CIR v. BOAC (1987, 149 SCRA 395)
CIR v. BOAC (1987, 149 SCRA 395)
CIR v. BOAC (1987, 149 SCRA 395)
L-65773-74, April
30, 1987, 149 SCRA 395)
EN BANC
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British
Airways.
DECISION
MELENCIO-HERRERA, J p:
G.R. No. 65773 (CTA Case No. 2373, the First Case)
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
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 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 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:
Next, we address ourselves to the issue of whether or not the revenue from
sales of tickets by BOAC in the Philippines constitutes income from Philippine
sources and, accordingly, taxable under our income tax laws.
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. 8 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. The tickets exchanged hands here and payments for
fares were also made here in Philippine currency. The situs 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.
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.
10
BOAC, however, would impress upon this Court 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 Tax Court upholds that stand in the joint Decision under review.
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:
The foregoing provision ensures that international airlines are taxed on their
income from Philippine sources. The 2-1/2% 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. 14 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.
SO ORDERED.
Fernan, J ., took no part, his brother-in-law being a member of the law firm
representing private respondents.
Separate Opinions
TEEHANKEE, C .J ., concurring:
FELICIANO, J ., dissenting:
With great respect and reluctance, I record my dissent from the opinion of
Mme. Justice A.A. Melencio-Herrera speaking for the majority. In my opinion,
the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British
Overseas Airways Corporation (BOAC), a foreign airline company which does
not maintain any flight operations to and from the Philippines, is liable for
Philippine income taxation in respect of "sales of air tickets" in the Philippines
through a general sales agent, relating to the carriage of passengers and cargo
between two points both outside the Philippines. cdtai
1. The Solicitor General has defined as one of the issues in this case the
question of:
It is important to note at the outset that the answer to the above-quoted issue
is not determinative of the liability of the BOAC to Philippine income taxation in
respect of the income here involved. The liability of BOAC to Philippine income
taxation in respect of such income depends, not on BOAC's status as a
"resident foreign corporation" or alternatively, as a "non-resident foreign
corporation," but rather on whether or not such income is derived from
"sources within the Philippines."
Republic Act No. 6110, which took effect on 4 August 1969, made this even
clearer when it amended once more Section 24 (b) (2) of the Tax Code so as
to read as follows:
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon
non-resident foreign corporations. Section 24 (b) (1) as amended by Republic
Act No. 3825 approved 22 June 1963, read as follows:
2. 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." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
Court dealt with the issue of the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign reinsurance company
in respect of risks located in the Philippines. The Court said:
3. We turn now to the question of what is the source of income rule applicable
in the instant case. There are two possibly relevant source of income rules that
must be confronted: (a) the source rule applicable in respect of contracts of
service; and (b) the source rule applicable in respect of sales of personal
property.
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. Section 37 (a) (3) of our Tax Code reads
as follows:
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from
sources without the Philippines in the following manner:
"(c) Gross income from sources without the Philippines. The
following items of gross income shall be treated as income from
sources without the Philippines:
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code
apply only in respect of services rendered by individual natural persons; they
also apply to services rendered by or through the medium of a juridical person.
6 Further, a contract of carriage or of transportation is assimilated in our Tax
Code and Revenue Regulations to a contract for services. Thus, Section 37 (e)
of the Tax Code provides as follows:
"(e) Income from sources partly within and partly without the
Philippines. Items of gross income, expenses, losses and
deductions, other than those specified in subsections (a) and (c)
of this section shall be allocated or apportioned to sources within
or without the Philippines, under the rules and regulations
prescribed by the Secretary of Finance. . . . Gains, profits, and
income from (1) transportation or other services rendered partly
within and partly without the Philippines, or (2) from the sale of
personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or
in part) by the taxpayer without and sold within the Philippines,
shall be treated as derived partly from sources within and partly
from sources without the Philippines. . . ." (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was
derived from the 1939 U.S. Tax Code which "was based upon a recognition
that 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." 7
Section 37 (e) of the Tax Code quoted above carries a strong, well-nigh
irresistible, 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. This implication is reinforced by
a consideration of certain provisions of Revenue Regulations No. 2 entitled
"Income Tax Regulations," as amended, first promulgated by the Department of
Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2
(implementing Section 37 of the Tax Code) provides in part as follows:
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax
Code) deals with a particular species of foreign transportation companies
i.e., foreign steamship companies deriving income from sources partly within
and partly without the Philippines:
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. If, however, the sale took place within
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 property was produced in the Philippines, then, the income
derived from the sale will be deemed partly as income sourced within and
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. Thus, Section 37 (e) of the
Tax Code, although already quoted above, may be usefully quoted again:
"(e) Income from sources partly within and partly without the
Philippines. . . . Gains, profits and income from (1) transportation
or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer
without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the
Philippines. . . ." (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property
i.e., trading is, under the Tax Code, regarded as sourced wholly in the place
where the personal property is sold. Section 37 (e) of the Tax Code provides in
part as follows:
"(e) Income from sources partly within and partly without the
Philippines . . . Gains, profits and income derived from the
purchase of personal property within and its sale without the
Philippines or from the purchase of personal property without
and its sale within the Philippines, shall be treated as derived
entirely from sources within the country in which sold."
(Emphasis supplied)
The phrase "sale of airline tickets," while widely used in popular parlance, does
not appear to be correct as a matter of tax law. The airline ticket in and of itself
has no monetary value, even as scrap paper. The value of the ticket lies wholly
in the right acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of the
"purchaser" or passenger from one point to another outside the Philippines.
The ticket is really the evidence of the contract of carriage entered into between
BOAC and the passenger. The money paid by the passenger changes hands in
the Philippines. But the passenger does not receive in the Philippines the
consideration therefor the service undertaken to be delivered by BOAC. The
"purchase price of the airline ticket" is quite different from the purchase price
of a physical good or commodity such as a pair of shoes or a refrigerator or an
automobile; it is really the compensation paid for the undertaking of BOAC to
transport the passenger or cargo outside the Philippines.