G.R. No.

L-65773-74 April 30, 1987 Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that
COMMISSIONER OF INTERNAL REVENUE, ​petitioner, income from transportation is income from services so that the place where services are rendered
vs. determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, ​respondents. credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways. BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
MELENCIO-HERRERA, ​J.: The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC)
Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation income of BOAC from Philippine sources, and, accordingly, taxable.
(BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in
November, 1983 denying reconsideration. the Philippines or has an office or place of business in the Philippines.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United 3. In the alternative that private respondent may not be considered a resident foreign corporation but a
Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent
Transport Association (IATA). As such it operates air transportation service and sells transportation tickets (35%) of its gross income received from all sources within the Philippines.
over the routes of the other airline members. During the periods covered by the disputed assessments, it is Under Section 20 of the 1977 Tax Code:
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a (h) the term resident foreign corporation engaged in trade or business within the Philippines or having an
Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board office or place of business therein.
(CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or
landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, business within the Philippines and not having any office or place of business therein
although during the period covered by the assessments, it maintained a general sales agent in the It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of
selling BOAC tickets covering passengers and cargoes. ​1 its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
G.R. No. 65773 ​(CTA Case No. 2373, the First Case) arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was object of the business organization. 2​ "In order that a foreign corporation may be regarded as doing business
protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 within a State, there must be continuity of conduct and intention to establish a continuous business, such as
January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment the appointment of a local agent, and not one of a temporary character. 3​
under protest. BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline
Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid. company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
G.R. No. 65774 ​(CTA Case No. 2561, the Second Case) companies on the basis of their participation in the services rendered through the mode of interline
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4​ Those activities
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC). main activity, is the very lifeblood of the airline business, the generation of sales being the paramount
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a
dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation
but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years subject to tax upon its total net income received in the preceding taxable year from all sources within the
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request Philippines. ​5
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case Sec. 24. Rates of tax on corporations. — ...
before the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to (b) Tax on foreign corporations. — ...
1971. (2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign
This case was subsequently tried jointly with the First Case. country, except a foreign fife insurance company, engaged in trade or business within the Philippines, shall
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court be taxable as provided in subsection (a) of this section upon the total net income received in the preceding
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, taxable year from ​all sources within the Philippines.​ (Emphasis supplied)
Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus: cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source"
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. ​13
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades, ​business, It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered
commerce,​ sales​, or dealings in property, whether real or personal, growing out of the ownership or use of or by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to
interest in such property; also from interests, rents, dividends, securities, or the ​transactions of any business 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international
carried on for gain or profile, ​or gains, profits, and ​income derived from any source whatever (Sec. 29[3]; carriers are now taxed as follows:
Emphasis supplied) ... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross Philippine
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The billings. (Sec. 24[b] [21, Tax Code).
words 'income from any source whatever' disclose a legislative policy to include all income not expressly Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
exempted within the class of taxable income under our laws." Income means "cash received or its "gross Philippine billings," thus:
equivalent"; it is the amount of money coming to a person within a specific time ...; it means something ... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, international carrier doing business in the Philippines of passage documents sold therein, whether for
"income" refers to the flow of wealth. 6​ passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 The foregoing provision ensures that international airlines are taxed on their income from Philippine sources.
amounted to P10,428,368 .00. ​7 The 2-½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or
Did such "flow of wealth" come from "sources within the Philippines", percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.
The source of an income is the property, activity or service that produced the income. 8​ For the source of Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
income to be considered as coming from the Philippines, it is sufficient that the income is derived from appeal in ​JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is ​res judicata
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets,
produces the income. The tickets exchanged hands here and payments for fares were also made here in unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one
government. In consideration of such protection, the flow of wealth should share the burden of supporting place to another. It purports to tax the business of transportation. 14 Being an excise tax, the same can be
the government. levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the of the Philippines. The subject matter of the case under consideration is income tax, a direct tax on the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket income of persons and other entities "of whatever kind and in whatever form derived from any source." Since
to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and the two cases treat of a different subject matter, the decision in one cannot be ​res judicata ​to the other.
conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
into the relationship. ​9 P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
property, and (6) sale of personal property, does not mention income from the sale of tickets for international SO ORDERED.
transportation. However, that does not render it less an income from sources within the Philippines. Section
37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of DIGEST
income listed therein be treated as income from sources within the Philippines. A cursory reading of the
section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income PRINCIPLE: ​"The source of an income is the property, activity or service that produced the income. For
may be so considered. " ​10 such source to be considered as coming from the Philippines, it is sufficient that the income is derived from
BOAC, however, would impress upon this Court that income derived from transportation is income for activity within the Philippines."
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
stand in the joint Decision under review. years 1959 to 1971. BOAC is a 100% British Government-owned corporation organized and existing under
The absence of flight operations to and from the Philippines is not determinative of the source of income or the laws of the United Kingdom, and is engaged in the international airline business. During the periods
the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in
case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the the Philippines. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although
income. ​11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the during the period covered by the assessments, it maintained a general sales agent in the Philippines —
revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC
if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", ​12 it tickets covering passengers and cargoes. The CTA sided with BOAC citing that the proceeds of sales of
BOAC tickets do not constitute BOAC income from Philippine sources since no service of carriage of
passengers or freight was performed by BOAC within the Philippines and, therefore, said income is not
subject to Philippine income tax. The CTA position was that income from transportation is income from
services so that the place where services are rendered determines the source.

ISSUE: ​Are the revenues derived by BOAC from sales of tickets for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable?

HELD: ​Yes. The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.