COMMISSIONER OF INTERNAL REVENUE vs.

BRITISH OVERSEAS AIRWAYS CORPORATION

G.R. No. L-65773-74 | April 30, 1987 | MELENCIO-HERRERA, J.: WON BOAC is a resident foreign corp – YES

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the Under Section 20 of the 1977 Tax Code:
United Kingdom
- It is engaged in the international airline business and is a member-signatory of the Interline Air (h) the term resident foreign corporation engaged in trade or business within the Philippines or
Transport Association (IATA). having an office or place of business therein.
- As such it operates air transportation service and sells transportation tickets over the routes of
the other airline members. (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in
trade or business within the Philippines and not having any office or place of business therein
During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights
for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity
- except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or
temporary landing permit by the CAB. works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization.
Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the - "In order that a foreign corporation may be regarded as doing business within a State, there
period covered by the assessments, it maintained a general sales agent in the Philippines — Wamer Barnes must be continuity of conduct and intention to establish a continuous business, such as the
and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets covering appointment of a local agent, and not one of a temporary character.
passengers and cargoes.
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
G.R. No. 65773 (CTA Case No. 2373, the First Case) Philippines, That general sales agent, from 1959 to 1971 was engaged in
- CIR assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes (1) selling and issuing tickets;
covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a
resulted in the issuance of a new assessment, for the years 1959 to 1967 in the amount of different airline company;
P858,307.79. BOAC paid this new assessment under protest. (3) receiving the fare from the whole trip; and
- BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR. (4) consequently allocating to the various airline companies on the basis of their participation in
But before said denial, BOAC had already filed a petition for review with the Tax Court the services rendered through the mode of interline settlement as prescribed by Article VI of
the Resolution No. 850 of the IATA Agreement."
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
- BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968- Those activities were in exercise of the functions which are normally incident to, and are in progressive
1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of pursuit of, the purpose and object of its organization as an international air carrier.
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the - the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the
filing of corporation returns) penalized under Section 74 of the NIRC. generation of sales being the paramount objective.
- BOAC requested that the assessment be countermanded and set aside. I - There should be no doubt then that BOAC was "engaged in" business in the Philippines through
o CIR not only denied the BOAC request for refund in the First Case but also re-issued a local agent during the period covered by the assessments.
in the Second Case the deficiency income tax assessment for P534,132.08 for the
years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of WON the revenue from sales of tickets by BOAC in the Philippines constitutes income from Philippine
the Tax Code. sources - YES

Tax Court rendered the assailed joint Decision reversing the CIR. Sec. 29 Tax Code defines "gross income":
- The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by - "Gross income" includes gains, profits, and income derived from salaries, wages or
Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, compensation for personal service of whatever kind and in whatever form paid, or from
do not constitute BOAC income from Philippine sources "since no service of carriage of profession, vocations, trades, business, commerce, sales, or dealings in property, whether real
passengers or freight was performed by BOAC within the Philippines" and, therefore, said or personal, growing out of the ownership or use of or interest in such property; also from
income is not subject to Philippine income tax. interests, rents, dividends, securities, or the transactions of any business carried on for gain or
- income from transportation is income from services so that the place where services are profile, or gains, profits, and income derived from any source whatever
rendered determines the source
The definition is broad and comprehensive to include proceeds from sales of transport documents.
BOAC argues - "The words 'income from any source whatever' disclose a legislative policy to include all income
- income derived from transportation is income for services, with the result that the place where not expressly exempted within the class of taxable income under our laws."
the services are rendered determines the source; - Income means "cash received or its equivalent"; it is the amount of money coming to a person
- since BOAC's service of transportation is performed outside the Philippines, the income derived within a specific time ...; it means something distinct from principal or capital.
is from sources without the Philippines and, therefore, not taxable under our income tax laws.
 - For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to whatever kind and in whatever form derived from any source." Since the two cases treat of a
the flow of wealth. different subject matter, the decision in one cannot be res judicata to the other.

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
amounted to P10,428,368 .00. respondent, the British Overseas Airways Corporation (BOAC), is hereby 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%
The source of an income is the property, activity or service that produced the income. monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the
Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
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. SO ORDERED.
- 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.

Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international 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.
o It merely directs that the types of 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
may be so considered. "

The absence of flight operations to and from the Philippines is not determinative of the source of income
or the site of income taxation.
- Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The
test of taxability is the "source"; and the source of an income is that activity ... which produced
the income.
- the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines. business a And
even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the
Philippines.

The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines.

Excise tax IS NOT income tax, it is the latter which can be taxed from sources within the PH

JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041)

- 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. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax,
being a tax on the activity of transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of transportation. being an excise tax, the
same can be levied by the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of the case under
consideration is income tax, a direct tax on the income of persons and other entities "of