CIR vs.

British Overseas Airways Corporation and CTA

FACTS:

BOAC is a 100% British government owned corporation organized and existing under
the law of the UK.

It is engaged in the international airline business and is a member-signatory of the

Interline Air Transport Association (IATA). As such it operates air transportation service
and sells transportation tickets over the routes of the other airline members

BOAC had no landing rights not granted a certificate of public convenience by Civil
Aeronautics Board (CAB). Except for a 9 month period sometime between 1961 and
1962. BOAC did not carry passengers/cargo to or from the PHL. but it maintained a
general sales agent in the Philippines.(Wamer Barnes and Company – Qantas airways
= responsible for selling BOAC tickets for passengers and cargoes)

1st case: 1959-1963

In May 1968, CIR assessed BOAC the aggregate amount of almost 2.5M for deficiency
income taxes for years covering 1959-1963.BOAC protested. A new assessment was
later issued on Jan. 16, 1970 in the amount of at least P850k for years covering 1959-
1968, BOAC paid under protest and later filed a claim for refund in October. BOAC then
filed a petition for review with the CTA .CIR later denied the claim for refund in February
1972.

2nd case 1968-1969 & 1970-1971

In November 1971, BOAC was assessed deficiency income taxes for fiscal years 1968-
1969 to 1970-1971 for amount of almost 552k including compromise penalties for failing
to file corporation returns. BOAC again requested that the assessment be set aside, but
was again denied along with subsequent MR and further reissued the 552k deficiency
income tax assessment. BOAC thus submitted the case to the CTA with prayer to be
absolved of liability.

CTA

CTA reversed CIR’s decision. The CTA held that Income from transportation is
income from services so that the place where services are rendered determines
the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency
income tax assessments against BOAC in the amount of P534,132.08 for the fiscal
years 1968-69 to 1970-71.
It held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during the period in question,
do not constitute BOAC income from Philippine sources "since no service of
carriage of passengers or freight was performed by BOAC within the Philippines"
and, therefore, said income is not subject to Philippine income tax

ISSUE:

(1) Whether or not the revenue derived by private respondent British Overseas Airways
Corporation (BOAC) from sales of tickets in the Philippines for air transportation,
while having no landing rights here, constitute income of BOAC from Philippine
sources, and, accordingly, taxable.
(2) Whether or not during the fiscal years in question BOAC is a resident foreign
corporation doing business in the Philippines or has an office or place of business in
the Philippines

HELD:

(1) Yes, tax rate of 2 & ½% of income derived in the PHL. . the income was derived, or
originally sourced from within the Philippines. The 2-½ % tax on gross Philippine
billings is an income tax. If it had been intended as an excise or percentage tax it
would have been place under Title V of the Tax Code covering Taxes on Business.

"Gross income" include proceeds from sales of transport documents. includes gains,
profits, and income derived from salaries, wages or compensation for personal
service of whatever kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also from
interests, rents, dividends, securities, or the transactions of any business carried on
for gain or profile, or gains, profits, and income derived from any source whatever

"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. .

Although sale of tickets for international transportation is not mentioned as income, it

is still income derived from sources within the Philippines. 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.

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.

From the facts provided, the Philippine gross income of BOAC for the fiscal years
1968-69 to 1970-71 amounted to P10,428,368 .00. The source of an income is the
property, activity or service that produced the income. For the source of income
to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income.

It is not income from services rendered outside the country but the sale
perfected in the PHL.

(2) BOAC is a resident foreign corporation. the term resident foreign corporation
engaged in trade or business within the Philippines or having an office or place of
business therein. There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. 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.

From the facts provided, the selling of tickets was in exercise of the functions which
are normally incident to, and are in progressive pursuit of, the purpose and object of
its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective

BOAC, during the periods covered by the subject - assessments, maintained a

general sales agent in the Philippines, That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into
series of trips — each trip in the series corresponding to a different airline company;
(3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the Resolution
No. 850 of the IATA Agreement."
 There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.

NOTES:

JAL vs. Commissioner of Internal Revenue 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. 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 whatever kind and in whatever form derived
from any source." Since the two cases treat of a different subject matter, the decision in
one cannot be res judicata to the other.

Dissenting opinion

For purposes of income taxation, it is well to bear in mind that the "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.

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as
the activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying
prestation was the indemnification of the local insurance company. Such indemnification could take
place only in the Philippines where the risks were located and where payment from the foreign
reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos
under the reinsurance premiums paid by the local insurance companies constituted Philippine
source income of the foreign reinsurances.

income may be derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the
sale of capital assets.

If the income is from labor (services) the place where the labor is done should be decisive; if it is
done in this counrty, the income should be from "source within the United States."
If the income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the United States".

If the income is from the sale of capital assets, the place where the sale is made should be likewise
decisive.

"source" It is not a place; it is an activity or property. The intention of Congress in the 1916 and
subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the income issue 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.

Where a contract for the rendition of service is involved, the applicable source rule may be simply
stated as follows: the income is sourced in the place where the service contracted for is rendered.
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 transportation was rendered. implication that income derived
from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand,
and to the purchase and sale of personal property, upon the other hand.

We consider first 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 as 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.

If the personal property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale
of the property takes place outside the Philippines and the personal was produced in the Philippines,
then, the income derived from the sale will be deemed partly as income sourced without the
Philippines. In other words, the income (and the related expenses, losses and deductions) will be
allocated between sources within and sources without the Philippines.

This 2-½ per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax
on income. Thereby, the Government has done away with the difficulties attending the allocation of
income and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in choosing from among competing
possible characterizations under or interpretation of tax statutes. It is hence perhaps useful to point
out that the determination of the appropriate characterization here — that of contracts of air carriage
rather than sales of airline tickets — entails no down-the-road loss of income tax revenues to the
Government. In lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax
on the gross Philippine billings or receipts of international carriers.