RepublicofthePhilippines

SUPREMECOURT
Manila
ENBANC
G.R.No.L6577374April30,1987
COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
BRITISHOVERSEASAIRWAYSCORPORATIONandCOURTOFTAXAPPEALS,respondents.

MELENCIOHERRERA,J.:
PetitionerCommissionerofInternalRevenue(CIR)seeksareviewoncertiorariofthejointDecisionofthe
CourtofTaxAppeals(CTA)inCTACasesNos.2373and2561,dated26January1983,whichsetaside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways
Corporation(BOAC)forthefiscalyears1959to1967,196869to197071,respectively,aswellasits
Resolutionof18November,1983denyingreconsideration.
BOACisa100%BritishGovernmentownedcorporationorganizedandexistingunderthelawsofthe
United Kingdom It is engaged in the international airline business and is a membersignatory of the
Interline Air Transport Association (IATA). As such it operates air transportation service and sells
transportation ticketsover theroutesoftheotherairlinemembers.Duringtheperiodscovered bythe
disputedassessments,itisadmittedthatBOAChadnolandingrightsfortrafficpurposesinthePhilippines,
andwasnotgrantedaCertificateofpublicconvenienceandnecessitytooperateinthePhilippinesbythe
CivilAeronauticsBoard(CAB),exceptforaninemonthperiod,partlyin1961andpartlyin1962,whenit
wasgrantedatemporarylandingpermitbytheCAB.Consequently,itdidnotcarrypassengersand/or
cargotoorfromthePhilippines,althoughduringtheperiodcoveredbytheassessments,itmaintaineda
generalsalesagentinthePhilippinesWamerBarnesandCompany,Ltd.,andlaterQantasAirways
whichwasresponsibleforsellingBOACticketscoveringpassengersandcargoes.1
G.R.No.65773(CTACaseNo.2373,theFirstCase)
On7May 1968,petitionerCommissioner ofInternal Revenue (CIR,for brevity) assessed BOAC the
aggregateamountofP2,498,358.56fordeficiencyincometaxescoveringtheyears1959to1963.Thiswas
protested byBOAC.Subsequent investigationresulted inthe issuance ofanew assessment,dated 16
January1970fortheyears1959to1967intheamountofP858,307.79.BOACpaidthisnewassessment
underprotest.
On7October1970,BOACfiledaclaimforrefundoftheamountofP858,307.79,whichclaimwasdenied
bytheCIRon16February1972.Butbeforesaiddenial,BOAChadalreadyfiledapetitionforreviewwith
theTaxCourton27January1972,assailingtheassessmentandprayingfortherefundoftheamountpaid.
G.R.No.65774(CTACaseNo.2561,theSecondCase)
On17November1971,BOACwasassesseddeficiencyincometaxes,interests,andpenaltyforthefiscal
years19681969to19701971intheaggregateamountofP549,327.43,andtheadditionalamountsof
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporationreturns)penalizedunderSection74oftheNationalInternalRevenueCode(NIRC).

On25November1971,BOACrequestedthattheassessmentbecountermandedandsetaside.Inaletter,
dated16February1972,however,theCIRnotonlydeniedtheBOACrequestforrefundintheFirstCase
butalsoreissuedintheSecondCasethedeficiencyincometaxassessmentforP534,132.08fortheyears
1969to197071plusP1,000.00ascompromisepenaltyunderSection74oftheTaxCode.BOAC'srequest
forreconsiderationwasdeniedbytheCIRon24August1973.ThispromptedBOACtofiletheSecond
CasebeforetheTaxCourtprayingthatitbeabsolvedofliabilityfordeficiencyincometaxfortheyears
1969to1971.
ThiscasewassubsequentlytriedjointlywiththeFirstCase.
On26January1983,theTaxCourtrenderedtheassailedjointDecisionreversingtheCIR.TheTaxCourt
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company,Ltd.,and laterbyQantas Airways, duringtheperiod inquestion,donot constitute BOAC
incomefromPhilippinesources"sincenoserviceofcarriageofpassengersorfreightwasperformedby
BOACwithinthePhilippines"and,therefore,saidincomeisnotsubjecttoPhilippineincometax.The
CTApositionwasthatincomefromtransportationisincomefromservicessothattheplacewhereservices
arerendereddeterminesthesource.Thus,inthedispositiveportionofitsDecision,theTaxCourtordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessmentsagainstBOACintheamountofP534,132.08forthefiscalyears196869to197071.
Hence,thisPetitionforReviewoncertiorarioftheDecisionoftheTaxCourt.
TheSolicitorGeneral,inrepresentationoftheCIR,hasaptlydefinedtheissues,thus:
1.WhetherornottherevenuederivedbyprivaterespondentBritishOverseasAirways
Corporation(BOAC)fromsalesofticketsinthePhilippinesforairtransportation,while
havingnolandingrightshere,constituteincomeofBOACfromPhilippinesources,and,
accordingly,taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporationdoingbusinessinthePhilippinesorhasanofficeorplaceofbusinessinthe
Philippines.
3.Inthealternativethatprivaterespondent maynotbeconsideredaresident foreign
corporationbutanonresidentforeigncorporation,thenitisliabletoPhilippineincome
taxattherateofthirtyfivepercent(35%)ofitsgrossincomereceivedfromallsources
withinthePhilippines.
UnderSection20ofthe1977TaxCode:
(h) the term resident foreign corporation engaged in trade or business within the
Philippinesorhavinganofficeorplaceofbusinesstherein.
(i) The term "nonresident foreign corporation" applies to a foreign corporation not
engagedintradeorbusinesswithinthePhilippinesandnothavinganyofficeorplaceof
businesstherein
ItisourconsideredopinionthatBOACisaresidentforeigncorporation.Thereisnospecificcriterionasto
whatconstitutes"doing"or"engagingin"or"transacting"business.Eachcasemustbejudgedinthelight
ofitspeculiarenvironmentalcircumstances.Thetermimpliesacontinuityofcommercial dealingsand
arrangements,andcontemplates,tothatextent,theperformanceofactsorworksortheexerciseofsomeof
thefunctionsnormallyincidentto,andinprogressiveprosecutionofcommercialgainorforthepurpose
andobjectofthebusinessorganization.2"Inorderthataforeigncorporationmayberegardedasdoing
business within a State, there must be continuity of conduct and intention to establish a continuous
business,suchastheappointmentofalocalagent,andnotoneofatemporarycharacter.3

BOAC,duringtheperiodscoveredbythesubjectassessments,maintainedageneralsalesagentinthe
Philippines,Thatgeneralsalesagent,from1959to1971,"wasengagedin(1)sellingandissuingtickets;
(2)breakingdownthewholetripintoseriesoftripseachtripintheseriescorrespondingtoadifferent
airlinecompany;(3)receivingthefarefromthewholetrip;and(4)consequentlyallocatingtothevarious
airlinecompaniesonthebasisoftheirparticipationintheservicesrenderedthroughthemodeofinterline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement."4Those
activitieswereinexerciseofthefunctionswhicharenormallyincidentto,andareinprogressivepursuitof,
thepurposeandobjectofitsorganizationasaninternationalaircarrier.Infact,theregularsaleoftickets,
itsmainactivity,istheverylifebloodoftheairlinebusiness,thegenerationofsalesbeingtheparamount
objective.ThereshouldbenodoubtthenthatBOACwas"engagedin"businessinthePhilippinesthrough
alocalagentduringtheperiodcoveredbytheassessments.Accordingly,itisaresidentforeigncorporation
subjecttotaxuponitstotalnetincomereceivedintheprecedingtaxableyearfromallsourceswithinthe
Philippines.5
Sec.24.Ratesoftaxoncorporations....
(b)Taxonforeigncorporations....
(2)Residentcorporations.Acorporationorganized,authorized,orexistingunderthe
lawsofanyforeigncountry,exceptaforeignfifeinsurancecompany,engagedintradeor
businesswithinthePhilippines,shallbetaxableasprovidedinsubsection(a)ofthis
sectionuponthetotalnetincomereceivedintheprecedingtaxableyearfromallsources
withinthePhilippines.(Emphasissupplied)
Next,weaddressourselvestotheissueofwhetherornottherevenuefromsalesofticketsbyBOACinthe
PhilippinesconstitutesincomefromPhilippinesourcesand,accordingly,taxableunderourincometax
laws.
TheTaxCodedefines"grossincome"thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or
compensationforpersonalserviceofwhateverkindandinwhateverformpaid,orfrom
profession,vocations,trades,business,commerce,sales,ordealingsinproperty,whether
realorpersonal,growingoutoftheownershiporuseoforinterestinsuchproperty;also
frominterests,rents,dividends,securities,orthetransactionsofanybusinesscarriedon
forgainorprofile,orgains,profits,andincomederivedfromanysourcewhatever(Sec.
29[3];Emphasissupplied)
Thedefinitionisbroadandcomprehensivetoincludeproceedsfromsalesoftransportdocuments."The
words'incomefromanysourcewhatever'disclosealegislativepolicytoincludeallincomenotexpressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent";itistheamountofmoneycomingtoapersonwithinaspecifictime...;itmeanssomething
distinctfromprincipalorcapital.For,whilecapitalisafund,incomeisaflow.Asusedinourincometax
law,"income"referstotheflowofwealth.6
Therecords showthatthePhilippinegrossincomeofBOACforthefiscalyears196869to197071
amountedtoP10,428,368.00.7
Didsuch"flowofwealth"comefrom"sourceswithinthePhilippines",
Thesourceofanincomeistheproperty,activityorservicethatproducedtheincome.8Forthesourceof
incometobeconsideredascomingfromthePhilippines,itissufficientthattheincomeisderivedfrom
activitywithinthePhilippines.InBOAC'scase,thesaleofticketsinthePhilippinesistheactivitythat
producestheincome.Theticketsexchangedhandshereandpaymentsforfareswerealsomadeherein
Philippinecurrency.ThesiteofthesourceofpaymentsisthePhilippines.Theflowofwealthproceeded

from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government.Inconsiderationofsuchprotection,theflowofwealthshouldsharetheburdenofsupporting
thegovernment.
Atransportationticketisnotamerepieceofpaper.Whenissuedbyacommoncarrier,itconstitutesthe
contractbetweentheticketholderandthecarrier.Itgivesrisetotheobligationofthepurchaserofthe
tickettopaythefareandthecorrespondingobligationofthecarriertotransportthepassengeruponthe
termsandconditionssetforththereon.Theordinaryticketissuedtomembersofthetravelingpublicin
generalembraceswithinitstermsalltheelementstoconstituteitavalidcontract,bindingupontheparties
enteringintotherelationship.9
True,Section37(a)oftheTaxCode,whichenumeratesitemsofgrossincomefromsourceswithinthe
Philippines, namely: (1) interest, (21) dividends, (3)service, (4)rentals and royalties,(5) saleof 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.Section37,byitslanguage,doesnotintendtheenumerationtobeexclusive.Itmerelydirects
thatthetypesofincomelistedthereinbetreatedasincomefromsourceswithinthePhilippines.Acursory
readingofthesectionwillshowthatitdoesnotstatethatitisanallinclusiveenumeration,andthatno
otherkindofincomemaybesoconsidered."10
BOAC,however,wouldimpressuponthisCourtthatincomederivedfromtransportationisincomefor
services,withtheresultthattheplacewheretheservicesarerendereddeterminesthesource;andsince
BOAC'sserviceoftransportationisperformedoutsidethePhilippines,theincomederivedisfromsources
withoutthePhilippinesand,therefore,nottaxableunderourincometaxlaws.TheTaxCourtupholdsthat
standinthejointDecisionunderreview.
TheabsenceofflightoperationstoandfromthePhilippinesisnotdeterminativeofthesourceofincomeor
thesiteofincometaxation.Admittedly,BOACwasanofflineinternationalairlineatthetimepertinentto
thiscase. Thetestoftaxabilityisthe"source";andthesourceofanincomeisthatactivity...which
produced the income.11Unquestionably, the passage documentations in these cases were sold in the
PhilippinesandtherevenuetherefromwasderivedfromaactivityregularlypursuedwithinthePhilippines.
businessaAndeveniftheBOACticketssoldcoveredthe"transportofpassengersandcargotoandfrom
foreign cities",12it cannot alter the fact that income from the sale of tickets was derived from the
Philippines.Theword"source"conveysoneessentialidea,thatoforigin,andtheoriginoftheincome
hereinisthePhilippines.13
Itshouldbepointedout,however,thattheassessmentsupheldhereinapplyonlytothefiscalyearscovered
bythequestioneddeficiencyincometaxassessmentsinthesecases,or,from1959to1967,196869to
197071.For,pursuanttoPresidentialDecreeNo.69,promulgatedon24November,1972,international
carriersarenowtaxedasfollows:
...Provided,however,Thatinternationalcarriersshallpayataxof2percentontheir
crossPhilippinebillings.(Sec.24[b][21,TaxCode).
PresidentialDecreeNo.1355,promulgatedon21April,1978,providedastatutorydefinitionoftheterm
"grossPhilippinebillings,"thus:
..."GrossPhilippinebillings"includesgrossrevenuerealizedfromupliftsanywherein
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
cargoormailoriginatesfromthePhilippines....

The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources.The2%taxongrossPhilippinebillingsisanincometax.Ifithadbeenintendedasanexciseor
percentagetaxitwouldhavebeenplaceunderTitleVoftheTaxCodecoveringTaxesonBusiness.
Lastly,wefindasuntenabletheBOACargumentthatthedismissalforlackofmeritbythisCourtofthe
appeal inJAL vs. Commissioner of Internal Revenue(G.R. No. L30041) on February 3, 1969, isres
judicatatothepresentcase.TherulingbytheTaxCourtinthatcasewastotheeffectthatthemeresaleof
tickets, unaccompanied bythe physical act ofcarriage oftransportation, does not render thetaxpayer
thereinsubjecttothecommoncarrier'stax.AselucidatedbytheTaxCourt,however,thecommoncarrier's
taxisanexcisetax,beingataxontheactivityoftransporting,conveyingorremovingpassengersandcargo
fromoneplacetoanother.Itpurportstotaxthebusinessoftransportation.14Beinganexcisetax,thesame
canbeleviedbytheStateonlywhentheacts,privilegesorbusinessesaredoneorperformedwithinthe
jurisdictionofthePhilippines.Thesubjectmatterofthecaseunderconsiderationisincometax,adirecttax
ontheincomeofpersonsandotherentities"ofwhateverkindandinwhateverformderivedfromany
source."Sincethetwocasestreatofadifferentsubjectmatter,thedecisioninonecannotbe resjudicatato
theother.
WHEREFORE,theappealedjointDecisionoftheCourtofTaxAppealsishereby SETASIDE.
Privaterespondent,theBritishOverseasAirwaysCorporation(BOAC),isherebyorderedtopaythe
amountofP534,132.08asdeficiencyincometaxforthefiscalyears196869to197071plus5%
surcharge,and1%monthlyinterestfromApril16,1972foraperiodnottoexceedthree(3)yearsin
accordancewiththeTaxCode.TheBOACclaimforrefundintheamountofP858,307.79ishereby
denied.Withoutcosts.
SOORDERED.