MERCURY DRUG CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE- Tax Credit

FACTS:

Mercury Drug granted 20% sales discount to qualified senior citizens on their purchases of medicines. They subsequently filed a refund for taxable years 1993 and 1994 given that the then prevailing rule allowed that the sales discounts be claimed as tax credits.

ISSUE:

Is the claim for tax credit to be based on the full amount of the 20% senior citizen discount or the     acquisition cost of the item sold?

HELD:

The tax credit should be equivalent to the actual 20% sales discount granted to the senior citizens. The previous ruling of the CTA that the tax credit is based  only on the “cost of the discount” which was interpreted to cover only direct acquisition cost, excluding administrative and other incremental costs, was struck down by the Court.

N.B. The March 3, 2008 case of M.E. Holdings Corporation vs. CIR & CTA clarified that the rule will be --  (i) prior to March 21, 2004 (effectivity of Expanded Senior Citizens Act) the discounts are treated as tax credit; (ii) after March 21, 2004 the same are treated as deductions.