M.E. Holding Corporation vs. The Hon. Court of Appeals, Court of Tax Appeals, and The Commissioner of Internal Revenue

Under Section 4(a) of Republic Act No. 7432, a private establishment may claim the 20% senior citizen sales discount as a tax credit equal to the actual discount granted, not as a deduction from gross income or gross sales and not as a tax refund; Revenue Regulation No. 2-94, Section 2(i), which treated the discount as a deduction, is inconsistent with the statute and invalid. Claims for tax credit or refund are claims for exemption, construed strictissimi juris against the taxpayer, and belatedly offered cash slips not formally offered cannot be considered.

M.E. Holding Corporation is an establishment that granted 20% sales discounts to qualified senior citizens on purchases of medicines. Republic Act No. 7432, passed on April 23, 1992, granted such discounts and provided that private establishments may claim the cost as tax credit. The Bureau of Internal Revenue issued Revenue Regulation No. 2-94, Section 2(i), which characterized the discount as an amount deductible from gross income for income tax purposes and from gross sales for value-added or percentage tax purposes. The dispute concerns the proper tax treatment of the discount for taxable year 1995.

M.E. Holding Corporation is a corporation that, in taxable year 1995, granted 20% sales discounts to qualified senior citizens on purchases of medicines. Republic Act No. 7432, passed on April 23, 1992, entitled senior citizens to a 20% discount and provided that private establishments may claim the cost as tax credit. The Bureau of Internal Revenue issued Revenue Regulation No. 2-94 on August 23, 1993; Section 2(i) defined tax credit as the 20% discount, which "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes." M.E. thus treated the discount as deductions from gross income.

On April 15, 1996, M.E. filed its 1995 Corporate Annual Income Tax Return, claiming deductions amounting to PhP 603,424 for the 20% sales discount it granted. It filed the return under protest, however, arguing that under Section 4(a) of RA 7432 the discount should be treated as a tax credit, not as mere deductions under RR 2-94. On December 27, 1996, M.E. sent the Bureau of Internal Revenue a letter-claim dated December 6, 1996, stating that it overpaid income tax because of the Bureau's erroneous interpretation of Section 4(a). Because the Bureau did not act, and to toll the two-year prescriptive period, M.E. appealed to the Court of Tax Appeals, reiterating that the discount should be a tax credit and that RR 2-94, Section 2(i), was without effect for being inconsistent with RA 7432.

The Court of Tax Appeals ruled that the 20% sales discount should be treated as a tax credit, not as an item deduction from gross income or sales, because Section 4(a) of RA 7432 was unequivocal and RR 2-94 contravened it. On the amount, the independent auditor M.E. hired found that PhP 603,923.46 had been granted as sales discounts to qualified senior citizens, but M.E. failed to properly support the claimed discount with corresponding cash slips. The Court of Tax Appeals disallowed PhP 241,348.89 as unsupported, reduced the claim to PhP 362,574.57, and lowered the refundable amount to PhP 122,195.74.

M.E. moved for reconsideration on May 24, 2000, attributing its failure to submit and offer the cash slips to the inadvertence of its independent auditor, who failed to transmit the documents to M.E.'s counsel. It also argued that the tax credit should be based on the actual discount, not on the acquisition cost of the medicines. On July 11, 2000, the Court of Tax Appeals denied the motion, including M.E.'s prayer to present additional evidence consisting of duplicate copies of the cash slips allegedly not submitted by the auditor. In refuting M.E.'s contention, the Court of Tax Appeals applied the Court of Appeals ruling in CIR vs. Elmas Drug Corporation, which interpreted "cost of the discount" to mean only the direct acquisition cost, excluding administrative and other incremental costs.

M.E. elevated the matter to the Court of Appeals. The Court of Appeals dismissed the petition, blaming M.E. for its failure to present additional evidence and holding that forgotten evidence is not newly discovered evidence that can be presented to the appellate tax court even after decision. The Court of Appeals also interpreted "cost" as direct acquisition cost, warning that a broader interpretation would allow drugstores to pad costs. It cited CIR vs. Tokyo Shipping Co., Ltd. for the rule that claims for refund, being claims for exemption, are construed strictissimi juris against the taxpayer. The Court of Appeals denied reconsideration on September 24, 2003, and M.E. filed the instant petition for review.

• Tax Credit vs. Deduction: Petitioner argued that the 20% sales discount to senior citizens should be treated as a tax credit under Section 4(a) of RA 7432, not as a mere deduction from gross income as provided under RR 2-94, Section 2(i); it filed its return under protest and claimed that the regulation was without effect for being inconsistent with the statute.
• Evidence of Discount Amount: Petitioner maintained that the Court of Appeals gravely erred in not appreciating other competent evidence proving the amount of discounts granted to senior citizens, such as the Special Record Book required by the Bureau of Food and Drugs and the Special Record Book required under RR 2-94, and in relying solely on the cash slips.
• Belated Submission of Cash Slips: Petitioner argued that the Court of Appeals gravely abused its discretion in affirming the Court of Tax Appeals' denial of its motion to order and submit as documentary evidence the cash slips that the independent certified public accountant inadvertently did not turn over to petitioner's counsel; counsel relied on the auditor's representation, and the auditor, being an officer of the court commissioned by the Court of Tax Appeals, is presumed to have done his duty regularly.
• Meaning of "Cost": Petitioner contended that it is entitled, as a matter of law, to claim as tax credit the full amount of the sales discount granted to senior citizens, and that the tax credit should be based on the actual discount and not on the acquisition cost of the medicines.

• Tax Treatment of Senior Citizen Discount: Whether the 20% sales discount granted to qualified senior citizens under RA 7432 should be treated as a tax credit, as a deduction from gross income or gross sales, or as a tax refund.
• Evidence of Discount Amount: Whether the Court of Appeals gravely erred in not appreciating other competent evidence, such as the Special Record Books required by the Bureau of Food and Drugs and RR 2-94, and in relying solely on the cash slips to prove the amount of discounts granted.
• Belated Submission of Cash Slips: Whether the Court of Appeals gravely abused its discretion in affirming the Court of Tax Appeals' denial of M.E.'s motion to order and submit as documentary evidence the cash slips inadvertently not turned over by the independent certified public accountant.
• Meaning of "Cost": Whether the term "cost" under Section 4(a) of RA 7432 is equivalent only to acquisition cost.

• Tax Treatment of Senior Citizen Discount: Yes, as tax credit. RA 7432, Section 4(a), expressly allows private establishments to claim the cost as tax credit; RR 2-94, Section 2(i), treating it as a deduction, is inconsistent with the statute and invalid. The discount is not a tax refund.
• Evidence of Discount Amount: No. The Court of Appeals did not err in relying on cash slips; findings of fact affirmed by the Court of Appeals are binding, and the belatedly submitted cash slips were not formally offered. The special record books, being secondary evidence, could not corroborate disallowed evidence.
• Belated Submission of Cash Slips: No. Grave abuse of discretion was not shown; the Court of Appeals' refusal to consider the special record books in lieu of the unsubmitted cash slips was not capricious, whimsical, arbitrary, or despotic.
• Meaning of "Cost": No. The term "cost" refers to the actual amount of the 20% discount extended to senior citizens, not the theoretical acquisition cost of the medicines.

• Tax Treatment of Senior Citizen Discount: Section 4(a) of RA 7432 provides that senior citizens are entitled to a 20% discount and that private establishments may claim the cost as tax credit. RR 2-94, Section 2(i), defines tax credit but states that the discount shall be deducted from gross income and gross sales. The Court held that the regulation clashes with the clear language of RA 7432; an administrative issuance cannot prevail over the statute. The nullity of the implementing rule had already been settled in a string of cases. RA 7432 expressly provides for a tax credit, not a tax refund. The Court also noted that RA 9257 later changed the treatment to a tax deduction starting taxable year 2004.
• Evidence of Discount Amount: M.E. argued that special record books and testimonies could prove the discounts. The Court held that the exact amount is a factual matter; findings of fact of the trial court, especially when affirmed by the Court of Appeals, are binding absent overlooked, misunderstood, or misinterpreted facts, which was not present. The Rules of Court is of suppletory application in quasi-judicial proceedings. The Court of Tax Appeals correctly disallowed the belated cash slips under Rule 132, Section 34, which requires formal offer with a statement of purpose. The best evidence rule required the cash slips as the best evidence; the special record books are secondary evidence and cannot corroborate disallowed evidence. The inadvertence of the auditor was not excusable negligence, and the belated cash slips were not newly discovered evidence. Claims for tax refund or credit are claims for exemption, construed strictissimi juris against the taxpayer, and the proofs are strictly scrutinized.
• Belated Submission of Cash Slips: M.E. claimed grave abuse of discretion because the Court of Appeals denied the opportunity to submit the disallowed cash slips despite the auditor's affidavit of guilt for inadvertence. The Court held that grave abuse of discretion connotes capricious, whimsical, arbitrary, or despotic exercise of jurisdiction. The Court of Appeals could not have gravely abused its discretion when it refused to consider the special record books as substitutes for the unsubmitted cash slips; the cash slips were the best evidence and were offered only after the Court of Tax Appeals had rendered its decision. These factors negate whimsical or capricious exercise.
• Meaning of "Cost": M.E. contended that it was entitled to claim as tax credit the full amount of the sales discount granted. The Court agreed, citing Bicolandia Drug Corporation (formerly Elmas Drug Corporation) vs. Commissioner of Internal Revenue, where "cost" in Section 4(a) of RA 7432 was interpreted as the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines. The Government should fully shoulder the cost of the sales discount. The Court of Appeals' contrary interpretation of "cost" as theoretical acquisition cost was reversed and set aside. Thus, M.E. is entitled to a tax credit equivalent to the actual 20% sales discount it granted. With the disallowance of PhP 241,348.89 and the net allowed discount of PhP 362,574.57, the amount due as tax credit is PhP 151,201.71. Because RA 7432 provides for a tax credit, not a refund, the Commissioner of Internal Revenue was ordered to issue a tax credit certificate.

• Tax Credit for Senior Citizen Discounts under RA 7432 — Under Section 4(a) of RA 7432, private establishments may claim the 20% sales discount granted to qualified senior citizens as a tax credit. An implementing regulation that treats the discount as a deduction from gross income or gross sales is inconsistent with the statute and invalid. The Court applied this to hold that M.E. was entitled to a tax credit, not a deduction or refund.
• "Cost" as Actual Discount — The term "cost" in Section 4(a) of RA 7432 refers to the actual amount of the 20% discount extended by the establishment to senior citizens, not the theoretical or direct acquisition cost of the medicines. The Government fully shoulders the cost of the discount. The Court applied this to compute M.E.'s tax credit based on the actual discount granted.
• Tax Refund/Credit Claims as Claims for Exemption — Claims for tax refund or credit are in the nature of claims for exemption; the law is construed strictissimi juris against the taxpayer, and the proofs presented to entitle the taxpayer to the exemption are strictly scrutinized. The Court applied this to reject M.E.'s belated and unsupported cash slips.
• Formal Offer of Evidence and Best Evidence Rule — Under Rule 132, Section 34 of the Rules of Court, no evidence shall be considered unless formally offered with a statement of purpose. The best evidence must be adduced; secondary evidence is admissible only when the best evidence cannot be submitted. The Court applied this to disallow the cash slips offered only after the Court of Tax Appeals decision and to hold that the special record books could not substitute for them.
• Findings of Fact of Trial Court Affirmed by CA — Findings of fact of the trial court, particularly when affirmed by the Court of Appeals, are binding on the Supreme Court, except when the lower courts overlooked, misunderstood, or misinterpreted facts of weight that would affect the result. The Court found no such exception and declined to re-evaluate the evidence.
• Grave Abuse of Discretion — Grave abuse of discretion connotes capricious, whimsical, arbitrary, or despotic exercise of jurisdiction. The Court held that the Court of Appeals did not commit grave abuse in refusing to consider secondary evidence in lieu of unsubmitted best evidence.
• RA 9257 Prospective Change — Starting taxable year 2004, under RA 9257, the 20% sales discount granted to qualified senior citizens is treated as a tax deduction based on the net cost of goods sold or services rendered, no longer as a tax credit. The Court noted this statutory change but applied RA 7432 to taxable year 1995.

• "The 20% sales discount to senior citizens may be claimed by an establishment owner as tax credit. RA 7432, the applicable law, is unequivocal on this. The implementing RR 2-94 that considers such discount as mere deductions to the taxpayer's gross income or gross sales clearly clashes with the clear language of RA 7432, the law sought to be implemented." — This passage states the ratio decidendi on the invalidity of RR 2-94's deduction treatment and confirms that the discount is a tax credit under RA 7432.
• "In Bicolandia Drug Corporation (formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue, we interpreted the term 'cost' found in Sec. 4(a) of RA 7432 as referring to the amount of the 20% discount extended by a private establishment to senior citizens in their purchase of medicines." — This passage defines "cost" for purposes of the tax credit and is the controlling interpretation applied to M.E.'s claim.
• "We reiterate at this juncture that claims for tax refund/credit, as in the instant case, are in the nature of claims for exemption. Accordingly, the law relied upon is not only construed in strictissimi juris against the taxpayer, but also the proofs presented entitling a taxpayer to an exemption are strictissimi scrutinized." — This passage states the strictissimi juris rule for tax exemption claims and explains why M.E.'s unsupported cash slips were disallowed.
• "RA 7432 expressly provides that the sales discount may be claimed as tax credit, not as tax refund." — This passage clarifies the mode of relief and supports the modification from a refund to a tax credit certificate.

• Bicolandia Drug Corporation (formerly Elmas Drug Corporation) vs. Commissioner of Internal Revenue, G.R. No. 142299, June 22, 2006, 492 SCRA 159 — Controlling precedent; interpreted "cost" in Section 4(a) of RA 7432 as the actual 20% discount extended to senior citizens, not the theoretical acquisition cost, and was relied upon to reverse the Court of Appeals' interpretation.
• Commissioner of Internal Revenue vs. Bicolandia Drug Corporation, G.R. No. 148083, July 21, 2006, 496 SCRA 176 — Cited among the string of cases settling that RR 2-94 is inconsistent with RA 7432.
• Commissioner of Internal Revenue vs. Central Luzon Drug Corporation, G.R. No. 148512, June 26, 2006, 492 SCRA 575; G.R. No. 159647, April 15, 2005, 456 SCRA 414 — Cited in the same string of cases on the invalidity of the implementing rule's deduction treatment.
• Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995) — Cited for the rule that claims for refund, being claims for exemption, are construed strictissimi juris against the taxpayer.
• Xentrex Automotive, Inc. vs. Court of Appeals, G.R. No. 121559, June 18, 1998, 291 SCRA 66, 71 — Cited for the rule that findings of fact of the trial court, especially when affirmed by the Court of Appeals, are binding on the Supreme Court.
• Carlos Superdrug Corp. vs. Department of Social Welfare and Development (DSWD), G.R. No. 166494, June 29, 2007, 526 SCRA 130 — Cited for the treatment under RA 9257 of the senior citizen discount as a tax deduction beginning taxable year 2004.
• CIR vs. Elmas Drug Corporation, CA-G.R. SP No. 49946, October 19, 1999 — The Court of Appeals ruling applied by the Court of Tax Appeals, which interpreted "cost of the discount" as direct acquisition cost; later reversed and set aside by the Supreme Court in Bicolandia.

• Republic Act No. 7432, Section 4(a) — Senior citizens are entitled to a 20% discount, and private establishments may claim the cost as tax credit. The Court applied this to hold that the discount is a tax credit, not a deduction or refund, and that "cost" means the actual discount.
• Revenue Regulation No. 2-94, Section 2(i) — Defined tax credit but provided that the discount shall be deducted from gross income and gross sales. Held inconsistent with RA 7432 and without effect.
• Republic Act No. 9257, Section 4(a) — The Expanded Senior Citizens Act of 2003; from taxable year 2004, establishments may claim discounts as a tax deduction based on the net cost of goods sold or services rendered. Noted as a prospective change.
• Rules of Court, Rule 132, Section 34 — No evidence shall be considered unless formally offered with a statement of purpose. Applied to disallow the belatedly submitted cash slips.

Justices Quisumbing (Chairperson), Carpio, Azcuna, Carpio-Morales, and Tinga concurred. The text notes that Justice Quisumbing was on official leave and Justice Azcuna was an additional member per Special Order No. 485 dated February 14, 2008.