CIR vs.

BRITISH OVERSEAS AIRWAYS CORPORATION

BOAC is a 100% British Government-owned corporation organized and existing under the laws
of the United Kingdom It is engaged in the international airline business and is a member-
signatory of the Interline Air Transport Association (IATA).

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 necessity to operate in the Philippines by the Civil Aeronautics Board (CAB),
except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a
temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to
or from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas
Airways — which was responsible for selling BOAC tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, CIR assessed BOAC the aggregate amount of P2,498,358.56 for deficiency
income taxes covering the years 1959 to 1963.

Subsequent investigation resulted in the issuance of a new assessment, in the amount of

P858,307.79. BOAC paid this new assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim
was denied by the CIR.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for
the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the
additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section
46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal
Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside.
However, the CIR not only denied the BOAC request for refund in the First Case but also re-
issued 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 the Tax Code.
BOAC's request for reconsideration was denied by the CIR on 24 August 1973.

This prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court 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. The CTA position was 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.
Hence, this Petition.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

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 s a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.

3. In the alternative that private respondent may not be considered a resident foreign corporation
but a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of
thirty-five per cent (35%) of its gross income received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein.
(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

It is our considered opinion that BOAC is a resident foreign corporation. "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.  3

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 engage 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." 

Those activities were 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. 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. 5

Sec. 24. Rates of tax on corporations. — ...

(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign fife insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Issue:
WON the revenue from sales of tickets by BOAC in the Philippines constitutes income from
Philippine sources and, accordingly, taxable under our income tax laws.

Ruling:
Yes, 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% 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.

The Tax Code defines "gross income" thus:

"Gross income" 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.

" Income means "cash received or its equivalent"; it is the amount of money coming to a person
within a specific time ...; it means something distinct from principal or capital. For, while capital is
a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth.  6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-
71 amounted to P10,428,368 .00.  7

Did such "flow of wealth" come from "sources within the Philippines"? The source of an income is
the property, activity or service that produced the income.   For the source of income to be
8

considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines.

In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.

A transportation ticket is not a mere piece of paper but constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon.

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within
the Philippines, namely:
(1) interest,
(2) 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. 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. " 

BOAC’ Argument: that income derived from transportation is income for services, with the
result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived
is from sources without the Philippines and, therefore, not taxable under our income tax
laws.

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. 11 Unquestionably, 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", 12 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. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned
deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2-½ per cent
on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of
the term "gross Philippine billings," thus:

... "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. ...

The foregoing provision ensures that international airlines are taxed on their income from
Philippine sources. 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.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court
of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3,
1969, is res judicata to the present case. 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.