VOL.

149, APRIL 30, 395 ________________

1987 *
 EN BANC.
Commissioner of Internal
396
Revenue vs. British Overseas
Airways Corporation 3 SUPREME
Nos. L-65773-74. April 30, 1987. *
96 COURT REPORTS
COMMISSIONER OF INTERNAL REVENUE, ANNOTATED
petitioner, vs. BRITISH OVERSEAS AIRWAYS Commissioner of
CORPORATION and COURT OF TAX APPEALS,
Internal Revenue vs. British
respondents.
Overseas Airways
Taxation; Words and Phrases; "Doing" or "Engaging in" or Corporation
"transacting" business have no specific meaning. Each case has to engaged in (1) selling and issuing tickets; (2) breaking down
be judged by its peculiar circumstances.—lt is our considered the whole trip into series of trips—each trip in the series
opinion that BOAC is a resident foreign corporation, There is no corresponding to a different airline company; (3) receiving the fare
specific criterion as to what constitutes "doing" or "engaging in" or from the whole trip; and (4) consequently allocating to the various
"transacting" business. Each case must be judged in the light of its airline companies on the basis of their participation in the services
peculiar environmental circumstances. The term implies a continuity rendered through the mode of interline settlement as prescribed by
of commercial dealings and arrangements, and contemplates, to that Article VI of the Resolution No. 850 of the IATA Agreement."
extent, the performance of acts or works or the exercise of some of Those activities were in exercise of the functions which are normally
the functions normally incident to, and in progressive prosecution of incident to, and are in progressive pursuit of the purpose and object
commercial gain or for the purpose and object of the business of its organization as an international air carrier. In fact, the regular
organization. "In order that a foreign corporation may be regarded as sale of tickets, its main activity, is the very lifeblood of the airline
doing business within a State, there must be continuity of conduct business, the generation of sales being the paramount objective.
and intention to establish a continuous business, such as the There should be no doubt then that BOAC was "engaged in" business
appointment of a local agent, and not one of a temporary character.' in the Philippines through a local agent during the period covered by
Same; An international airline, like BOAC, which has the assessments. Accordingly, it is a resident foreign corporation
appointed a ticket sales agent in the Philippines and which allocates subject to tax upon its total net income received in the preceding
fares received to various airlines on the basis of their participation taxable year from all sources within the Philippines.
in the services rendered. although BOAC does not operate any Same; Words and Phrases; Definition of "gross income" in the
airplane in the Philippines, is a resident foreign corporation subject Tax Code is broad enough to include proceeds from sales of airline
to tax on income received from Philippine sources.—BOAC, during tickets in the Philippines even if no service or airlifting of passenger
the periods covered by the subject assessments, maintained a general or cargo by an airline is done by its planes in the Philippines.—The
sales agent in the Philippines. That general sales agent, from 1959 to source of an income is the property, activity or service that produced
1971, "was the income. For the source of income to be considered as coming

1|Page
from the Philippines, it is sufficient that the income is derived from from the Philippines. The word "source" conveys one essential idea,
activity within the Philippines. In BOAC's case, the sale of tickets in that of origin, and the origin of the income herein is the Philippines.
the Philippines is the activity that produces the income. The tickets Same; Under P.D. 69 and P.D. 1355, international air carriers
exchanged hands here and payments for fares were also made here in are subject to income tax of  ½% of their gross Philippine billings.—
2

Philippine currency. The situs of the source of payments is the The foregoing provision ensures that international airlines are taxed
Philippines. The flow of wealth proceeded from, and occurred on their income from Philippine sources. The 2½% tax on gross
within, Philippine territory, enjoying the protection accorded by the Philippine billings is an income tax. If it had been intended as an
Philippine government. In consideration of such protection, the flow excise or percentage tax it would have been place under Title V of
of wealth should share the burden of supporting the government. the Tax Code covering Taxes on Business.
Same; Same.—BOAC, however, would impress upon this Same; Same; The common carrier's tax, an excise tax, where
Court that income derived from transportation is income for services, can be levied only when the act, business or privilege is performed in
with the result that the place where the services are rendered the Philippines is different from the income tax.—Lastly, we find as
determines the source; and since BOAC's service of transportation is untenable the BO AC argument that the dismissal for lack of merit
performed outside the Philippines, the income derived is from by this Court of the Appeal in JAL vs. Commissioner of Internal
sources without the Philippines and, therefore, not taxable under our Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to
income tax laws. The Tax Court upholds that stand in the joint the present case. The ruling by the Tax Court in that case was to the
Decision under review. The absence of flight operations to and from effect that the mere sale of tickets, unaccompanied by the physical
the Philippines act of carriage of transportation, does not render the taxpayer therein
397 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
VOL. 149, APRIL 3 activity of transporting, conveying or removing passengers and cargo
30, 1987 97 from one place to another. It purports to tax the business of
Commissioner of transportation. Being an excise tax, the same can be levied by the
lnternal Revenue vs. British State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject
Overseas Airways matter of the case under consideration is income tax, a direct tax on
Corporation the income of persons and other entities "of whatever kind and in
is not determinative of the source of income or the situs of whatever form derived from any source." Since the two cases treat of
income taxation. Admittedly, BOAC was an off-line international a different subject matter, the decision in one cannot be res
airline at the time pertinent to this case. The test of taxability is the judicata to the other.
"source"; and the source of an income is that activity x x x which
produced the income. Unquestionably, the passage documentations 398
in these cases were sold in the Philippines and the revenue therefrom 398 SUPREME COURT
was derived from a business activity regularly pursued within the REPORTS
Philippines. And even if the BOAC tickets sold covered the ANNOTATED
"transport of passengers and cargo to and from foreign cities," it
cannot alter the fact that income from the sale of tickets was derived Commissioner of lnternal

2|Page
Revenue vs. British Overseas income. Conversely, the receipt of Philippine source income creates
Airways Corporation no presumption that the recipient foreign corporation is a resident of
the Philippines. The critical issue, for present purposes, is
therefore whether or not BOAC is deriving income from sources
TEEHANKEE, C.J., concurring:
within the Philippines.
Same; Source of income relates to the property, activity or
Taxation; The differences of opinion between the majority and
service which produced the income, not to the flow of money or site
the dissenting members of the court has now become moot
of payment.—For purposes of income taxation, it is well to bear in
and academic.—I just wish to point out that the conflict between the
mind that the "source of income" relates not to the physical sourcing
majority opinion penned by Mme. Justice Melencio-Herrera and the
of a
dissenting opinion penned by Mr. Justice Feliciano as to the proper 399
characterization of the taxable income derived by respondent BOAC
from the sales in the Philippines of tickets for BOAC flights as sold VOL. 149, APRIL 3
and issued by its general sales agent in the Philippines has become
moot after November 24, 1972. Both opinions state that by
30, 1987 99
amendment through P.D. No. 69, promulgated on November 24, Commissioner of
1972, of section 24(b) (2) of the Tax Code providing for the rate of Internal Revenue vs. British
income tax on foreign corporations international carriers such as Overseas Airways
respondent BOAC, have since then been taxed at a reduced rate of 2- Corporation
1/2% on their gross Philippine billings. There is, therefore, no longer flow of money or the physical situs of payment but rather to the
any source of substantial conflict between the two opinions as to the "property, activity or service which produced the income."
present 2-½% tax on their gross Philippine billings charged against In Howden and Co., Ltd. vs. Collector of Internal Revenue, the Court
such international carriers as herein respondent f oreign corporation. dealt with the issue of the applicable source rule relating to
reinsurance premiums paid by a local insurance company to a foreign
FELICIANO, J., dissenting: reinsurance company in respect of risks located in the Philippines.
Same; Where income taxation of services is involved, the
Taxation; Whether a foreign corporation is a resident or income is sourced in the place where the service is rendered.—
nonresident corporation, it is taxable only on income from Where a contract for the rendition of service is involved, the
Philippine sources.—Clearly, whether the foreign corporate taxpayer applicable source rule may be simply stated as follows: the income is
is doing business in the Philippines and therefore a resident foreign sourced in the place where the service contracted for is rendered.
corporation, or not doing business in the Philippines and therefore a Section 37 (a) (3) of our Tax Code reads as follows: "Section 37.
nonresident foreign corporation, it is liable to income tax only to the Income from sources within the Philippines. (a) Gross income from
extent that it derives income from sources within the Philippines. sources within the Philippines.—The following items of gross
The circumstance that a foreign corporation is resident in the income shall be treated as gross income from sources within the
Philippines yields no inference that all or any part of its income is Philippines: (3) Services.—Compensation for labor or personal
Philippine source income. Similarly, the non-resident status of a services performed in the Philippines; x x x" (Italics supplied)
foreign corporation does not imply that it has no Philippine source

3|Page
 Same; Income from transportation or other services done law. The airline ticket in and of itself has no monetary value, even as
outside the Philippines must be treated as derived entirely from scrap paper. The value of the ticket lies wholly in the right acquired
sources outside the Philippines.—Section 37 (e) of the Tax Code by the "purchaser"—the passenger—to demand a prestation from
quoted above carries a strong, well-nigh irresistible, implication that BOAC, which prestation consists of the carriage of the "purchaser"
income derived from transportation or other services rendered or passenger from one point to another outside the Philippines. The
entirely outside the Philippines must be treated as derived entirely ticket is really the evidence of the contract of carriage entered into
from sources without the Philippines. This implication is reinforced between BOAC and the passenger. The money paid by the passenger
by a consideration of certain provisions of Revenue Regulations No. changes hands in the Philippines. But the passenger does not receive
2 entitled "Income Tax Regulations," as amended, first promulgated in the Philippines the consideration therefor—the service undertaken
by the Department of Finance on 10 February 1940. Section 155 of to be delivered by BOAC. The "purchase price of the airline ticket"
Revenue Regulations No. 2 (implementing Section 37 of the Tax is quite different from the purchase price of a physical good or
Code) provides in part as follows: "Section 155. Compensation for commodity such as a pair of shoes or a refrigerator or an automobile;
labor or per-sonal services.—Gross income from sources within the it is really the compensation paid for the undertaking of BOAC to
Philippines includes compensation for labor or personal services transport the passenger or cargo outside the Philippines.
within the Philippines regardless of the residence of the payor, of the Same; Same.—The characterization of the BOAC transactions
place in which the contract for services was made, or of the place of either as sales of personal property or as purchases and sales of
payment—" Italics supplied) personal property, appear entirely inappropriate from another
Same; Income of a foreign airline for carriage of passengers viewpoint. Consider first purchases and sales: is BOAC properly
and cargo between points located outside the Philippines is not an regarded as engaged in trading—in the purchase and sale of personal
income from sources within the Philippines although the tickets are property? Certainly, BOAC was not purchasing tickets outside the
sold here, such tickets being merely an evidence of the contract of Philippines and selling them in the Philippines. Consider next sales:
carriage.—The appropriate characterization, in my opinion, of the can BOAC be regarded as "selling" personal property produced or
400 manufactured by it? In a popular or journalistic sense, BOAC might
be described as "selling" "a product"—its services. However, for the
4 SUPREME technical purposes of the law on income taxation, BOAC is in fact
00 COURT REPORTS entering into contracts of service or carriage. The very existence of
ANNOTATED "source" rules" specifically and precisely applicable to the rendition
Commissioner of of services must preclude the application here of "source rules"
applying generally to sales, and purchases and sales, of personal
lnternal Revenue vs. British property which can be invoked only by the grace of popular
Overseas Airways language. On a slightly more abstract level, BOAC's income is more
Corporation appropriately characterized as derived from a "service", rather than
BOAC transactions is that of entering into contracts of service, from an "activity" (a broader term than service and including the
i.e., carriage of passengers or cargo between points located outside activity of selling) or from the use of "property." Finally, it is well to
the Philippines. The phrase "sale of airline tickets/' while widely used recall that what is here involved is income taxation,
in popular parlance, does not appear to be correct as a matter of tax and not a sales tax or an excise or privilege tax.
401

4|Page
 VOL. 149, APRIL 4 possible characterizations under or interpretations of tax statutes. It is
30, 1987 01 hence perhaps useful to point out that the determination of the
appropriate characterization here—that of contracts of air carriage
Commissioner of rather than sales of airline tickets—entails no downthe road loss of
Internal Revenue vs. British income tax revenues to the Government. In lieu thereof, the
Overseas Airways Government takes in revenues generated by the 2-½ per cent tax on
Corporation the gross Philippine billings or receipts of international carriers.
Same; Under P.D. 1355 international carriers issuing passage
documentation in the Philippines for uplifts between points outside PETITION for certiorari to review the decision of the Court of
the Philippines are not charged any Philippine income tax on their Tax Appeals.
Philippine billings. In place thereof, a 2½% excise tax on billings in
respect of passengers and cargoes originating from the Philippines The facts are stated in the opinion of the Court.
regardless of embarkation or debarkation, is imposed.—Under the 402
above-quoted proviso, international carriers issuing for compensation 402 SUPREME COURT
passage documentation in the Philippines for uplifts from any point REPORTS
in the world to any other point in the world, are not charged any ANNOTATED
Philippine income tax on their Philippine billings (i.e., billings in
respect of passenger or cargo originating from the Philippines). Commissioner of lnternal
Under this new approach, international carriers who service ports or Revenue vs. British Overseas
points in the Philippines are treated in exactly the same way as Airways Corporation
international carriers not servicing any port or point in the      Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for
Philippines. Thus, the source of income rule applicable, as above respondent British Airways.
discussed, to transportation or other services rendered partly within
and partly without the Philippines, or wholly without the Philippines, MELENCIO-HERRERA, J.:
has been set aside. In place of Philippine income taxation, the Tax
Code now imposes this 2½ per cent tax computed on the basis of Petitioner Commissioner of Internal Revenue (CIR) seeks a
billings in respect of passengers and cargo originating from the review on Certiorari of the joint Decision of the Court of Tax
Philippines regardless of where embarkation and debarkation would
Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26
be taking place. This 2-½ per cent tax is effectively a tax on
gross receipts or an excise or privilege tax and not a tax January 1983, which set aside petitioner 's assessment of
on income. Thereby, the Government has done away with the deficiency income taxes against respondent British Overseas
difficulties attending the allocation of income and related expenses, Airways Corporation (BOAC) for the fiscal years 1959 to
losses and deductions. Because taxes are the very lifeblood of 1967, 1968-69 to 1970-71, respectively, as well as its
government, the resulting potential "loss" or "gain" in the amount of Resolution of 18 November, 1983 denying reconsideration.
taxes collectible by the state is sometimes, with varying degrees of BOAC is a 100% British Government-owned corporation
consciousness, considered in choosing from among competing organized and existing under the laws of the United Kingdom.

5|Page
It is engaged in the international airline business and is a the years 1959 to 1963. This was protested by BOAC.
member-signatory of the Interline Air Transport Association Subsequent investigation resulted in the issuance of a new
(IATA). As such, it operates air transportation service and sells assessment, dated 16 January 1970 for the years 1959 to 1967
transportation tickets over the routes of the other airline in the amount of P858,307.79. BOAC paid this new assessment
members. During the periods covered by the disputed under protest.
assessments, it is admitted that BOAC had no landing rights for On 7 October 1970, BOAC filed a claim for refund of the
traffic purposes in the Philippines, and was not granted a amount of P858,307.79, which claim was denied by the CIR on
Certificate of public convenience and necessity to operate in 16 February 1972. But before said denial, BOAC had already
the Philippines by the Civil Aeronautics Board (CAB), except filed a petition for review with the Tax Court on 27 January
for a nine-month period, partly in 1961 and partly in 1962, 1972, assailing the assessment and praying for the refund of the
when it was granted a temporary landing permit by the CAB. amount paid.
Consequently, it did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by the G.R. No. 65774 (CTA Case No. 2561, the Second Case)
assessments, it maintained a general sales agent in the
Philippines—Warner Barnes and Company, Ltd., and later On 17 November 1971, BOAC was assessed deficiency income
Qantas Airways—which was responsible for selling BOAC taxes, interests, and penalty for the fiscal years 19681969 to
tickets covering passengers and cargoes.  1 1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise
G.R. No. 65773 (CTA Case No. 2373, the First Case) penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National
On 7 May 1968, petitioner Commissioner of Internal Internal Revenue Code (NIRC).
________________ On 25 November 1971, BOAC requested that the
assessment be countermanded and set aside. In a letter, dated
1
 Partial Stipulation of Facts, Annex "E" and Annex "4", pp. 74-77 and 87-
90, Rollo. 16 February 1972, however, the CIR not only denied the
BOAC request for refund in the First Case but also re-issued in
403 the Second Case the deficiency income tax assessment for
VOL. 149, APRIL 30, 403 P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as
1987 compromise penalty under Section 74 of the Tax Code.
Commissioner of lnternal BOAC's request for reconsideration was denied by the CIR on
Revenue vs. British Overseas 24 August 1973. This prompted BOAC to file the Second Case
Airways Corporation bef ore the Tax Court praying that it be absolved of liability for
Revenue (CIR, for brevity) assessed BOAC the aggregate deficiency income tax for the years 1969 to 1971.
amount of P2,498,358.56 for deficiency income taxes covering This case was subsequently tried jointly with the First Case.

6|Page
 On 26 January 1983, the Tax Court rendered the assailed constitute income of BOAC from Philippine sources,
joint Decision reversing the ClR. The Tax Court held that the and, accordingly, taxable.
proceeds of sales of BOAC passage tickets in the Philippines 2. "2.Whether or not during the fiscal years in question
404 BOAC is a resident foreign corporation doing business
404 SUPREME COURT in the Philippines or has an of fice or place of business
REPORTS in the Philippines.
ANNOTATED 3. "3.In the alternative that private respondent may not be
Commissioner of lnternal considered a resident foreign corporation but a non-
Revenue vs. British Overseas resident foreign corporation, then it is liable to
Airways Corporation Philippine income tax at the rate of thirty-five per cent
(35%) of its gross income received from all sources
by Warner Barnes and Company, Ltd., and later by Qantas
within the Philippines.''
Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of
Under Section 20 of the 1977 Tax Code:
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 1. "(h)the term 'resident foreign corporation' applies to a
income from transportation is income from services so that the foreign corporation engaged in trade or business
place where services are rendered determines the source. Thus, within the Philippines or having an of fice or place of
in the dispositive portion of its Decision, the Tax Court ordered business therein.
petitioner to credit BOAC with the sum of P858,307.79, and to 2. "(i)The term 'non-resident foreign corporation' applies
cancel the deficiency income tax assessments against BOAC in to a
the amount of P534,132.08 for the fiscal years 1968-69 to
405
197071.
VOL. 149, APRIL 30, 405
Hence, this Petition for Review on Certiorari of the
Decision of the Tax Court. 1987
The Solicitor General, in representation of the CIR, has Commissioner of Internal
aptly defined the issues, thus: Revenue vs. British Overseas
Airways Corporation
1. "1.Whether or not the revenue derived by private
respondent British Overseas Airways Corporation 1. foreign corporation not engaged in trade or business
(BOAC) from sales of tickets in the Philippines for air within the Philippines and not having any office or
transportation, while having no landing rights here, place of business therein."

7|Page
It is our considered opinion that BOAC is a resident foreign 3
 Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23,
30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847 and Fisher's
corporation. There is no specific criterion as to what constitutes Philippine Law of Stock Corporation, p. 415.
"doing" or "engaging in" or "transacting" business. Each case 4
 P. 11, BOAC Memorandum; p. 261, Rollo.
must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial 406
dealings and arrangements, and contemplates, to that extent, the 406 SUPREME COURT
performance of acts or works or the exercise of some of the REPORTS
functions normally incident to, and in progressive prosecution ANNOTATED
of commercial gain or for the purpose and object of the Commissioner of lnternal
business organization.  "In order that a foreign corporation may
2
Revenue vs. British Overseas
be regarded as doing business within a State, there must be Airways Corporation
continuity of conduct and intention to establish a continuous generation of sales being the paramount objective. There
business, such as the appointment of a local agent, and not one
of a temporary character.' 3
should be no doubt then that BOAC was "engaged in" business
BOAC, during the periods covered by the subject in the Philippines through a local agent during the period
assessments, maintained a general sales agent in the covered by the assessments. Accordingly, it is a resident
Philippines. That general sales agent, from 1959 to 1971, "was foreign corporation subject to tax upon its total net income
engaged in (1) selling and issuing tickets; (2) breaking down received in the preceding taxable year from all sources within
the whole trip into series of trips—each trip in the series the Philippines. 5

corresponding to a different airline company; (3) receiving the "Sec. 24. Rates of tax on corporations.—x x x
fare from the whole trip; and (4) consequently allocating to the "(b) Tax on foreign corporations.—x x x
various airline companies on the basis of their participation in "(2) Resident corporations.—A corporation organized,
the services rendered through the mode of interline settlement authorized, or existing under the laws of any foreign country, except
as prescribed by Article VI of the Resolution No. 850 of the a foreign life insurance company, engaged in trade or business within
IATA Agreement."  Those activities were in exercise of the
4
the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable
functions which are normally incident to, and are in
year from all sources within the Philippines. (Italics ours)
progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular Next, we address ourselves to the issue of whether or not the
sale of tickets, its main activity, is the very lifeblood of the revenue from sales of tickets by BOAC in the Philippines
airline business, the constitutes income from Philippine sources and, accordingly,
________________ taxable under our income tax laws.
 The Mentholatum Co., Inc., et al. vs. Anacleto Mangaliman, et al, 72 Phil.
2 The Tax Code defines "gross income" thus:
524 (1941); Section 1, R.A. No. 5455.

8|Page
" 'Gross income' includes gains, profits, and income derived from Did such "flow of wealth" come from "sources within the
salaries, wages or compensation for personal service of whatever Philippines"?
kind and in whatever form paid, or from profession, vocations, The source of an income is the property, activity or service
trades, business, commerce, sales, or dealings in property, whether that produced the income.  For the source of income to be
8

real or personal, growing out of the ownership or use of or interest in considered as coming from the Philippines, it is sufficient that
such property; also from interests, rents, dividends, securities, or
the income is derived from activity within the Philippines. In
the transactions of any business carried on for gain or profit, or
gains, profits, and income derived from any source whatever" (Sec. BOAC's case, the sale of tickets in the Philippines is the
29[3]; Italics supplied) activity that produces the income. The tickets exchanged hands
here and payments for fares were also made here in Philippine
The definition is broad and comprehensive to include proceeds currency. The situs of the source of payments is the
from sales of transport documents. "The words 'income from Philippines. The flow of wealth proceeded from, and occurred
any source whatever' disclose a legislative policy to include all within, Philippine territory, enjoying the protection accorded
income not expressly exempted within the class of by the Philippine government. In consideration of such
________________ protection, the flow of wealth should share the burden of
supporting the government.
 Section 24(b), (2), Tax Code, as amended by R.A. 6110, approved on 4
5

August 1969. A transportation ticket is not a mere piece of paper. When

issued by a common carrier, it constitutes the contract between
407 the ticket-holder and the carrier. It gives rise to the obligation
VOL, 149, APRIL 30, 407 of the purchaser of the ticket to pay the fare and the
1987 corresponding obligation of the carrier to transport the
Commissioner of lnternal passenger upon the terms and conditions set forth thereon. The
Revenue vs. British Overseas ordinary ticket issued to members of the travelling public in
________________
Airways Corporation
taxable income under our laws." Income means "cash received 6
 Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil. 414(1918).
or its equivalent"; it is the amount of money coming to a person 7
 Memorandum for Petitioner, p. 22; p. 299, Rollo.
within a specific time x x x; it means something distinct from 8
 Mertens, Jr., Jacob, Law on Federal Income Taxation, Vol. 8, Section
45.27; cited in Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA
principal or capital For, while capital is a fund, income is a 601 (1965).
flow. As used in our income tax law, "income" refers to the
flow of wealth. 6 408
The records show that the Philippine gross income of 408 SUPREME COURT
BOAC for the fiscal years 1968-69 to 1970-71 amounted to REPORTS
P10,428,368.00. 7
ANNOTATED
Commissioner of lnternal

9|Page
Revenue vs. British Overseas passage documentations in these cases were sold in the
Airways Corporation Philippines and the revenue therefrom was derived from a
________________
general embraces within its terms all the elements to constitute
it a valid contract, binding upon the parties entering into the 9
 14 Am Jur 2d 813.
relationship. 9 10
 British Trader's Insurance Co., Ltd. vs. Commissioner of Internal
True, Section 37(a) of the Tax Code, which enumerates Revenue, 13 SCRA 719 (1965).
11
 Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA
items of gross income from sources within the Philippines, 601 (1965).
namely: (1) interest, (2) dividends, (3) service, (4) rentals and
royalties, (5) sale of real property, and (6) sale of personal 409
property, does not mention income from the sale of tickets for VOL. 149, APRIL 30, 409
international transportation. However, that does not render it 1987
less an income from sources within the Philippines. Section 37, Commissioner of lnternal
by its language, does not intend the enumeration to be Revenue vs. British Overseas
exclusive. It merely directs that the types of income listed Airways Corporation
therein be treated as income from sources within the
business activity regularly pursued within the Philippines. And
Philippines. A cursory reading of the section will show that it
even if the BOAC tickets sold covered the "transport of
does not state that it is an all-inclusive enumeration. and that no
passengers and cargo to and from foreign cities",  it cannot
12

other kind of income may be so considered. 10

alter the fact that income from the sale of tickets was derived
BOAC, however, would impress upon this Court that
from the Philippines. The word "source" conveys one essential
income derived from transportation is income for services, with
idea, that of origin, and the origin of the income herein is the
the result that the place where the services are rendered
Philippines. 13

determines the source; and since BOAC's service of

It should be pointed out, however, that the assessments
transportation is performed outside the Philippines, the income
upheld herein apply only to the fiscal years covered by the
derived is from sources without the Philippines and, therefore,
questioned deficiency income tax assessments in these cases,
not taxable under our income tax laws. The Tax Court upholds
or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to
that stand in the j oint Decision under review.
Presidential Decree No. 69, promulgated on 24 November,
The absence of flight operations to and from the Philippines
1972, international carriers are now taxed as follows:
is not determinative of the source of income or the situs of "x x x Provided, however, That international carriers shall pay a tax
income taxation. Admittedly, BOAC was an off-line of 2-½ per cent on their gross Philippine billings." (Sec, 24[b] [2],
international airline at the time pertinent to this case. The test TaxCode).
of taxability is the "source"; and the source of an income is that
activity x x x which produced the income.  Unquestionably, the
11

10 | P a g e
Presidential Decree No. 1355, promulgated on 21 April, 1978. to the common carrier's tax. As elucidated by the Tax Court,
provided a statutory definition of the term "gross Philippine however, the common carrier's tax is an excise tax, being a tax
billings,'' thus: on the activity of transporting, conveying or removing
"x x x 'Gross Philippine billings' includes gross revenue realized passengers and cargo from one place to another. It purports to
from uplifts anywhere in the world by any international carrier doing tax the business of transportation.  Being an excise tax, the
14

business in the Philippines of passage documents sold therein, same can be levied by the State only when the acts, privileges
whether for passenger, excess baggage or mail, provided the cargo or or businesses are done or performed within the jurisdiction of
mail originates from the Philippines. x x x" the Philippines. The subject matter of the case under
The foregoing provision ensures that international airlines are consideration is income tax, a direct tax on the income of
taxed on their income from Philippine sources. The 2½% tax persons and other entities "of whatever kind and in whatever
on gross Philippine billings is an income tax. If it had been form derived from any source." Since the two cases treat of a
intended as an excise or percentage tax it would have been different subject matter, the decision in one cannot be res
place under Title V of the Tax Code covering Taxes on judicata to the other.
Business. WHEREFORE, the appealed joint Decision of the Court of
Lastly, we find as untenable the BOAC argument that the Tax Appeals is hereby SET ASIDE. Private respondent, the
________________ British Overseas Airways Corporation (BOAC), is hereby
ordered to pay the amount of P534,132.08 as deficiency
12
 Partial Stipulation of Facts, paragraph 5, p. 89, Rollo. income tax for the fiscal years 1968-69 to 1970-71 plus 5%
13
 Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil.
895 (1935).
surcharge, and 1% monthly interest from April 16, 1972 for a
period not to exceed three (3) years in accordance with the Tax
410 Code. The BOAC claim for refund in the amount of
410 SUPREME COURT P858,307.79 is hereby denied. Without costs.
REPORTS SO ORDERED.
ANNOTATED Paras, Gancayco, Padilla, Bidin,  Sarmiento and Cortes,
Commissioner of lnternal JJ., concur.
Revenue vs. British Overseas Teehankee, C. J., files a brief concurrence.
Fernan, J., took no part, his brother-in-law being a
Airways Corporation
member of the law firm representing private respondents.
dismissal for lack of merit by this Court of the appeal in J AL ________________
vs. Commissioner of Internal Revenue (G.R. No. L-30041) on
February 3, 1969, is res judicata to the present case. The ruling 14
 Commissioner of Internal Revenue vs. U.S. Lines, Co., 5 SCRA
by the Tax Court in that case was to the effect that the mere 175 (1962).
sale of tickets, unaccompanied by the physical act of carriage 411
of transportation, does not render the taxpayer therein subject

11 | P a g e
 VOL. 149, APRIL 4 between the two opinions as to the present 2-½% tax on their
30, 1987 11 gross Philippine billings charged against such international
Commissioner of carriers as herein respondent foreign corporation.
lnternal Revenue vs. British
FELICIANO, J., dissenting:
Overseas Airways
Corporation With great respect and reluctance, I record my dissent from the
Narvasa, Gutierrez, Jr., and Cruz, JJ., joins Mr. Justice opinion of Mme. Justice A.A. Melencio-Herrera speaking for
Feliciano's dissent. the majority. In my opinion, the joint decision of the Court of
Feliciano, J., please see separate dissenting opinion. Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26
Teehankee, C.J. I certify that Justice Yap, presently on January 1983, is correct and should be affirmed.
leave, voted for the above judgment and concurred with the 412
majority opinion. 412 SUPREME COURT
REPORTS
TEEHANKEE, C.J.: ANNOTATED
I concur with the Court's majority judgment upholding the Commissioner of lnternal
assessments of deficiency income taxes against respondent Revenue vs. British Overseas
BOAC for the fiscal years 1959-1967, 1968-1969 to 1970-1971 Airways Corporation
and therefore setting aside the appealed joint decision of The fundamental issue raised in this petition for review is
respondent Court of Tax Appeals. I just wish to point out that whether the British Overseas Airways Corporation (BOAC), a
the conflict between the majority opinion penned by Mme. foreign airline company which does not maintain any flight
Justice Melencio-Herrera and the dissenting opinion penned by operations to and from the Philippines, is liable for Philippine
Mr. Justice Feliciano as to the proper characterization of the income taxation in respect of "sales of air tickets" in the
taxable income derived by respondent BOAC from the sales in Philippines through a general sales agent, relating to the
the Philippines of tickets for BOAC flights as sold and issued carriage of passengers and cargo between two points both
by its general sales agent in the Philippines has become moot outside the Philippines.
after November 24, 1972. Both opinions state that by
amendment through P.D. No. 69, promulgated on November 1. 1.The Solicitor General has defined as one of the issues
24, 1972, of section 24(b) (2) of the Tax Code providing for the in this case the question of:
rate of income tax on foreign corporations, international
carriers such as respondent BOAC, have since then been taxed 1. "2.Whether or not during the fiscal years in
at a reduced rate of 2-½% on their gross Philippine billings. question  BOAC [was] a resident foreign corporation
1

There is, therefore, no longer any source of substantial conflict

12 | P a g e
 doing business in the Philippines or [had] an office or Section 24 (a) of the Tax Code in turn provides:
place of business in the Philippines." "Rate of tax on corporations.—(a) Tax on domestic corporations.—
x x x and a like tax shall be levied, collected, and paid annually upon
It is important to note at the outset that the answer to the above- the total net income received in the preceeding taxable year from all
quoted issue is not determinative of the liability of the BOAC sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign
to Philippine income taxation in respect of the income here
country: x x x." (Italics supplied)
involved, The liability of BOAC to Philippine income taxation
in respect of such income depends, not on BOAC's status as a Republic Act No. 6110, which took effect on 4 August 1969,
"resident foreign corporation'' or alternatively, as a made this even clearer when it amended once more Section 24
"nonresident foreign.corporation," but rather on whether or not (b) (2) of the Tax Code so as to read as follows:
such income is derived from "sources within the Philippines." "(2) Resident Corporations.—A corporation, organized, authorized
A "resident foreign corporation" or a foreign corporation or existing under the laws of any foreign country, except foreign life
engaged in trade or business in the Philippines or having an insurance company, engaged in trade or business within the
office or place of business in the Philippines is subject to Philippines, shall be taxable as provided in subsection (a) of this
Philippine income taxation only in respect of income section upon the total net income received in the preceding taxable
derived from sources within the Philippines. Section 24 (b) (2) year from all sources within the Philippines," (Italics supplied)
of the National Internal Revenue Code ("Tax Code"), as Exactly the same rule is provided by Section 24 (b) (1) of the
amended by Republic Act No. 2343, approved 20 June 1959, as Tax Code upon non-resident foreign corporations. Section 24
it existed up to 3 August 1969, read as follows: (b) (1) as amended by Republic Act No. 3825 approved 22
"(2) Resident corporations.—A foreign corporation engaged in trade
or business within the Philippines (except foreign life insurance
June 1963, read as follows:
"(b) Tax on foreign corporations.—(1) Non-resident corporations.—
companies) shall be taxable as provided in subsection (a) of this
There shall be levied, collected and paid for each taxable year, in lieu
section."
of the tax imposed by the preceding paragraph upon the amount
________________ received by every foreign corporation not engaged in trade or
business within the Philippines, from all sources within the
1
 I.e., 1959-1969 and 1971. Philippines, as interests, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed
413 or determinative annual or periodical gains, profits and incomes a tax
VOL. 149, APRIL 30, 413 equal to thirty per centum of such amount: provided, however, that
1987 premiums shall not include reinsurance premiums." 2

Commissioner of lnternal
Clearly, whether the foreign corporate taxpayer is doing
Revenue vs. British Overseas ________________
Airways Corporation

13 | P a g e
 2
 Underscoring supplied, Republic Act No. 6110 continued the above- "The source of an income is the property, activity or service that
quoted subparagraph, except that it raised the tax rate from 30% to 35% produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had
414
for their source the undertaking to indemnify Commonwealth
414 SUPREME COURT Insurance Co. against liability. Said undertaking is the activity that
REPORTS produced the reinsurance premiums, and the same took place in the
ANNOTATED Philippines.—[T]he reinsured, the liabilities insured and the risks
Commissioner of lnternal originally underwritten by Commonwealth Insurance Co. , upon
Revenue vs. British Overseas which the reinsurance premiums and indemnity were based, were all
situated in the Philippines.—" 4

Airways Corporation
business in the Philippines and therefore a resident foreign The Court may be seen to be saying that it is the underlying
corporation, or not doing business in the Philippines and ________________
therefore a non-resident foreign corporation, it is liable to
3
 13 SCRA 601 (1965).
income tax only to the extent that it derives income from 4
 13 SCRA, at 604; underscoring supplied.
sources within the Philippines. The circumstance that a foreign
corporation is resident in the Philippines yields no inference 415
that all or any part of its income is Philippine source income. VOL. 149, APRIL 30, 415
Similarly, the non-resident status of a foreign corporation does 1987
not imply that it has no Philippine source income. Conversely, Commissioner of lnternal
the receipt of Philippine source income creates no presumption Revenue vs. British Overseas
that the recipient foreign corporation is a resident of the Airways Corporation
Philippines. The critical issue, for present purposes, is
prestation which is properly regarded as the activity giving rise
therefore whether or not BOAC is deriving income from
to the income that is sought to be taxed. In the Howden case,
sources within the Philippines.
that underly ing prestation was the indemnification of the local
2, For purposes of income taxation. it is well to bear in mind
insurance company. Such indemnification could take place
that the "source of income" relates not to the physical sourcing
only in the Philippines where the risks were located and where
of a flow of money or the physical situs of payment but rather to
payment from the foreign reinsurer (in case the casualty
the "property, activity or service which produced the income."
insured against occurs) would be received in Philippine pesos
In Howden and Co., Ltd. vs. Collector of Internal Revenue,  the 3

under the reinsurance contract. The Court held accordingly that

Court dealt with the issue of the applicable source rule relating
the reinsurance premiums paid by the local insurance
to reinsurance premiums paid by a local insurance company to
companies constituted Philippine source income of the foreign
a foreign reinsurance company in respect of risks located in the
reinsurers.
Philippines. The Court said:

14 | P a g e
 The concept of "source of income" for purposes of income Commissioner of lnternal
taxation originated in the United States income tax system. The Revenue vs. British Overseas
phrase "sources within the United States" was first introduced Airways Corporation
into the U.S, tax system in 1916, and was subsequently subsequent statutes was to discard the 1909 and 1913 basis of taxing
embodied in the 1939 U.S. Tax Code. As is commonly known, non-resident aliens and foreign corporations and to make the test of
our Tax Code (Commonwealth Act 466, as amended) was taxability the 'source,' or situs of the activities or property which
patterned after the 1939 U.S. Tax Code. It therefore seems produce the income.... Thus, if income is to be taxed, the recipient
useful to refer to a standard U.S. text on federal income thereof must be resident within the jurisdiction, or the property or
taxation: activities out of which the income issues or is derived must be
"The Supreme Court has said, in a definition much quoted but often situated within the jurisdiction so that the source of the income may
debated, that income may be derived from three possible sources be said to have a situs in this country. The underlying theory is that
only: (1) capital and/or (2) labor and/or (3) the sale of capital the consideration for taxation is protection of life and property and
assets. While the three elements of this attempt at definition need not that the income rightly to be levied upon to defray the burdens of the
be accepted as all-inclusive, they serve as useful guides in any United States Government is that income which is created by
inquiry into whether a particular item is from 'sources within the activities and property protected by this Government or obtained by
United States' and suggest an investigation into the nature and persons enjoying that protection. "
5

location of the activities or property which produce the income. If

the income is from labor (services) the place where the labor is 3. We turn now to the question of what is the source of income
done should be decisive; if it is done in this country, the income rule applicable in the instant case. There are two possibly
should be from 'sources within the United States.' If the income is relevant source 01 income rules that must be confronted: (a)
from capital, the place where the capital is employed should be the source rule applicable in respect of contracts of
decisive; if it is employed in this country, the income should be from service; and (b) the source rule applicable in respect of sales of
'sources within the United States.' If the income is from the sale of personal property.
capital assets, the place where the sale is made should be likewise Where a contract for the rendition of service is involved, the
decisive. Much confusion will be avoided by regarding the term applicable source rule may be simply stated as follows: the
'source' in this fundamental light It is not a place; it is an activity or income is sourced in the place where the service contracted for
property. As such, it has a situs or location; and if that situs or
is rendered. Section 37 (a) (3) of our Tax Code reads as
location is within the United States the resulting income is taxable to
non-resident aliens and foreign corporations. The intention of follows:
Congress in the 1916 and "Section 37. Income from sources within the Philippines.
(a) Gross income from sources within the Philippines.—The
416 following items of gross income shall be treated as gross income
416 SUPREME COURT from sources within the Philippines:
REPORTS x      x      x
(3) Services.—Compensation for labor or personal
ANNOTATED services performed in the Philippines; x x x" (Italics supplied)

15 | P a g e
Section 37 (c) (3) of the Tax Code, on the other hand, deals sold without the Philippines, or produced (in whole or in part) by the
with income from sources without the Philippines in the taxpayer without and sold within the Philippines, shall be treated as
following manner: derived partly from sources within and partly from sources without
________________ the Philippines. x x x" (Italics supplied)

5
 8 Mertens, Law of Federal Income Taxation, Section 45.27 (1957); It should be noted that the above underscored portion of
underscoring supplied; footnotes omitted. Section 37 (e) was derived from the 1939 U.S. Tax Code which
"was based upon a recognition that transportation was a
417
service and that the source of the income derived therefrom
VOL. 149, APRIL 30, 417
was to be treated as being the place where the service of trans-
1987 ________________
Commissioner of Internal
Revenue vs. British Overseas
6
 Commissioner v. Hawaiian Philippine Co., 100 F. 2d 988, 991 (9th Cir.
1939), where the Court also observed that the sugar milling services rendered
Airways Corporation by the respondent were not any less in the nature of "personal" services merely
"(c) Gross income from sources without the Philippines.—The because "they were performed, in part, through the use of machinery, or because
following items of gross income shall be treated as income from of the magnitude of the taxpayers operations," Id.
sources without the Philippines:
418
(3) Compensation for labor or personal services performed
without the Philippines; x x x" (Italics supplied) 418 SUPREME COURT
REPORTS
It should not be supposed that Section 37 (a) (3) and (c) (3) of ANNOTATED
the Tax Code apply only in respect of services rendered by Commissioner of lnternal
individual natural persons; they also apply to services rendered Revenue vs. British Overseas
by or through the medium of a juridical person.  Further, a
6

Airways Corporation
contract of carriage or of transportation is assimilated in our
portation was rendered.'' 7

Tax Code and Revenue Regulations to a contract for services.

Section 37 (e) of the Tax Code quoted above carries a
Thus, Section 37 (e) of the Tax Code provides as follows:
"(e) Income from sources partly within and partly without the strong, well-nigh irresistible, implication that income derived
Philippines.—ltems of gross income, expenses, losses and from transportation or other services rendered entirely outside
deductions, other than those specified in subsections (a) and (c) of the Philippines must be treated as derived entirely from sources
this section shall be allocated or apportioned to sources within or without the Philippines. This implication is reinforced by a
without the Philippines, under the rules and regulations prescribed by consideration of certain provisions of Revenue Regulations No.
the Secretary of Finance. x x x Gains, profits, and income 2 entitled "Income Tax Regulations," as amended, first
from (1) transportation or other services rendered partly within and promulgated by the Department of Finance on 10 February
partly without the Philippines, or (2) from the sale of personal 1940. Section 155 of Revenue Regulations No. 2
property produced (in whole or in part) by the taxpayer within and

16 | P a g e
(implementing Section 37 of the Tax Code) provides in part as from all ports, both within and without the Philippines of all vessels,
follows: whether touching ports of the Philippines or not, should be
"Section 155. Compensation for labor or personal services.—Gross determined as the basis upon which allowable deductions may be
income from sources within the Philippines includes compensation computed.—." (Italics supplied)
for labor or personal services within the Philippines regardless of the
residence of the payor, of the place in which the contract for services Another type of utility or service enterprise is dealt with in
was made, or of the place of payment.—" (Italics supplied) Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) which provides as
Section 163 of Revenue Regulations No. 2 (still relating to follows:
Section 37 of the Tax Code) deals with a particular species of "Section 164. Telegraph and cable services.—A foreign corporation
foreign transportation companies—i.e., carrying on the business of transmission of telegraph or cable
foreign steamship companies deriving income from sources messages between points in the Philippines and points outside the
partly within and partly without the Philippines: Philippines derives income partly from sources within and partly
"Section 163. Foreign steamship companies.—The returns of foreign from sources without the Philippines.
steamship companies whose vessels touch ports of the x x x" (Italics supplied)
Philippines should include as gross income, the total receipts of all
outgoing business whether freight or passengers. With the gross Once more, a very strong inference arises under Sections 163
income thus ascertained, the ratio existing between it and the gross and 164 of Revenue Regulations No. 2 that steamship and tele-
income graph 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
7
 8 Mertens, Id., Section 45.43, which goes on to state that: "It was the intention
of Congress under the 1921 law to place the taxation of transportation companies
taxation.
upon a sounder and more scientific basis (rather than the species of franchise We turn to the "source of income" rules relating to
tax previously imposed upon non-residents in general), and so the principle was the sale of personal property, upon the one hand, and to
adopted of considering income derived from transportation to be income for
services, with the result that the place where the services were rendered determined
the purchase and sale of personal property, upon the other
the source. The result was income from sources partly within and partly without the hand.
United States." Id.) (Italics supplied) We consider first sales of personal property. Income from
419
the sale of personal property by the producer or manufacturer
of such personal property will be regarded as sourced entirely
VOL. 149, APRIL 30, 419
within or entirely without the Philippines or as sourced partly
1987 within and partly without the Philippines, depending upon two
Commissioner of Internal factors: (a) the place where the sale of such personal property
Revenue vs. British Overseas occurs; and (b) the place where such personal property was
Airways Corporation produced or manufactured. If the personal property involved
was both produced or manufactured and sold outside the

17 | P a g e
Philippines, the income derived therefrom will be regarded as property is sold. Section 37 (e) of the Tax Code provides in
sourced entirely outside the Philippines. If, however, the sale part as follows:
took place within the Philippines, although the personal "(e) Income from sources partly within and partly without the
property had been produced outside the Philippines, or if the Philippines x x x Gains, profits and income derived from
sale the purchase of personal property within and its sale without the
420 Philippines or from the purchase of personal property without and
420 SUPREME COURT its sale within the Philippines, shall be treated as derived entirely
from sources within the country in which sold," (Italics supplied)
REPORTS
ANNOTATED Section 159 of Revenue Regulations No. 2 puts the applicable
Commissioner of lnternal rule succinctly:
Revenue vs. British Overseas "Section 159. Sale of personal property, Income derived from the
Airways Corporation purchase and sale of personal property shall be treated as derived
entirely from the country in which sold The word 'sold' includes
of the property takes place outside the Philippines and the
'exchange.' The 'country' in which 'sold' ordinarily means the place
personal property was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income 421
sourced within and partly as income sourced without the VOL. 149, APRIL 30, 421
Philippines. In other words, the income (and the related 1987
expenses, losses and deductions) will be allocated between Commissioner of Internal
sources within and sources without the Philippines. Thus, Revenue vs. British Overseas
Section 37 (e) of the Tax Code, although already quoted above,
Airways Corporation
may be usefully quoted again:
where the property is marketed. This Section does not apply to
"(e) Income from sources partly within and partly without the
income from the sale of personal property produced (in whole or in
Philippines. x x x Gains, profits and income from (1) transportation
part) by the taxpayer within and sold without the Philippines or
or other services rendered partly within and partly without the
produced (in whole or in part) by the taxpayer without and sold
Philippines; or (2) from the sale of personal property produced (in
within the Philippines. (See Section 162 of these regulations). (Italics
whole or in part) by the taxpayer within and sold without the
supplied)
Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived 4. It will be seen that the basic problem is one of
partly from sources within and partly from sources without the
characterization of the transactions entered into by BOAC in
Philippines. x x x" (Italics supplied)
the Philippines. Those transactions may be characterized either
In contrast, income derived from the purchase and sale of as sales of personal property (i.e., "sales of airline tickets") or
personal property—i.e., trading—is, under the Tax Code, as entering into a lease of services or a contract of service or
regarded as sourced wholly in the place where the personal carriage. The applicable "source of income" rules differ

18 | P a g e
depending upon which characterization is given to the BOAC property, appear entirely inappropriate from another viewpoint
transactions. Consider first purchases and sales: is BOAC properly regarded
The appropriate characterization, in my opinion, of the as engaged in trading—in the purchase and sale of personal
BOAC transactions is that of entering into contracts of service, property? Certainly, BOAC was not purchasing tickets outside
i.e., carriage of passengers or cargo between points located the Philippines and selling them in the Philippines. Consider
outside the Philippines. next sales: can BOAC be regarded as "selling" personal
The phrase "sale of airline tickets," while widely used in property produced or manufactured by it? In a popular or
popular parlance, does not appear to be correct as a matter of journalistic sense, BOAC might be described as "selling" "a
tax law. The airline ticket in and of itself has no monetary product"—its services. However, for the technical purposes of
value, even as scrap paper. The value of the ticket lies wholly the law on income taxation, BOAC is in fact entering into
in the right acquired by the "purchaser"—the passenger—to contracts of service or carriage. The very existence of "source"
demand a prestation from BOAC, which prestation consists of rules" specifically and precisely applicable to the rendition of
the carriage of the "purchaser" or passenger from one point to services must preclude the application here of "source rules"
another outside the Philippines. The ticket is really applying generally to sales, and purchases and sales, of
the evidence of the contract of carriage entered into between personal property which can be invoked only by the grace of
BOAC and the passenger. The money paid by the passenger popular language. On a slightly more abstract level, BOAC's
changes hands in the Philippines. But the passenger does not income is more appropriately characterized as derived from a
receive in the Philippines the consideration therefor—the "service??, rather than from an "activity" (a broader term than
service undertaken to be delivered by BOAC. The "purchase service and including the activity of selling) or from the use of
price of the airline ticket" is quite different from the purchase "property." Finally, it is well to recall that what is here
price of a physical good or commodity such as a pair of shoes involved is income taxation, and not a sales tax or
or a refrigerator or an automobile; it is really the compensation an excise or privilege tax.
paid for the undertaking of BOAC to transport the passenger or 5. The taxation of international carriers is today effected
cargo outside the Philippines. under Section 24 (b) (2) of the Tax Code, as amended by
The characterization of the BOAC transactions either as Presidential Decree No. 69, promulgated on 24 November
sales of personal property or as purchases and sales of personal 1972 and by Presidential Decree No. 1355, promulgated on 21
422 April 1978, in the following manner:
422 SUPREME COURT "(2) Resident corporations.—A corporation organized, authorized. or
REPORTS existing under the laws of any foreign country. engaged in trade or
ANNOTATED business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in
Commissioner of lnternal the preceding taxable year from all sources within the
Revenue vs. British Overseas Philippines: Provided, however, That international carriers shall
Airways Corporation pay a tax of two and one-half per cent on their gross Philippine

19 | P a g e
billings. Gross Philippine billings' includes gross revenue realized Philippine income taxation, the Tax Code now imposes
from uplifts anywhere in the world by any international carrier doing this 2½ per cent tax computed on the basis of billings in respect
business in the Philippines of passage documents sold therein, of passengers and cargo originating from the Philippines
whether for passenger, excess baggage or mail, provided the cargo or regardless of where embarkation and debarkation would be
mail originates from the taking place. This 2-½ per cent tax is effectively a tax on
423 gross receipts or an excise or privilege tax and not a tax
VOL. 149, APRIL 30, 423 on income. Thereby, the Government has done away with the
1987 difficulties attending the allocation of income and related
expenses, losses and deductions, Because taxes are the very
Commissioner of lnternal
lifeblood of government, the resulting potential "loss" or "gain"
Revenue vs. British Overseas
in the amount of taxes collectible by the state is sometimes,
Airways Corporation with varying degrees of consciousness, considered in choosing
Philippines. The gross revenue realized from the said cargo or mail from among competing possible characterizations under or
shall include the gross freight charge up to final destination. Gross
interpretations of tax statutes, It is hence perhaps useful to
revenues from chartered flights originating from the Philippines shall
likewise form part of 'gross Philippine billings' regardless of the point out that the determination of the appropriate
place of sale or payment of the passage documents. For purposes of characterization here—that of contracts of air carriage rather
determining the taxability of revenues from chartered flights, the than sales of airline tickets
term 'originating from the Philippines' shall include flight of 424
passengers who stay in the Philippines for more than forty-eight (48) 424 SUPREME COURT
hours prior to embarkation." (Italics supplied) REPORTS
ANNOTATED
Under the above-quoted proviso, international carriers issuing
for compensation passage documentation in the Philippines for United CMC Textile Workers
uplifts from any point in the world to any other point in the Union vs. Labor Arbiter
world, are not charged any Philippine income tax on their —entails no down-the-road loss of income tax revenues to the
Philippine billings (i.e., billings in respect of passenger or Government. In lieu thereof, the Government takes in revenues
cargo originating from the Philippines). Under this new generated by the 2-½ per cent tax on the gross Philippine
approach, international carriers who service ports or points in billings or receipts of international carriers.
the Philippines are treated in exactly the same way as I would vote to affirm the decision of the Court of Tax
international carriers not servicing any port or point in the Appeals.
Philippines. Thus, the source of income rule applicable, as Decision set aside.
above discussed, to transportation or other services rendered Notes.—Taxes being the chief source of revenue for the
partly within and partly without the Philippines, or wholly Government to keep it running must be paid immediately and
without the Philippines, has been set aside. In place of

20 | P a g e
without delay. (Collector of Internal Revenue vs. Yuseco, 3
SCRA 315.)
Taxability of a foreign corporation's income depends upon
the locus of the activity, property or service giving rise
thereto. (British Traders Insurance Co., Ltd. vs. Commissioner
of lnternal Revenue, 13 SCRA 713.)
Since the items of income not belonging to its Philippine
business are not taxable to its Philippine branch, they should be
excluded in determining the head expenses allowable to a
Philippine branch of a foreign corporation. (Commissioner of
Internal Revenue vs. Phoenix Assurance Co., Ltd., 14 SCRA
52.)

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