refund in the amounts of P2,417,536.00 for 1993 and P23,075,386.00 for 1994, presenting a computation of its alleged overpayment of income tax. The CIR failed to act upon MDCs assertions, hence the latter filed a petition for review with the Court of Tax Appeals (CTA). The CTA handed down its decision, viz: WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, Revenue Regulations No. 2-94 of the Respondent is declared null and void insofar as it treats the 20% discount given by private establishments as a deduction from gross sales.

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Respondent is hereby ORDERED to GRANT A REFUND OR ISSUE A TAX CREDIT CERTIFI- CATE to Petitioner in the reduced amount of P1,688,178.43 representing the latter s overpaid income tax for the taxable year 1993. However, the claim for refund for taxable year 1994 is denied for lack of merit. The CTA further averred: Thus the cost of the 20% discount repre- sents the actual amount spent by drug corpora- tions in complying with the mandate of RA 7432. Working on this premise, it could not have been the intention of the lawmakers to grant these companies the full amount of the 20% discount as this could be extending to them more than what they actually sacrificed when they gave the 20% discount to senior citizens. (Underscoring supplied) The CTA issued on December 20, 2000 a Resolu- tion which modified its earlier ruling by increasing the creditable tax to P18,038,489.71 for the years 1993 and 1994. On the basis of the cash slips presented by MDC, the CTA finally acceded to the claim of refund for 1994 in the amount of P16,350,311.28. MDC elevated the case to the Court of Appeals (CA) raising the issue 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 bases for computation of tax credit. On October 20, 2003, the CA handed down its ruling sustaining the CTA. The latter interpreted the word cost as used in Section 4(a) of RA 7432 to mean the acquisition cost of the medicines sold to senior citizens. Issue: Where is the 20% discount granted under RA No. 7432, as amended, based? Held: The SC declared that the main issue under this case is to determine whether the claim for tax credit should be based on the full amount of the 20% senior citizens discount or the acquisition cost of the merchandise sold. The SC declared: Preliminarily, Republic Act 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 sales discounts on the purchase of medicines to senior citizens. Section 4 (a) of Republic Act No. 7432 reads: SEC. 4. Privileges for Senior Citizens. The senior citizens shall be entitled to the following: a) the grant of twenty percent (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; X x x.

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. X x x. In Bicolandia, we 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. X x x. We reiterated this ruling in the 2008 case of Cagayan Valley Drug 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 than taxable year. We finally affirmed in M.E. Holding that the tax credit should be equivalent to the actual 20% sales discount granted to qualified senior citizens. The SC mentioned that RA No. 7432 has under- gone two amendments. The first was in 2003 by RA No. 9257 and the second by RA No. 9994 in 2010. The SC stressed that the 20% sales discount granted by establishments to qualified senior citizens is now treated as tax deduction and not as a tax credit.

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The SC concluded:

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Based on the foregoing, we sustain peti- tioner s argument that the cost of discount should be computed on the actual amount of the discount extended to senior citizens. How- ever, we give full accord to the factual findings of the Court of Tax Appeals with respect to the actual amount of the 20% sales discount, i.e., the sum of P3,522,123.25. for the year 1993 and P34,211,769.45 for the year 1994. There- fore, petitioner is entitled to a tax credit equiva- lent to the actual amounts of the 20% sales discount as determined by the Court of Tax Appeals.

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PAGCOR vs. BIR: ISSUE : W/N PAGCOR IS EXEMPTED FROM VAT. YES

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.Facts:With the passage of Republic Act No. (RA) 9337, the PhilippineAmusement and Gaming Corporation (PAGCOR) has beenexcluded from the list of government-owned and -controlledcorporations (GOCCs) that are exempt from tax under Section27(c) of the Tax Code;PAGCOR is now subject to corporate income tax.The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by RA 9337 does not violatethe right to equal protection of the laws under Section 1, ArticleIII of the Constitution, because PAGCORs exemption from payment of corporate income tax was not based on classificationshowing substantial distinctions; rather, it was granted upon thecorporations own request to be exempted from corporateincome tax. Legislative records likewise reveal that the legislativeintention is to require PAGCOR to pay corporateincome tax.With regard to the issue that the removal of PAGCOR from theexempted list violates the non-impairment clause contained inSection 10, Article III of the Constitution which provides thatno law impairing the obligation of contracts shall be passed theSC explained that following its previous ruling in the case of Manila Electric Company v. Province of Laguna 366 Phil. 428(1999), this does not apply.Franchises such as that granted to PAGCOR partake of the natureof a grant, and is thus beyond the purview of the non-impairmentclause of the Constitution.As regards the liability of PAGCOR to VAT, the SC findsSection 4.108-3 of Revenue Regulations No. (RR) 16-2005,which subjects PAGCOR and its licensees and franchisees toVAT, null and void for being contrary to the National InternalRevenue Code (NIRC), as amended by RA 9337. According tothe SC, RA 9337 does not contain any provision that subjectsPAGCOR to VAT. Instead, the SC finds support to the VATexemption of PAGCOR under Section 109(k) of theTax Code, which provides that transactions exempt under international agreements to which the Philippines is a signatory or under special laws [except Presidential Decree No. (PD) 529] areexempt from VAT. Considering that PAGCORs charter, i.e., PD1869 which grants PAGCOR exemption from taxes is aspecial law, it is exempt from payment of VAT.Accordingly, the SC held that the BIR exceeded its authority insubjecting PAGCOR to VAT, and thus declared RR 16-05 nulland void insofar as it subjects PAGCOR to VAT for beingcontrary to the NIRC, as amended by RA 9337. PAGCOR is subject to income tax but remains exempt fromthe imposition of value-added tax. With the amendment by R.A. No. 9337 of Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the list of government corporations exempt for income tax,the legislative intent is to require PAGCOR to pay corporateincome tax. However, nowhere in R.A. No. 9337 is it providedthat PAGCOR can be subjected to VAT. Thus, the provision of RR No. 16-2005, which the respondent BIR issued to implementthe VAT law, subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. ( Philippine Amusement and Gaming Corporation vs. BIR, G.R. No. 172087, March 15, 2011) With the passage of Republic Act No. (RA) 9337, the PhilippineA m u s e m e n t a n d G a m i n g C o r p o r a t i o n ( P A G C O R ) h a s b e e n excluded from the list of government-owned and controlledcorporations (GOCCs) that are exempt from tax under Section27(c) of the Tax Code; PAGCOR is now subject to corporateincome tax. The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by RA 9337 doesnot violate the right to equal protection of the laws under Section1, Article III of the Constitution, because PAGCORs exemptionf r o m p a y m e n t o f c o r p o r a t e i n c o m e t a x w a s n o t b a s e d o n classification showing substa ntial distinctions; rather, it wasgranted upon the corporations own request to be exempted fromcorporate income tax. Legislative records likewise reveal that thelegislative intention is to require PAGCOR to pay corporateincome tax.With regard to the issue that the removal of PAGCOR from theexempted list violates the nonimpairment clause contained inSection 10, Article III of the Constitution which provides thatno law impairing the obligation of contractsshall be passed the SC explained that following its previousruling in the case of Manila Electric Company v. Province of Laguna 366 Phil. 428(1999), this does not apply. Franchises such as that granted toPAGCOR partake of the nature of a grant, and is thus beyond the purview of the non-impairment clause of the Constitution. Asregards the liability of PAGCOR to VAT, the SC finds Section4 . 1 0 8 3 o f R e v e n u e R e g u l a t i o n s N o . ( R R ) 1 6 - 2 0 0 5 , w h i c h subjects PAGCOR and its licensees and franchisees to VAT, nulland void for being contrary to the National Internal RevenueCode (NIRC), as amended by RA 9337.According to the SC, RA 9337 does not contain any provisionthat subjects PAGCOR to VAT. Instead, the SC finds support tothe VAT exemption of PAGCOR under Section 109(k) of the TaxC o d e , w h i c h p r o v i d e s t h a t t r a n s a c t i o n s e x e m p t u n d e r international agreements to which the Philippines is a signatory or under special laws [except Presidential Decree No. (PD) 529] areexempt from VAT. Considering that PAGCORs charter, i.e., PD1869 which grants PAGCOR exemption from taxes is aspecial law, it is exempt from payment of VAT. Accordingly, theS C h e l d t h a t t h e B I R e x c e e d e d i t s a u t h o r i t y i n s u b j e c t i n g PAGCOR to VAT, and thus declared RR 16-05 null and void insofar as it subjects PAGCOR to VAT for being contrary tothe NIRC, as amended by RA 9337. [Philippine Amusement andG a m i n g C o r p o r a t i o n ( P A G C O R ) v . t h e B u r e a u o f I n t e r n a l Revenue (BIR), et. al., GR 172087, March 15, 201

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Hence, respondent CIR was ordered to issue tax credit certificates (TCTs) in favor of MDC in the amounts of P2,289,381.71 for 1993 and P22,237,650.34 for 1994.