COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
BRITISH whole trip into series of trips — each trip in the series corresponding to a
OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,
respondents.
G.R. No. L-65773-74 | April 30, 1987 | Melencio-Herrera, J. (Angeli)
FACTS: BOAC is a 100% British Government-owned corporation organized
and existing under the laws of the United Kingdom. BOAC had no landing
rights for traffic purposes in the Philippines, and was not granted a Certificate
of Public Convenience by the CAB (except for a temporary 9-month period in
1961-62). It maintained a general sales agent in the Philippines (Wamer
Barnes and Company and, later, Qantas Airways) which was responsible for
selling BOAC tickets for passengers and cargoes.
These two consolidated cases refer to the assessments made by CIR which
BOAC paid under protest. Claims for refund made by BOAC were also denied
by CIR.
CTA reversed CIR. According to the CTA, the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways 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.
ISSUES/RATIO:
1) W/N BOAC is a resident foreign corporation – YES
There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. 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. 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.
BOAC, maintained a general sales agent in the Philippines. That general sales
agent was engaged in (1) selling and issuing tickets; (2) breaking down the
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.
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.
2) W/N the revenue from sales of tickets by BOAC in the Philippines
constitutes income from Philippine sources and, accordingly, taxable
under our income tax laws - YES
The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets 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.
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, Section 37, by its language, does not
intend the enumeration to be exclusive.

Even if the BOAC tickets sold covered the "transport of passengers and cargo
to and from foreign cities", it 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.

Note that the assessments made here are applicable only for the years 1959-
1967, 1968-69 to 1970-71 because pursuant to PD 69 (promulgated 24 Nov
1972), international carriers shall now pay a tax of 2-½ per cent on their gross
Philippine billings.

3) Whether the sale of tickets falls under excise taxes or income taxes –
INCOME TAX

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. 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."

FALLO: Decision REVERSED. BOAC ordered to pay assessments; claim for

refund denied.
CIR v Isabela
(Danica)
FACTS:
Isabela Cultural Corporation (ICC) is a domestic corporation. In 1990, it
received from the BIR Assessment Notice No. FAS-1-86-90-000680
(Assessment Notice 1), for deficiency income tax in the amount of P333,196,
and Assessment Notice No. FAS-1-86-90000681 (Assessment Notice 2) for
deficiency expanded withholding tax in the amount of P4,897 both for the
taxable year 1986.
Assessment Notice 1 arose from:
1. The BIR’s disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co. for the year ending Dec.
31, 1985;
(b) Expenses for the legal services of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.
(c) Expense for security services of El Tigre Security & Investigation Agency
for the months of April and May 1986.
2. The alleged understatement of ICC’s interest income on the three
promissory notes due from a debtor of ICC.
On the other hand, Assessment Notice 2 arose from: the failure of ICC to
withhold 1% expanded withholding tax on its claimed deduction for security
services.
Pissed about the assessments, ICC brought the case to the Court of Tax
Appeals (CTA). The CTA rendered a decision in favor of ICC, canceling and
setting aside the assessment notices issued against it. It held that the claimed
deductions for professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. The CTA also held that ICC did not understate its
interest income on the subject promissory notes. Likewise, CTA found that ICC
in fact properly withheld 1% expanded withholding tax on its claimed deduction
for security services as shown by the various payment orders and confirmation
receipts it presented as evidence. In short, CTA cancelled and set aside all the
Assessment Notices, so that ICC is freed from liability to the BIR.
Court of Appeals (CA) affirmed the decision of the CTA.
BIR is now before the SC, asking that Assessment Notices 1 and 2 be upheld.
BIR contends that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 1985 should
have been declared as deductions from income during the said years, and that
the failure of ICC to do so bars it from claiming said expenses as deduction for
the taxable year 1986. As to the alleged deficiency interest income and failure
to withhold expanded withholding tax assessment, BIR invoked the
presumption that the assessment notices issued by the BIR are valid.
ISSUE/HELD:
1st issue (main): W/N there should be deduction of the expenses for
professional (aka legal and audit) services from ICC’s gross income: [NO]
2nd issue: W/N there should be deduction of the expenses for security
services: [YES]
3rd issue: W/N ICC properly stated its interest income, and therefore there can
be no deficiency assessment for it: [YES]
4th issue: W/N ICC properly withheld the required 1% withholding tax from the
deductions for security services, and therefore there can be no deficiency
assessment for it: [YES]
BOTTOMLINE: only the expenses for legal and auditing services CANNOT be
deductible expenses from gross income (in 1986), and are therefore the proper
subjects of deficiency assessment (in 1990)! BIR is wrong to assess ICC in all
other respects. Sorry guys, there’s so many types assessment involved in this
case but I tried to simplify it as much as possible 
RATIO:
CONCEPTS:
The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses are the following:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.
The requisite that it must have been “paid or incurred during the taxable year”
is further qualified by Sec 45 NIRC which states: “the deduction shall be taken
for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ dependent
upon the method of accounting upon the basis of which the net income is
computed.”
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions. In the present case, the
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000 provides that under the
accrual method of accounting (as opposed to cash method), expenses not
being claimed as deductions by a taxpayer in the current year when they are
incurred cannot be claimed as deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue
where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of
payment.
For a taxpayer using the accrual method, the determinative question is: When
do the facts present themselves, in such a manner that the taxpayer must
recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The amount of
liability does not have to be determined exactly; it must be determined with
“reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies
something less than an exact or completely accurate amount.
In other words, the propriety of an accrual must be judged by the fact that a
taxpayer knew, or could reasonably be expected to have known, at the closing
of its books for the taxable year. Accrual method of accounting presents largely
a question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.
Corollarily, tax exemptions must be construed in strictissimi juris against the
taxpayer, and one who claims an exemption must be able to justify the same
by the clearest grant of organic or statute law. And since a deduction for
income tax purposes partakes of the nature of a tax exemption, then it must
also be strictly construed.
AS APPLIED:
re: Legal services
The expenses for legal services pertain to the 1984 and 1985 legal and
retainer fees of the law firm, and for reimbursement of the expenses of said
firm in connection with ICC’s tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the 1960’s. From the
nature of the claimed deductions and the span of time during which the firm
was retained, ICC can be expected to have reasonably known the retainer
fees charged by the firm, as well as the compensation for its legal services.
The failure to determine the exact amount of the expense during the taxable
year when they could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these liabilities by the firm.
For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual
method of accounting. For another, it could have reasonably determined the
amount of legal and retainer fees owing to its familiarity with the rates charged
by their long time legal consultant.
ICC simply relied on the defense of “delayed billing” by the law firm, which
under the circumstances, is NOT sufficient to exempt it from being charged
with knowledge of the reasonable amount of the expenses for legal and
auditing services.
As to the purported understatement of interest income from ICC’s debtor, SC
sustained the findings of the CTA and the CA that no such understatement
exists and that only simple interest computation and not a compounded one
should have been applied by the BIR.
re: Withholding tax
The findings of the CTA and the CA that ICC properly withheld the required
withholding tax from its claimed deductions for security services and remitted
the same to the BIR is supported by payment order and confirmation receipts.
Hence, the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.
IN SUM: Assessment Notice 1 should be cancelled and set aside but only
insofar as the claimed deductions of ICC for security services; it is valid as to
BIR’s disallowance of ICC’s expenses for legal and auditing services.

re: Auditing services On the other hand, the entire cancellation of Assessment Notice 2 is sustained.

In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 CANNOT be validly claimed as expense
deductions in 1986, because ICC failed to present evidence showing that even
with only “reasonable accuracy,” it cannot determine the professional fees
which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the
taxable year 1986. Hence, per Revenue Audit Memorandum Order No.
1-2000, they CANNOT be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.

re: Security services

As to the expenses for security services, the records show that these expenses
were incurred by ICC in 1986 and could therefore be properly claimed as
deductions for the said year.

re: Interest income