CAGAYAN VALLEY DRUG CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Cagayan Valley Drug Corporation versus Commissioner of Internal Revenue

The Case

This is a petition for review brought by Cagayan Valley Drug Corporation against the Commissioner of Internal Revenue, asking the Supreme Court to set aside a Resolution of the Court of Appeals that had dismissed the corporation's appeal on a procedural technicality. The corporation, which operates two drugstores under the name Mercury Drug, had granted the twenty percent sales discount to qualified senior citizens in 1995 and then claimed the amount as a tax credit. The case matters for two reasons. First, it settles who within a corporation may sign the verification and certification against forum shopping. Second, it confirms that a drug company that suffers a net loss may still claim the senior citizen discount as a tax credit, even though it paid no tax for that year.

Procedural History

The corporation filed a claim for tax refund or tax credit with the Bureau of Internal Revenue. When the Bureau did not act, the corporation filed a petition for review before the Court of Tax Appeals to preserve its claim within the two year prescriptive period. The Court of Tax Appeals ruled that the discount should be treated as a tax credit and not as a deduction from gross sales, and that the revenue regulation saying otherwise was invalid. But it still dismissed the claim, because the corporation had suffered a net loss in 1995 and had paid no tax. The corporation's motion for reconsideration was denied.

The corporation then went up to the Court of Appeals. That court dismissed the petition on procedural grounds, holding that the President who signed the verification and certification against forum shopping had not shown that the board of directors had authorized him to do so. The corporation came to the Supreme Court by petition for review under Rule 45.

Facts

Cagayan Valley Drug Corporation is a duly licensed retailer of medicine and other pharmaceutical products. It operates two drugstores, one in Tuguegarao, Cagayan, and the other in Roxas, Isabela, under the name and style of Mercury Drug.

In 1995, the corporation granted twenty percent sales discounts to qualified senior citizens on their purchases of medicine, pursuant to Republic Act Number 7432 and its implementing rules. Following Revenue Regulation Number 2-94, the corporation treated those discounts as deductions from gross sales in order to arrive at net sales, instead of treating them as a tax credit as Section 4 of Republic Act Number 7432 provides.

On December 27, 1996, the corporation filed with the Bureau of Internal Revenue a claim for tax refund or tax credit of the full amount of the discounts it had granted for 1995, allegedly totaling 123,083 pesos. When the Bureau did not act, the corporation filed a petition for review before the Court of Tax Appeals on March 18, 1998. The Court of Tax Appeals agreed that the discount was a tax credit, but denied the claim because the corporation had suffered a net loss and had paid no tax in 1995. The Court of Appeals then dismissed the appeal because the President who signed the verification and certification had not shown board authority.

Issues

• Whether or not the President of a corporation may sign the verification and certification against forum shopping without the approval of the board of directors.
• Whether or not the Court of Tax Appeals committed reversible error in denying the corporation's claim for tax credit on the ground that it had suffered a net loss in 1995.

Applicable Provisions

Section 4 of Republic Act Number 7432 provides:

Section 4. Privileges 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 recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit.

This is the provision that grants the drug company the right to claim the discount as a tax credit, and the Court reads it as containing no qualification about net loss or prior tax payment.

Ruling

On the first issue, the Court held that the Court of Appeals erroneously relied on the Premium Marble case, because the issue there was which of two rival boards had authority to sue, not who may sign a verification. The Court noted that the rules on verification and certification are silent as to who the authorized signatory of a juridical person should be. It then listed the officials who may sign without a board resolution: the Chairperson of the Board, the President of a corporation, the General Manager or Acting General Manager, a Personnel Officer, and an Employment Specialist in a labor case. The rationale is that such officers are in a position to verify the truthfulness and correctness of the allegations in the petition. The Court also said that appending the board resolution is the better procedure, but here the corporation substantially complied, because the board resolution was submitted albeit belatedly, the President was in a position to verify the allegations, and he had signed the original petition before the Court of Tax Appeals.

On the second issue, the Court held that a net loss does not bar the tax credit. It quoted the very words of the law, which grants the credit without any qualification, and explained that while a tax liability is essential to the use of a tax credit, prior tax payments are not. The credit may be applied against a future tax liability. Since the Court of Tax Appeals had not disallowed the 123,083 pesos claimed, the Court granted it as a tax credit.

Doctrine

First, the President of a corporation may sign the verification and certification against forum shopping without a board resolution, because the President is in a position to verify the truthfulness and correctness of the allegations in the petition. The submission of a board resolution is the better procedure, but its belated submission, together with the President's signing of the original petition, amounts to substantial compliance.

Second, under Section 4 of Republic Act Number 7432, a private establishment may claim the twenty percent senior citizen discount as a tax credit, and a net loss for the taxable year does not preclude the grant of that credit. Prior tax payment is not required, because the credit may be deducted from a future tax liability.

Disposition

The petition was granted. The Court annulled and set aside the Court of Appeals Resolution and reversed and set aside the Court of Tax Appeals Decision, and ordered the Commissioner of Internal Revenue to issue a Tax Credit Certificate in favor of the corporation in the amount of 123,083 pesos, with no costs.

Remember This

Memorize this line: a net loss does not bar the grant of a tax credit under Republic Act Number 7432, because prior tax payment is not required. Examiners use this case to test the authority of a corporate President to sign the verification and certification against forum shopping, and to test whether a losing drug company may still claim the senior citizen discount as a tax credit.