CIR VS BRITISH OVERSEAS AIRWAYS CORPORATION (BOAC)

FACTS:

British overseas airways corporation is a 100% government owned and controlled

corporation established and organized under the laws of the United Kingdom. It is
engaged in the business of operating air transportation service and sale of
transportation tickets over the routes of its other airline members.

During the period indicated in the disputed assessments moreover, BOAC was not
issued a certificate of public convenience and necessity by the Civil Aeronautics Board
and had no landing rights in the Philippines. Except for a 9-month period in 1961-1962.
BOAC did not carry any passengers or cargo to or from the Philippines. It however
maintained a general sales agent (Wamer Barnes and Company) which was
responsible for selling BOAC tickets in the Philippines for passengers and cargoes.

So there are 2 disputed assessments. The first for the period of 1959-1963, and the
other for 1968-1969 & 1970-1971. For the first, the CIR assessed BOAC the aggregate
amount of almost 2.5M for deficiency income taxes. The assessment was protested and
reduced to at least 800k, which was paid for by BOAC in protest, with a claim for refund.
The refund was denied.

For the second, BOAC was assessed deficiency income taxes for an amount of at least
550k including compromise penalties for failing to file their corporation returns. The CIR
denied BOAC’s request to set aside the assessment and BOAC’s subsequent MR.

BOAC thus submitted both cases to the CTA. BOAC contended that that the income
derived by Wamer Barnes from activity and service rendered in the Philippines is not
income derived from sources within the Philippines since the passengers or cargo
boarded the flights they paid for in other countries.

The CTA did not confirm CIR’s decisions and ordered petitioner to credit back to BOAC
the 800k paid and to further cancel other deficiency income tax assessments. The CTA
held that income from transportation is income from services. Therefore, the place
where the services are rendered constitute as the source whereby the income was
derived, which in this case was not the Philippines but where the passengers will
aboard the plane. Therefore, since no service of carriage of passengers or freight was
performed by the BOAC within the Philippines, the income derived by BOAC’s sales
agent is not subject to Philippine income tax.

ISSUE:

(1) Whether or not the revenue derived by BOAC constitute income from Philippine
sources although it had no landing rights in the Philippines and merely sold tickets.
(2) Whether or not BOAC is a resident foreign corporation doing business in the
Philippines.

HELD:

(1) Yes, the income was derived or originally sourced within the Philippines. The
high court held in this case that gross income includes proceeds from sales of
transport documents. Gross income includes gains, profits and income derived
from salaries, wages or compensation for personal service of whatever kind and
whatever form paid from business, commerce, sales, among others, or from
transactions of any business carried on for gain or profit, derived from any source
whatever. The High court further held that The test of taxability is the source and
the source of an income is an activity which produced the income.

From the facts provided, the income realized by Wamer Barnes Company from
sales made over tickets sold within the Philippines must be considered income
derived from sources within the Philippines. Why, because the tickets exchanged
hands here and that payments for the same were in Philippine currency. The
situs thus is the Philippines. The absence of flight operations to and from the
Philippines is immaterial in this case, since the source considered is the activity
of selling tickets. It is not income from services rendered outside the country but
the sale perfected in the Philippines.

(2) Yes, BOAC is a resident foreign corporation. The high court held that the term
resident foreign corporation is that foreign corporation engaged in trade or
business within the Philippines or having an office or place of business within.
Although there is no specific criterion for doing or engaging in business, there
must be a continuity of conduct and has an intention to establish a continuous
business. acts constituting the same may be the appointment of a local agent in
the country.

From the facts provided, the selling of tickets by BOAC’s agent, Wamer Barnes
from 1959-1971, was in the direct exercise of the functions which are the very
purpose and object of its organization as an international air carrier. The court
held that the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective.

Therefore, since BOAC’s general sales agent, Wamer Barnes, continuously sold
tickets since 1959, the very purpose and lifeblood of an airline business, BOAC is
considered as a resident foreign corporation.