CIR v British Overseas Airways Corporation

Appeal from a decision of the CTA setting aside CIRs assessment of deficiency income taxes against British Airways
from 1959 to 1967, 1968-1969 to 1970-1971.
British Overseas Airways Corporation is a 100% British Government-owned corporation organized and existing under
the laws of the United Kingdom.
o It engaged in the international airline business.
o It operates air transportation service and sells transportation tickets over the routes of the other airline
members.
For the periods of the disputed assessments, BOAC had no landing rights in the Philippines and not granted a CPCN
to operate in the Philippines.
It merely maintained a general sales agent in the Philippines (Warner Barnes and Co. and later Quantas Airways)
responsible for selling BOAC tickets covering passengers and cargo.

First CTA Case
In 1968 CIR assessed BOAC the amount of 2,498,350 Php for deficiency income tax from 1959-1963, which BOAC
protested.
Investigation resulted in the issuance of a new (modified) assessment for the years 1959-1967 which amounted to
858,307 Php.
o This was paid by BOAC under protest.
BOAC filed a claim for refund of the money they paid, which was eventually denied by the CIR.
o Before denial, BOAC already filed a petition for review with the CTA (this case) assailing the assessment and
praying for the refund of the amount.

Second CTA Case
In 1971, BOAC was assessed deficiency income taxes, interests and penalty from the fiscal years 68-69 and 70-71
in the amount of 549, 327 Php + (1,000 + 1,800) as penalities for violation of Sec 46 penalized under Sec 74 of the
NIRC.
BOAC requested that the assessment be set aside, but the CIR denied the request, as well as a request for
reconsideration that they subsequently filed.
BOAC then filed the Second Case before the CTA praying that it be absolved of liability for deficiency income tax for
1969 to 1971.

CTAs joint decision on the two cases
Reversed the CIRs denials for the setting aside of the assessments
Said that the proceeds of sales of BOAC passage tickets by their sales agent do not constitute income from Philippine
sources since no service of carriage of passengers or freight was performed by BOAC within the Philippines.
o Thus, not subject to Philippine income taxes.
Said that income from transportation is income from services so that the place where services are rendered
determines the source.
Hence this petition for Review on the decision of the CTA.
ISSUES + RULING

Under Section 20 of the 1977 Tax Code:

(h) the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or
business within the Philippines or having an of fice or place of business therein.
(i) The term 'non-resident foreign corporation' applies foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein.

Was BOAC, during the fiscal years in question, BOAC a resident foreign corporation doing business in the
Philippines or has an office or place of business in the Philippines and thus taxable on its income? YES.
No specific criterion as to what constitutes doing or engaging in or transacting business.
o In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character (Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon)
BOAC, during the periods for assessment, maintained a general sales agent in the Philippines engaged in the
selling and issuing of tickets, receiving fares, allocating the trips to airline companies.
o Such activities were in exercise of the functions which are normally incident to, and are in progressive
pursuit of the purpose of an international air carrier.
o Such is the very lifeblood of the airline business.
No doubt that BOAC was engaged in business in the Philippines.
Thus, subject to tax upon its total net income.
Does the revenue from sales of tickets by BOAC in the Philippines constitute income from Philippine sources
and taxable under income tax laws? YES.
Under Philippine tax laws, income refers to the flow of wealth, cash received or its equivalent.
o Settled that the Philippine gross income of BOAC from 68-69, 70-71 amounted to Php 10,428,368
But did such flow of wealth come from sources within the Philippines?
o 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.
o In this case, the sale of tickets produces the income. The cash and payments for fares were received in the
Philippines.
The flow of wealth proceeded from, and occurred within, the Philippine territority, enjoying
protection from the Philippine government.
o Thus, the flow of wealth proceeded from Philippine territory.
Sec. 37(a) of the tax code, in enumerating the sources of income, was not meant to be exclusive.
o Sales of airline tickets are included in the definition of gross income.
Is BOACs argument on the source of income being outside the Philippines tenable? NO.
BOAC argues that income is derived from transportation is income for services, and thus the place where the
services are rendered should determine the source.
o Thus, since the transportation is performed outside the Philippines, income cannot be taxed under its
laws.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the
situs of income taxation.
o The test of taxability is the "source"; and the source of an income is that activity x x x which produced the
income
o The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines.
Revenue was acquired from a business activity regularly pursued within the Philippines.
Does JAL v CIR constitute res judicata to the case? NO.
The ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's
tax.
But the subject of that case was EXCISE tax and not INCOME tax as is the subject in this case.

Note the scope of this ruling: Only fiscal years covered by questioned tax assessments, or from 1959-67, 1968-69 to
1970-71.
Because PD 69, promulgated in 1972, laid down regulations on taxing international carriers.
2-.5 percent on their gross Philippine billings.
Gross Philippine billings: includes gross revenue realized from uplifts anywhere in the world by any international
carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess
baggage or mail, provided the cargo or mail originates from the Philippines.

Disposition: Decision of CTA is set aside and BOAC is ordered to pay the amount of P534,132.08 as deficiency income
tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period
not to exceed three (3) years in accordance with the Tax Code. Claim for refund on their previous payment was denied.
Teehankee, J. CONCURRING

Just said that there is no longer any source of substantial conflict as to the present 2-1/2% tax on gross Philippine
Billings between Dissent and Majority opinion since the promulgation of PD 69.

Feliciano, J. DISSENTING

The answer to the question of WON BOAC was a resident foreign corporation doing business in the Philippines is
not determinative of liability of BOAC in respect of the income involved.
o Because the Tax Code and subsequent amendments made it clear that the same rule applied in cases of
resident and non-resident foreign corporations both are taxed on income from all sources within the
Philippines.
o Thus, whether BOAC is doing business or not doing business, it is liable to income tax only to the extent that
it derives income from sources within the Philippines.
o The liability of BOAC to Philippine income taxation in respect of such income depends on whether or not such
income is derived from "sources within the Philippines."
For purposes of income taxation, "source of income" relates not to the physical sourcing of a flow of money or the
physical situs of payment but rather to the "property, activity or service which produced the income"
o Howden and Co Ltd vs CIR: The source of an income is the property, activity or service that produced the
income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines.
It is the underlying prestation which is property regarded as the activity giving rise to the income
sought to be taxed.
o Concept of source of income for purposes of income tax originated in the US income tax system, and our
Tax Code was patterned after the US tax code.
Three sources of income:
Capital: the place where the capital is employed should be decisive
Labor: the place where the labor is done should be decisive
Sale of Capital Assets: the place where the sale is made should be likewise decisive
Thus, the term source in this fundamental light is not a place it is an activity or property.
Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction, or
the property or activities out of which the income issues or is derived must be situated within
the jurisdiction so that the source of the income may be said to have a situs in this country.
Underlying theory: consideration for taxation is protection of life and property and income to
be levied upon is to defray the burdens of the government in protecting such income-
generating activities.
Two possibly relevant source income rules confronted: (a) rule as to the contracts of service (b) rule as to the sales of
personal property.
As to contract for rendition of services: income is sourced in the place where the service contract is rendered.
o Contract of carriage or transportation (which includes airline tickets) are regarded in our Tax Code as contract
for services. (Sec. 37 (e))
"(e) Income from sources partly within and partly without the Philippines.ltems of gross income, expenses,
losses and deductions, other than those specified in subsections (a) and (c) of this section shall be allocated
or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the
Secretary of Finance. x x x Gains, profits, and income from (1) transportation or other services rendered partly
within and partly without the Philippines, or (2) from the sale of personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines. x x x"

o Sec. 37 carries an irresistible implication that derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the Philippines (since no
business in the Philippines anyway, just the sales)

Strengthened by the following:

That the section was derived from the 1939 U.S. Tax Code which "was based upon a
recognition that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of trans portation was
rendered

Revenue Regulations No. 2, Section 155. (Implementing Sec. 37)

Compensation for labor or personal services.Gross income from sources within the
Philippines includes compensation for labor or personal services within the Philippines
regardless of the residence of the payor, of the place in which the contract for services was
made, or of the place of payment.

Revenue Regulations No. 2, Section 163 and Revenue Regulations No. 2, Section 164:
Steamship and telegraph and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the Philippines, and therefore not
subject to Philippine income taxation.

As to the source of income rule on the sale of personal property and purchase and sale of personal property.
o Rule on sales of personal property: Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or s sourced partly within and partly without the Philippines, depending upon two factors:
a. The place where the sale of such personal property occurs; and
b. The place where such personal property was produced or manufactured.
Income will be allocated between sources within and sources without the Philippines.
o Rule on purchase and sale of personal property: regarded as sourced wholly in the place where the personal
property is sold
Thus, what is the character of transactions entered by BOAC in the Philippines? Either sales of personal property or as
entering into a lease of services or contract of service of carriage.
Proper characterization is that of entering into contracts of service, i.e., carriage of passengers or cargo between
points located outside the Philippines.
o Value of the ticket lies in the acquired right by the purchaser to demand a prestation from BOAC, a prestation
which takes place partly outside the Philippines.
o The "purchase price of the airline ticket" is quite different from the purchase price of a physical good or
commodity such as a pair of shoes or a refrigerator or an automobile; it is really the compensation paid for the
undertaking of BOAC to transport the passenger or cargo outside the Philippines.
Today, PD 69 establishes that such carriers shall pay 2-1/2% on their gross Philippine billings, and not longer on their
income.
Under this new approach, international carriers who service ports or points in the Philippines are treated in exactly the
same way as international carriers not servicing any port or point in the Philippines.
Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has been set aside.