G.R. No.

L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals
(CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is
engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such
it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the
periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil
Aeronautics 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 carry passengers and/or cargo to or from the Philippines, although during
the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company,
Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of
P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16
February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court on 27 January 1972,
assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to
1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the National
Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February
1972, however, the CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case
the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty
under Section 74 of the Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This

prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income 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 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:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute
income of BOAC from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in
the Philippines or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation but a nonresident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent (35%) of
its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office
or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business
within the Philippines and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific 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. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. 2 "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent 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 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. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, except a foreign fife insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
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 Tax Code defines "gross income" thus:
"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 in such property; also from interests, rents, dividends, securities, or the transactions of any business
carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any
source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income
under our laws." Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific
time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income
tax law, "income" refers to the flow of wealth.

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 site 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.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to
members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding
upon the parties entering into the relationship.

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1)
interest, (21) 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.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income
taxation. Admittedly, BOAC was an off-line international 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. 11Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly
pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to
and from foreign cities", 12it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word
"source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
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:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine
billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine
billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in 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 cargo or mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 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.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British
Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the
fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three
(3) years in accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without
costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against respondent BOAC for
the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form
the issued by its general sales agent in the Philippines gas become moot after November 24, 1972. Booth 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 dor 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-% on their gross Philippine billings. There is, therefore, no longer ant source of substantial conflict between the two
opinions as to the present 2-% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
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.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity 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 "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place
of business in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines (expect
foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)
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:
(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
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:

(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and paid
for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received
by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that premiums shall not include reinsurance premiums.

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation,
or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the
extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the
Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of
a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income
creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.
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:
The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. [T]he reinsurance, the
liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity giving rise to
the income that is sought to be taxed. In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines where the risks were located and where
payment from the foreign reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos under
the reinsurance premiums paid by the local insurance companies constituted Philippine source income of the foreign
reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system. The
phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was subsequently embodied
in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after
the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text on federal income taxation:
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 "source 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 doneshould be decisive; if it is done in this counrty, the income should
be from "source 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 "source 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 nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue or is derived must be situated
within the jurisdiction so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created
by activities and property protected by this Government or obtained by persons enjoying that protection.

3. We turn now to the question 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. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross income shall be treated
as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the Philippines;...
(Emphasis supplied)
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:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)
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 form 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 personnel 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 155. Compensation for labor or personnel services. Gross income from sources within the
Philippines includes compensation for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was made, or of the place of payment
(Emphasis supplied)
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:
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels
touch parts of the Philippines should include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it
and the gross income from all ports, both within and without the Philippines of all vessels, whether touching of
the Philippines or not, should be determined as the basis upon which allowable deductions may be computed,
. (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again implementing
Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission of
telegraph or cable messages between points in the Philippines and points outside the Philippines derives
income partly form source within and partly from sources without the Philippines.
... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship and
telegraph and cable services rendered between points both outside the Philippines give rise to income wholly from sources
outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the purchase and
sale of personal property, upon the other hand.
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, 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 was produced in the Philippines, then, the income derived from the sale will be deemed
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)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall
be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." The
"country" in which "sold" ordinarily means the place where the property is marketed. This Section does not
apply to income from the sale 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.
(See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the Philippines.
Those transactions may be characterized either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income" rules differ depending upon which
characterization is given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e.,
carriage of passengers or cargo between points located outside the Philippines.
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 the 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 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 of 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.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of personal
property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as
engaged in trading in the purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the
Philippines and selling them in the Philippines. Consider next sales: can BOAC be regarded as "selling" personal property
produced or manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product" its
service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering into contracts of service or
carriage. The very existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property which can be
invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an "activity" (a broader term than service and including the activity of
selling) or from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by Presidential
Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether for passenger, excess
baggege or mail, provide the cargo or mail originates from the 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 to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers who stay in
the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the Philippines for
uplifts from any point in the world to any other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines). Under this new approach, international

carriers who service port or points in the Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other
services rendered partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed on the basis of billings in respect of
passengers and cargo originating from the Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax and 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 interpretation 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 down-theroad loss of income tax revenues to the Government. In lieu thereof, the Government takes in revenues generated by the 2-
per cent tax on the gross Philippine billings or receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against respondent BOAC for
the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision of respondent Court of Tax
Appeals. I just wish to point out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the proper
characterization of the taxable income derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form
the issued by its general sales agent in the Philippines gas become moot after November 24, 1972. Booth 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 dor 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-% on their gross Philippine billings. There is, therefore, no longer ant source of substantial conflict between the two
opinions as to the present 2-% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
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.
1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity 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 "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place
of business in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines (expect
foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within the
Philippines by every corporation organized, authorized, or existing under the laws of any foreign country: ... .
(Emphasis supplied)
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:
(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any foreign
counrty, except foreign life insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
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:
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and paid
for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount received
by every foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income a tax equal to thirty
per centum of such amount: provided, however, that premiums shall not include reinsurance premiums.

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation,
or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the
extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the
Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of

a foreign corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine source income
creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.
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:
The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. [T]he reinsurance, the
liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. 4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity giving rise to
the income that is sought to be taxed. In the Howden case, that underlying prestation was theindemnification of the local
insurance company. Such indemnification could take place only in the Philippines where the risks were located and where
payment from the foreign reinsurance (in case the casualty insured against occurs) would be received in Philippine pesos under
the reinsurance premiums paid by the local insurance companies constituted Philippine source income of the foreign
reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system. The
phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was subsequently embodied
in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after
the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text on federal income taxation:
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 "source 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 doneshould be decisive; if it is done in this counrty, the income should
be from "source 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 "source 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 nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident

within the jurisdiction, or the property or activities out of which the income issue or is derived must be situated
within the jurisdiction so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created
by activities and property protected by this Government or obtained by persons enjoying that protection.

3. We turn now to the question 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. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross income shall be treated
as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in the Philippines;...
(Emphasis supplied)
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:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis supplied)
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 form 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 personnel 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 155. Compensation for labor or personnel services. Gross income from sources within the
Philippines includes compensation for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was made, or of the place of payment
(Emphasis supplied)
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:
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels
touch parts of the Philippines should include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it
and the gross income from all ports, both within and without the Philippines of all vessels, whether touching of
the Philippines or not, should be determined as the basis upon which allowable deductions may be computed,
. (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again implementing
Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of transmission of
telegraph or cable messages between points in the Philippines and points outside the Philippines derives
income partly form source within and partly from sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship and
telegraph and cable services rendered between points both outside the Philippines give rise to income wholly from sources
outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the purchase and
sale of personal property, upon the other hand.
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, 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 was produced in the Philippines, then, the income derived from the sale will be deemed
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)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal property shall
be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." The
"country" in which "sold" ordinarily means the place where the property is marketed. This Section does not
apply to income from the sale 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.
(See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the Philippines.
Those transactions may be characterized either as sales of personal property (i. e., "sales of airline tickets") or as entering into a
lease of services or a contract of service or carriage. The applicable "source of income" rules differ depending upon which
characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e.,
carriage of passengers or cargo between points located outside the Philippines.
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 the 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 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 of 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.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of personal
property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as
engaged in trading in the purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the
Philippines and selling them in the Philippines. Consider next sales: can BOAC be regarded as "selling" personal property
produced or manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product" its
service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering into contracts of service or
carriage. The very existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property which can be
invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an "activity" (a broader term than service and including the activity of
selling) or from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by Presidential
Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the
following manner:
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of
this section upon the total net income received in the preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether for passenger, excess
baggege or mail, provide the cargo or mail originates from the 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 to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers who stay in
the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the Philippines for
uplifts from any point in the world to any other point in the world, are not charged any Philippine income tax on their Philippine
billings (i.e., billings in respect of passenger or cargo originating from the Philippines). Under this new approach, international
carriers who service port or points in the Philippines are treated in exactly the same way as international carriers not serving any
port or point in the Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other
services rendered partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2 per cent tax computed on the basis of billings in respect of
passengers and cargo originating from the Philippines regardless of where embarkation and debarkation would be taking place.
This 2- per cent tax is effectively a tax on gross receipts or an excise or privilege tax and 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 interpretation 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 down-theroad loss of income tax revenues to the Government. In lieu thereof, the Government takes in revenues generated by the 2-
per cent tax on the gross Philippine billings or receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully studied it
and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the
construction of twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by the Central
Bank. 2 Initial payments were made in cash and through irrevocable letters of credit. 3 Fourteen promissory notes were signed
for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant
thereto, the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were
eventually completed and delivered to the NDC in Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.
Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of
the claimed amount. 6 The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the
compromise penalty. 7 The NDC then came to this Court in a petition for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. (a) Gross income from sources within the Philippines. The
following items of gross income shall be treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and interest on bonds, notes, or other interestbearing obligations of residents, corporate or otherwise;
xxx

xxx

xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related
activities the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to
the NDC were done in Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest
received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the
condition that 'the activity or labor and the sale from which the (interest) income flowed had its situs' in the
Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of
non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who
pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C.
Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine
Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the
interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond,
note or other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the
laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines
unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum. (See
Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms
and conditions of these promisory notes, which are duly signed by its Vice Chairman and General Manager, petitioner
remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17,
$1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price of the aforesaid
vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under
consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized
and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c),
National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on
the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960,
1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from
sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue
Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading
as follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx
(b) Exclusion from gross income. The following items shall not be included in gross income and shall be exempt from
taxation under this Title:
xxx

xxx

xxx

(4) Interest on Government Securities. Interest upon the obligations of the Government of the Republic of the
Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of this Code,
only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis
supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter.
C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes
the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the
undertaking signed by the Secretary of Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual
payment of both principal and interest of the above note. 10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver
therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably
expressed. 11 Any doubt concerning this question must be resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking
was made by the government in consonance with and certainly not against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership (companies colectivas), in
whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines
having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or categorical gains, profits and
income of any nonresident alien individual, not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except in the cases provided for in subsection (a) of this section) deduct and
withhold from such annual or periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to taxation under
this Title not engaged in trade or business within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in
section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without
diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its
eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also
by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC
did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. Every person required to deduct and withhold any tax under this section shall
make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by
law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines
authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As
amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals,
approval the following regulation of the BIR on the responsibilities of withholding agents:

13

the Court quoted with

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a
query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to
an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid
to an individual is not subject to withholding, the withholding agent may thereupon remit the amount of a tax withheld.
(2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice
Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should be held
liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.

G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents.
FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in CTA No. 1275 dated
June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency income tax and interest for the calendar year 1957
and P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta, Rizal, containing a
total area of 1,678,000 square meters. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and
subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to
make the lots saleable. Soon after, the lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958, petitioners
disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03
as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as real
estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code, required them to pay the real estate
dealer's tax 2 and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary
income.
On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:
a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate dealer's fixed tax of
P150.00 and P10.00 compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on ordinary gain of
P3,018.00 plus interest of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the aforementioned
assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the assessment regarding the
compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected in the absence of a valid and
binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and

b. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains
taxable at capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of the lots under Section 34
[b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section 34[a] [1] of the Tax
Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate business and may not be
denied the preferential tax treatment given to gains from sale of capital assets, merely because he disposed of it in the only
possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was sold because of their intention to effect a liquidation.
They claimed that it was parcelled out into smaller lots because its size proved difficult, if not impossible, of disposition in one
single transaction. They pointed out that once subdivided, certainly, the lots cannot be sold in one isolated transaction.
Petitioners, however, admitted that roads and other improvements were introduced to facilitate its sale.

On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in accordance with law
since petitioners are deemed to be in the real estate business for having been involved in a series of real estate transactions
pursued for profit. Respondent argued that property acquired by inheritance may be converted from an investment property to a
business property if, as in the present case, it was subdivided, improved, and subsequently sold and the number, continuity and
frequency of the sales were such as to constitute "doing business." Respondent likewise contended that inherited property is by
itself neutral and the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer
did with the property. Respondent concluded that since the lots are ordinary assets, the profits realized therefrom are ordinary
gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section 34[a] [1] of the
National Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not connected
with his trade or business], but does not include, stock in trade of the taxpayer or other property of a kind which
would properly be included, in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
property used in the trade or business of a character which is subject to the allowance for depreciation provided
in subsection [f] of section thirty; or real property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it is a capital asset;
conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or
exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality whether property sold by a taxpayer
was held primarily for sale to customers in the ordinary course of his trade or business or whether it was sold as a capital

asset. 6 Although several factors or indices 7 have been recognized as helpful guides in making a determination, none of these is
decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the last analysis rest upon its
own peculiar facts and circumstances.

Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors
indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale
of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to
make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held
primarily for sale to customers in the ordinary course of the heir's business.

Upon an examination of the facts on record, We are convinced that the activities of petitioners are indistinguishable from those
invariably employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development which is very much in evidence.
Petitioners did not sell the land in the condition in which they acquired it. While the land was originally devoted to rice and fruit
trees, 10 it was subdivided into small lots and in the process converted into a residential subdivision and given the name Don
Mariano Subdivision. Extensive improvements like the laying out of streets, construction of concrete gutters and installation of
lighting system and drainage facilities, among others, were undertaken to enhance the value of the lots and make them more
attractive to prospective buyers. The audited financial statements

11

submitted together with the tax return in question disclosed

that a considerable amount was expended to cover the cost of improvements. As a matter of fact, the estimated improvements
of the lots sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to
be a capital asset if the amount expended to improve it is double its original cost, for the extensive improvement indicates that
the seller held the property primarily for sale to customers in the ordinary course of his business.

12

Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables,
which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of receivables in comparison with the
sales volume of P446,407.00 during the same period signifies that the lots were sold on installment basis and suggests the
number, continuity and frequency of the sales. Also of significance is the circumstance that the lots were advertised

13

for sale to

the public and that sales and collection commissions were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.
In Ehrman vs. Commissioner, 14 the American court in clear and categorical terms rejected the liquidation test in determining
whether or not a taxpayer is carrying on a trade or business The court observed that the fact that property is sold for purposes of
liquidation does not foreclose a determination that a "trade or business" is being conducted by the seller. The court enunciated
further:
We fail to see that the reasons behind a person's entering into a business-whether it is to make money or
whether it is to liquidate-should be determinative of the question of whether or not the gains resulting from the
sales are ordinary gains or capital gains. The sole question is-were the taxpayers in the business of subdividing
real estate? If they were, then it seems indisputable that the property sold falls within the exception in the
definition of capital assets . . . that is, that it constituted 'property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business.
Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise:

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may be conducted in the
most advantageous manner to the seller and he will not lose the benefits of the capital gain provision of the
statute unless he enters the real estate business and carries on the sale in the manner in which such a
business is ordinarily conducted. In that event, the liquidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost.
In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in the real estate business
and accordingly, the gains from the sale of the lots are ordinary income taxable in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
SO ORDERED.