Professional Documents
Culture Documents
*
Nos. L-65773-74. April 30, 1987.
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* EN BANC.
396
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." 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.
Same; Words and Phrases; Definition of "gross income" in the
Tax Code is broad enough to include proceeds from sales of airline
tickets in the Philippines even if no service or airlifting of passenger
or cargo by an airline is done by its planes in the Philippines.·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
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397
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398
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from the sales in the Philippines of tickets for BOAC flights as sold
and issued by its general sales agent in the Philippines has become
moot after November 24, 1972. Both opinions state that by
amendment through P.D. No. 69, promulgated on November 24,
1972, of section 24(b) (2) of the Tax Code providing for the rate of
income tax on foreign corporations international carriers such as
respondent BOAC, have since then been taxed at a reduced rate of
2-1/2% on their gross Philippine billings. There is, therefore, no
longer any source of substantial conflict between the two opinions
as to the present 2-½% tax on their gross Philippine billings
charged against such international carriers as herein respondent f
oreign corporation.
399
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400
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401
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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
interpretations 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 downthe 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.
402
MELENCIO-HERRERA, J.:
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G.R. No. 65773 (CTA Case No. 2373, the First Case)
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1 Partial Stipulation of Facts, Annex "E" and Annex "4", pp. 74-77 and
87-90, Rollo.
403
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G.R. No. 65774 (CTA Case No. 2561, the Second Case)
404
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405
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406
" '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
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407
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408
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9 14 Am Jur 2d 813.
10 British Trader's Insurance Co., Ltd. vs. Commissioner of Internal
Revenue, 13 SCRA 719 (1965).
11 Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601
(1965).
409
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410
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Airways Corporation
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411
TEEHANKEE, C.J.:
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412
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413
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414
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415
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"The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry
into whether a particular item is from 'sources within the United
States' and suggest an investigation into the nature and location of
the activities or property which produce the income. If the income is
from labor (services) the place where the labor is done should be
decisive; if it is done in this country, the income should be from
'sources 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 'sources 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. Much
confusion will be avoided by regarding the term 'source' in this
fundamental light It is not a place; it is an activity or property. As
such, it has a situs or location; and if that situs or location is within
the United States the resulting income is taxable to non-resident
aliens and foreign corporations. The intention of Congress in the
1916 and
416
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Section 37 (c) (3) of the Tax Code, on the other hand, deals
with income from sources without the Philippines in the
following manner:
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417
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 services6
rendered by or through the medium of a juridical person.
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.·ltems 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. x x x 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. x x x" (Italics supplied)
service of trans-
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418
7
portation was rendered.''
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:
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7 8 Mertens, Id., Section 45.43, which goes on to state that: "It was the
intention of Congress under the 1921 law to place the taxation of
transportation companies upon a sounder and more scientific basis (rather
than the species of franchise tax previously imposed upon non-residents in
general), and so the principle was adopted of considering income derived from
transportation to be income for services, with the result that the place where the
services were rendered determined the source. The result was income from
sources partly within and partly without the United States." Id.) (Italics
supplied)
419
from all ports, both within and without the Philippines of all
vessels, whether touching ports of the Philippines or not, should be
determined as the basis upon which allowable deductions may be
computed.·." (Italics supplied)
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"(e) Income from sources partly within and partly without the
Philippines. x x x 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
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"(e) Income from sources partly within and partly without the
Philippines x x x 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," (Italics supplied)
421
422
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Philippines. The gross revenue realized from the said cargo or mail
shall include the gross freight charge up to final destination. Gross
revenues from chartered flights originating from the Philippines
shall likewise form part of 'gross Philippine billings' regardless of
the place of sale or payment of the passage documents. For
purposes of determining the taxability of revenues from chartered
flights, the term 'originating from the Philippines' shall include
flight of passengers who stay in the Philippines for more than forty-
eight (48) hours prior to embarkation." (Italics supplied)
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··o0o··
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