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EN BANC [G.R. Nos. L-65773-74. April 30, 1987.] COMMISSIONER OF INTERNAL REVENUE , petitioner, vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS , respondents. Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways. DECISION MELENCIO-HERRERA , J :
    EN BANC [G.R. Nos. L-65773-74. April 30, 1987.]COMMISSIONER OF INTERNAL REVENUECOMMISSIONER OF INTERNAL REVENUE,  petitioner  , vs.vs.  BRITISHBRITISHOVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALSOVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents  . Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.D E C I S I O ND E C I S I O NMELENCIO-HERRERAMELENCIO-HERRERA, J p :Petitioner Commissioner of Internal Revenue (CIR) seeks a review on Certiorari of the jointDecision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26January 1983, which set aside petitioner's assessment of deciency income taxes againstrespondent British Overseas Airways Corporation (BOAC) for the scal years 1959 to1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983denying reconsideration. cdphil BOAC is a 100% British Government-owned corporation organized and existing under thelaws of the United Kingdom. It is engaged in the international airline business and is amember-signatory of the Interline Air Transport Association (IATA). As such, it operates airtransportation service and sells transportation tickets over the routes of the other airlinemembers. During the periods covered by the disputed assessments, it is admitted thatBOAC had no landing rights for trafc purposes in the Philippines, and was not granted aCerticate of public convenience and necessity to operate in the Philippines by the CivilAeronautics 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 carrypassengers and/or cargo to or from the Philippines, although during the period covered bythe assessments, it maintained a general sales agent in the Philippines — Warner Barnesand Company, Ltd., and later Qantas Airways — which was responsible for selling BOACtickets covering passengers and cargoes. 11 G  . R  .  No  .  65773   (CTA Case No. 2373, the First Case)On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessedBOAC the aggregate amount of P2,498,358.56 for deciency income taxes covering theyears 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in theissuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in theamount of P858,307.79. BOAC paid this new assessment under protest.On 7 October 1970, BOAC led a claim for refund of the amount of P858,307.79, whichclaim was denied by the CIR on 16 February 1972. But before said denial, BOAC hadalready led a petition for review with the Tax Court on 27 January 1972, assailing theassessment and praying for the refund of the amount paid. CD Technologies Asia, Inc. © 2016cdasiaonline.com  G.R. No. 65774   (CTA Case No. 2561, the Second Case)On 17 November 1971, BOAC was assessed deciency income taxes, interests, andpenalty for the scal years 1968/1969 to 1970-1971 in the aggregate amount ofP549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromisepenalties for violation of Section 46 (requiring the ling of corporation returns) penalizedunder Section 74 of the National Internal Revenue Code (NIRC).On 25 November 1971, BOAC requested that the assessment be countermanded and setaside. In a letter, dated 16 February 1972, however, the CIR not only denied the BOACrequest for refund in the First Case but also re-issued in the Second Case the deciencyincome tax assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 ascompromise penalty under Section 74 of the Tax Code. BOAC's request forreconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to le theSecond Case before the Tax Court praying that it be absolved of liability for deciencyincome tax for the years 1969 to 1971.This case was subsequently tried jointly with the First Case.On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR.The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippinesby Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period inquestion, do not constitute BOAC income from Philippine sources since no service ofcarriage 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 thatincome from transportation is income from services so that the place where services arerendered determines the source. Thus, in the dispositive portion of its Decision, the TaxCourt ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel thedeciency income tax assessments against BOAC in the amount of P534,132.08 for thefiscal years 1968-69 to 1970-71.Hence, this Petition for Review on Certiorari of the Decision of the Tax Court.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 OverseasAirways Corporation (BOAC) from sales of tickets in the Philippines for airtransportation, while having no landing rights here, constitute income of BOACfrom Philippine sources, and, accordingly, taxable. 2. Whether or not during the scal years in question BOAC is a resident foreigncorporation doing business in the Philippines or has an ofce or place ofbusiness in the Philippines. 3. In the alternative that private respondent may not be considered a residentforeign corporation but a non-resident foreign corporation, then it is liable toPhilippine income tax at the rate of thirty-ve per cent (35%) of its gross incomereceived from all sources within the Philippines. Under Section 20 of the 1977 Tax Code: (h) the term 'resident foreign corporation' applies to a foreign corporationengaged in trade or business within the Philippines or having an ofce or place ofbusiness therein. (i) The term 'non-resident foreign corporation' applies to a foreign corporation not CD Technologies Asia, Inc. © 2016cdasiaonline.com  engaged in trade or business within the Philippines and not having any ofce orplace of business therein. LLpr It is our considered opinion that BOAC is a resident foreign corporation. There is nospecic criterion as to what constitutes doing or engaging in or transacting business.Each case must be judged in the light of its peculiar environmental circumstances. Theterm implies a continuity of commercial dealings and arrangements, and contemplates, tothat extent, the performance of acts or works or the exercise of some of the functionsnormally incident to, and in progressive prosecution of commercial gain or for the purposeand object of the business organization. 2 In order that a foreign corporation may beregarded as doing business within a State, there must be continuity of conduct andintention to establish a continuous business, such as the appointment of a local agent, andnot one of a temporary character.' 33 BOAC, during the periods covered by the subject-assessments, maintained a general salesagent 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 tripin the series corresponding to a different airline company; (3) receiving the fare from thewhole trip; and (4) consequently allocating to the various airline companies on the basis oftheir participation in the services rendered through the mode of interline settlement asprescribed by Article VI of the Resolution No. 850 of the IATA Agreement. 4 Thoseactivities were in exercise of the functions which are normally incident to, and are inprogressive pursuit of, the purpose and object of its organization as an international aircarrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airlinebusiness, the generation of sales being the paramount objective. There should be no doubtthen that BOAC was engaged in business in the Philippines through a local agent duringthe period covered by the assessments. Accordingly, it is a resident foreign corporationsubject to tax upon its total net income received in the preceding taxable year from allsources within the Philippines. 55 Sec. 24. Rates of tax on corporations. — . . . (b) Tax on foreign corporations. — . . . (2) Resident corporations. — A corporation organized, authorized, or existingunder the laws of any foreign country, except a foreign life insurance company,engaged in trade or business within the Philippines, shall be taxable as providedin subsection (a) of this section upon the total net income received in thepreceding taxable year from all sources within the Philippines. (Emphasis ours) Next, we address ourselves to the issue of whether or not the revenue from sales oftickets by BOAC in the Philippines constitutes income from Philippine sources and,accordingly, taxable under our income tax laws.The Tax Code defines gross income thus: 'Gross income' includes gains, prots, and income derived from salaries, wagesor compensation for personal service of whatever kind and in whatever form paid,or from profession, vocations, trades, business, commerce, sales, or dealings inproperty, whether real or personal, growing out of the ownership or use of orinterest in such property; also from interests, rents, dividends, securities, or thetransactions of any business carried on for gain or prot or gains, prots, andincome derived from any source whatever (Sec. 29[3]; Emphasis supplied) The denition is broad and comprehensive to include proceeds from sales of transport CD Technologies Asia, Inc. © 2016cdasiaonline.com  documents. The words 'income from any source whatever' disclose a legislative policy toinclude all income not expressly exempted within the class of taxable income under ourlaws. Income means cash received or its equivalent ; it is the amount of money coming toa person within a specic time . . .; it means something distinct from principal or capital.For, while capital is a fund, income is a ow. As used in our income tax law, income refersto the flow of wealth. 66  The records show that the Philippine gross income of BOAC for the scal years 1968-69to 1970-71 amounted to P10,428,368.00. 77 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. 88  Forthe source of income to be considered as coming from the Philippines, it is sufcient thatthe income is derived from activity within the Philippines. In BOAC's case, the sale oftickets in the Philippines is the activity that produces the income. The tickets exchangedhands here and payments for fares were also made here in Philippine currency. The situsof the source of payments is the Philippines. The ow of wealth proceeded from, andoccurred within, Philippine territory, enjoying the protection accorded by the Philippinegovernment. In consideration of such protection, the ow of wealth should share theburden of supporting the government.A transportation ticket is not a mere piece of paper. When issued by a common carrier, itconstitutes the contract between the ticket-holder and the carrier. It gives rise to theobligation of the purchaser of the ticket to pay the fare and the corresponding obligationof the carrier to transport the passenger upon the terms and conditions set forth thereon.The ordinary ticket issued to members of the travelling public in general embraces withinits terms all the elements to constitute it a valid contract, binding upon the parties enteringinto the relationship. 99 True, Section 37(a) of the Tax Code, which enumerates items of gross income fromsources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentalsand royalties, (5) sale of real property, and (6) sale of personal property, does not mentionincome from the sale of tickets for international transportation. However, that does notrender 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 incomelisted therein be treated as income from sources within the Philippines. A cursory readingof the section will show that it does not state that it is an all-inclusive enumeration, andthat no other kind of income may be so considered. 1010 BOAC, however, would impress upon this Court that income derived from transportation isincome for services, with the result that the place where the services are rendereddetermines the source; and since BOAC's service of transportation is performed outsidethe Philippines, the income derived is from sources without the Philippines and, therefore,not taxable under our income tax laws. The Tax Court upholds that stand in the jointDecision under review.The absence of ight operations to and from the Philippines is not determinative of thesource of income or the situs of income taxation. Admittedly, BOAC was an off-lineinternational 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 CD Technologies Asia, Inc. © 2016cdasiaonline.com
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