8/31/2016 G.R.No.

L6577374

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.L6577374April30,1987

COMMISSIONEROFINTERNALREVENUE,petitioner,
vs.
BRITISHOVERSEASAIRWAYSCORPORATIONandCOURTOFTAXAPPEALS,respondents.

Quasha,Asperilla,Ancheta,Pea,Valmonte&MarcosforrespondentBritishAirways.

MELENCIOHERRERA,J.:

PetitionerCommissionerofInternalRevenue(CIR)seeksareviewoncertiorariofthejointDecisionoftheCourt
of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's
assessmentofdeficiencyincometaxesagainstrespondentBritishOverseasAirwaysCorporation(BOAC)forthe
fiscal years 1959 to 1967, 196869 to 197071, respectively, as well as its Resolution of 18 November, 1983
denyingreconsideration.

BOAC is a 100% British Governmentowned corporation organized and existing under the laws of the United
Kingdom It is engaged in the international airline business and is a membersignatory of the Interline Air
Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over
theroutesoftheotherairlinemembers.Duringtheperiodscoveredbythedisputedassessments,itisadmitted
thatBOAChadnolandingrightsfortrafficpurposesinthePhilippines,andwasnotgrantedaCertificateofpublic
convenienceandnecessitytooperateinthePhilippinesbytheCivilAeronauticsBoard(CAB),exceptforanine
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.,andlaterQantasAirwayswhichwasresponsibleforsellingBOACticketscoveringpassengers
andcargoes.1

G.R.No.65773(CTACaseNo.2373,theFirstCase)

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
years1959to1967intheamountofP858,307.79.BOACpaidthisnewassessmentunderprotest.

On7October1970,BOACfiledaclaimforrefundoftheamountofP858,307.79,whichclaimwasdeniedbythe
CIRon16February1972.Butbeforesaiddenial,BOAChadalreadyfiledapetitionforreviewwiththeTaxCourt
on27January1972,assailingtheassessmentandprayingfortherefundoftheamountpaid.

G.R.No.65774(CTACaseNo.2561,theSecondCase)

On17November1971,BOACwasassesseddeficiencyincometaxes,interests,andpenaltyforthefiscalyears
19681969to19701971intheaggregateamountofP549,327.43,andtheadditionalamountsofP1,000.00and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns)
penalizedunderSection74oftheNationalInternalRevenueCode(NIRC).

On25November1971,BOACrequestedthattheassessmentbecountermandedandsetaside.Inaletter,dated
16February1972,however,theCIRnotonlydeniedtheBOACrequestforrefundintheFirstCasebutalsore
issuedintheSecondCasethedeficiencyincometaxassessmentforP534,132.08fortheyears1969to197071
plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration
wasdeniedbytheCIRon24August1973.ThispromptedBOACtofiletheSecondCasebeforetheTaxCourt
prayingthatitbeabsolvedofliabilityfordeficiencyincometaxfortheyears1969to1971.

ThiscasewassubsequentlytriedjointlywiththeFirstCase.

On26January1983,theTaxCourtrenderedtheassailedjointDecisionreversingtheCIR.TheTaxCourtheld
thattheproceedsofsalesofBOACpassageticketsinthePhilippinesbyWarnerBarnesandCompany,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,andtocancelthedeficiencyincometaxassessmentsagainstBOACintheamountofP534,132.08
forthefiscalyears196869to197071.

Hence,thisPetitionforReviewoncertiorarioftheDecisionoftheTaxCourt.

TheSolicitorGeneral,inrepresentationoftheCIR,hasaptlydefinedtheissues,thus:

1.WhetherornottherevenuederivedbyprivaterespondentBritishOverseasAirwaysCorporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights

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here,constituteincomeofBOACfromPhilippinesources,and,accordingly,taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing
businessinthePhilippinesorhasanofficeorplaceofbusinessinthePhilippines.

3.Inthealternativethatprivaterespondentmaynotbeconsideredaresidentforeigncorporationbut
anonresidentforeigncorporation,thenitisliabletoPhilippineincometaxattherateofthirtyfiveper
cent(35%)ofitsgrossincomereceivedfromallsourceswithinthePhilippines.

UnderSection20ofthe1977TaxCode:

(h) the term resident foreign corporation engaged in trade or business within the Philippines or
havinganofficeorplaceofbusinesstherein.

(i)Theterm"nonresidentforeigncorporation"appliestoaforeigncorporationnotengagedintrade
orbusinesswithinthePhilippinesandnothavinganyofficeorplaceofbusinesstherein

ItisourconsideredopinionthatBOACisaresidentforeigncorporation.Thereisnospecificcriterionastowhat
constitutes"doing"or"engagingin"or"transacting"business.Eachcasemustbejudgedinthelightofitspeculiar
environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and
contemplates,tothatextent,theperformanceofactsorworksortheexerciseofsomeofthefunctionsnormally
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
oneofatemporarycharacter.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
companiesonthebasisoftheirparticipationintheservicesrenderedthroughthemodeofinterlinesettlementas
prescribedbyArticleVIoftheResolutionNo.850oftheIATAAgreement." 4Thoseactivitieswereinexerciseofthe
functionswhicharenormallyincidentto,andareinprogressivepursuitof,thepurposeandobjectofitsorganizationasan
internationalaircarrier.Infact,theregularsaleoftickets,itsmainactivity,istheverylifebloodoftheairlinebusiness,the
generationofsalesbeingtheparamountobjective.ThereshouldbenodoubtthenthatBOACwas"engagedin"businessin
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.Ratesoftaxoncorporations....

(b)Taxonforeigncorporations....

(2)Residentcorporations.Acorporationorganized,authorized,orexistingunderthelawsofany
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
receivedintheprecedingtaxableyearfromallsourceswithinthePhilippines.(Emphasissupplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
PhilippinesconstitutesincomefromPhilippinesourcesand,accordingly,taxableunderourincometaxlaws.

TheTaxCodedefines"grossincome"thus:

"Grossincome"includesgains,profits,andincomederivedfromsalaries,wagesorcompensationfor
personalserviceofwhateverkindandinwhateverformpaid,orfromprofession,vocations,trades,
business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownershiporuseoforinterestinsuchpropertyalsofrominterests,rents,dividends,securities,or
thetransactionsofanybusinesscarriedonforgainorprofile,orgains,profits,andincome derived
fromanysourcewhatever(Sec.29[3]Emphasissupplied)

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,whilecapitalisafund,incomeisaflow.Asusedinourincometaxlaw,"income"referstotheflowof
wealth.6

TherecordsshowthatthePhilippinegrossincomeofBOACforthefiscalyears196869to197071amountedto
P10,428,368.00.7

Didsuch"flowofwealth"comefrom"sourceswithinthePhilippines",

Thesourceofanincomeistheproperty,activityorservicethatproducedtheincome.8Forthesourceofincometo
beconsideredascomingfromthePhilippines,itissufficientthattheincomeisderivedfromactivitywithinthePhilippines.
InBOAC'scase,thesaleofticketsinthePhilippinesistheactivitythatproducestheincome.Theticketsexchangedhands
here and payments for fares were also made here in Philippine currency. The site of the source of payments is the
Philippines.Theflowofwealthproceededfrom,andoccurredwithin,Philippineterritory,enjoyingtheprotectionaccordedby
thePhilippinegovernment.Inconsiderationofsuchprotection,theflowofwealthshouldsharetheburdenofsupportingthe
government.

Atransportationticketisnotamerepieceofpaper.Whenissuedbyacommoncarrier,itconstitutesthecontract
between the ticketholder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fareandthecorrespondingobligationofthecarriertotransportthepassengeruponthetermsandconditionsset
forththereon.Theordinaryticketissuedtomembersofthetravelingpublicingeneralembraceswithinitsterms
alltheelementstoconstituteitavalidcontract,bindinguponthepartiesenteringintotherelationship.9

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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)rentalsandroyalties,(5)saleofrealproperty,and
(6) sale of personal property, does not mention income from the sale of tickets for international transportation.
However,thatdoesnotrenderitlessanincomefromsourceswithinthePhilippines.Section37,byitslanguage,
does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be
treatedasincomefromsourceswithinthePhilippines.Acursoryreadingofthesectionwillshowthatitdoesnot
statethatitisanallinclusiveenumeration,andthatnootherkindofincomemaybesoconsidered."10

BOAC, however, would impress upon this Court that income derived from transportation is income for services,
withtheresultthattheplacewheretheservicesarerendereddeterminesthesourceandsinceBOAC'sservice
oftransportationisperformedoutsidethePhilippines,theincomederivedisfromsourceswithoutthePhilippines
and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision
underreview.

TheabsenceofflightoperationstoandfromthePhilippinesisnotdeterminativeofthesourceofincomeorthe
site of income taxation. Admittedly, BOAC was an offline international airline at the time pertinent to this case.
Thetestoftaxabilityisthe"source"andthesourceofanincomeisthatactivity...whichproducedtheincome.11
Unquestionably,thepassagedocumentationsinthesecasesweresoldinthePhilippinesandtherevenuetherefromwasderivedfromaactivityregularly
pursuedwithinthePhilippines.businessaAndeveniftheBOACticketssoldcoveredthe"transportofpassengersandcargotoandfromforeigncities",12
itcannotalterthefactthatincomefromthesaleofticketswasderivedfromthePhilippines.Theword"source"conveysoneessentialidea,thatoforigin,
andtheoriginoftheincomehereinisthePhilippines.13

Itshouldbepointedout,however,thattheassessmentsupheldhereinapplyonlytothefiscalyearscoveredby
thequestioneddeficiencyincometaxassessmentsinthesecases,or,from1959to1967,196869to197071.
For,pursuanttoPresidentialDecreeNo.69,promulgatedon24November,1972,internationalcarriersarenow
taxedasfollows:

... Provided, however, That international carriers shall pay a tax of 2 per cent on their cross
Philippinebillings.(Sec.24[b][21,TaxCode).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross
Philippinebillings,"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....

TheforegoingprovisionensuresthatinternationalairlinesaretaxedontheirincomefromPhilippinesources.The
2%taxongrossPhilippinebillingsisanincometax.Ifithadbeenintendedasanexciseorpercentagetaxit
wouldhavebeenplaceunderTitleVoftheTaxCodecoveringTaxesonBusiness.

Lastly,wefindasuntenabletheBOACargumentthatthedismissalforlackofmeritbythisCourtoftheappealin
JALvs.CommissionerofInternalRevenue(G.R.No.L30041)onFebruary3,1969,isresjudicatatothepresent
case.TherulingbytheTaxCourtinthatcasewastotheeffectthatthemeresaleoftickets,unaccompaniedby
the physical act of carriage of transportation, does not render the taxpayer therein subject to the common
carrier'stax.AselucidatedbytheTaxCourt,however,thecommoncarrier'staxisanexcisetax,beingataxon
theactivityoftransporting,conveyingorremovingpassengersandcargofromoneplacetoanother.Itpurportsto
tax the business of transportation. 14 Being an excise tax, the same can be levied by the State only when the
acts,privilegesorbusinessesaredoneorperformedwithinthejurisdictionofthePhilippines.Thesubjectmatter
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,thedecisioninonecannotberesjudicatatotheother.

WHEREFORE,theappealedjointDecisionoftheCourtofTaxAppealsisherebySETASIDE.Privaterespondent,
the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as
deficiencyincometaxforthefiscalyears196869to197071plus5%surcharge,and1%monthlyinterestfrom
April16,1972foraperiodnottoexceedthree(3)yearsinaccordancewiththeTaxCode.TheBOACclaimfor
refundintheamountofP858,307.79isherebydenied.Withoutcosts.

SOORDERED.

Paras,Gancayco,Padilla,Bidin,SarmientoandCortes,JJ.,concur.

Fernan,J.,tooknopart.

SeparateOpinions

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 19591969 to 19701971 and therefore setting aside the appealed joint
decisionofrespondentCourtofTaxAppeals.Ijustwishtopointoutthattheconflictbetweenthemajorityopinion
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,promulgatedonNovember24,1972,ofsection24(b)(2)oftheTaxCodeprovidingdortherateofincome
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
suchinternationalcarriersashereinrespondentforeigncorporation.

FELICIANO,J.,dissenting:
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With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. MelencioHerrera
speakingforthemajority.Inmyopinion,thejointdecisionoftheCourtofTaxAppealsinCTACasesNos.2373
and2561,dated26January1983,iscorrectandshouldbeaffirmed.

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
liableforPhilippineincometaxationinrespectof"salesofairtickets"inthePhilippinesthroughageneralsales
agent,relatingtothecarriageofpassengersandcargobetweentwopointsbothoutsidethePhilippines.

1.TheSolicitorGeneralhasdefinedasoneoftheissueinthiscasethequestionof:

2.Whetherornotduringthefiscalyearsinquestion1BOAC[was]aresidentforeigncorporationdoingbusinessinthe
Philippinesor[had]anofficeorplaceofbusinessinthePhilippines.

Itisimportanttonoteattheoutsetthattheanswertotheabovequotedissueisnotdeterminativeofthelialibityof
theBOACtoPhilippineincometaxationinrespectoftheincomehereinvolved.TheliabilityofBOACtoPhilippine
incometaxationinrespectofsuchincomedepends,notonBOAC'sstatusasa"residentforeigncorporation"or
alternatively, as a "nonresident foreign corporation," but rather on whether or not such income is derived from
"sourcewithinthePhilippines."

A"residentforeigncorporation"orforeigncorporationengagedintradeorbusinessinthePhilippinesorhaving
anofficeorplaceofbusinessinthePhilippinesissubjecttoPhilippineincometaxationonlyinrespectofincome
derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax
Code"),asamendedbyRepublicActNo.2343,approved20June1959,asitexistedupto3August1969,read
asfollows:

(2) Resident corporations. A foreign corporation engaged in trade or business with in the
Philippines(expectforeignlifeinsurancecompanies)shallbetaxableasprovidedinsubsection(a)of
thissection.

Section24(a)oftheTaxCodeinturnprovides:

Rateoftaxoncorporations.(a)Taxondomesticcorporations....andaliketaxshallbelivied,
collected,andpaidannuallyuponthetotalnetincomereceivedinthepreceedingtaxableyearfrom
all sources within the Philippines by every corporation organized, authorized, or existing under the
lawsofanyforeigncountry:....(Emphasissupplied)

RepublicActNo.6110,whichtookeffecton4August1969,madethisevenclearerwhenitamendedoncemore
Section24(b)(2)oftheTaxCodesoastoreadasfollows:

(2)ResidentCorporations.Acorporation,organized,authorizedorexistingunderthelawsofany
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
receivedintheprecedingtaxableyearfromallsourceswithinthePhilippines.(Emphasissupplied)

ExactlythesameruleisprovidedbySection24(b)(1)oftheTaxCodeuponnonresidentforeigncorporations.
Section24(b)(1)asamendedbyRepublicActNo.3825approved22June1963,readasfollows:

(b)Taxonforeigncorporations.(1)Nonresidentcorporations.Thereshallbelevied,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,thatpremiumsshallnotincludereinsurancepremiums.2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident
foreigncorporation,ornotdoingbusinessinthePhilippinesandthereforeanonresidentforeigncorporation,itis
liabletoincometaxonlytotheextentthatitderivesincomefromsourceswithinthePhilippines.Thecircumtances
that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is
Philippinesourceincome.Similarly,thenonresidentstatusofaforeigncorporationdoesnotimplythatithasno
Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the
recipientforeigncorporationisaresidentofthePhilippines.Thecriticalissue,forpresentpurposes,istherefore
whetherofnotBOACisderivingincomefromsourceswithinthePhilippines.

2.Forpurposesofincometaxation,itiswelltobearinmindthatthe"sourceofincome"relatesnottothephysical
sourcingofaflowofmoneyorthephysicalsitusofpaymentbutrathertothe"property,activityorservicewhich
producedtheincome."InHowdenandCo.,Ltd.vs.CollectorofInternalRevenue,3thecourtdealtwiththeissueof
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign reinsurance
companyinrespectofriskslocatedinthePhilippines.TheCourtsaid:

The source of an income is the property, activity or services that produced the income. The
reinsurancepremiumsremittedtoappellantsbyvirtueofthereinsurancecontract,accordingly,had
for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertakingistheactivitythatproducedthereinsurancepremiums,andthesametookplaceinthe
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,
wereallsituatedinthePhilippines.4

TheCourtmaybeseentobesayingthatitistheunderlyingprestationwhichisproperlyregardedastheactivity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was the
indemnification 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
insurancecompaniesconstitutedPhilippinesourceincomeoftheforeignreinsurances.

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The concept of "source of income" for purposes of income taxation originated in the United States income tax
system.Thephrase"sourceswithintheUnitedStates"wasfirstintroducedintotheU.S.taxsystemin1916,and
wassubsequentlyembodiedinthe1939U.S.TaxCode.Asiscommonlyknown,ourTaxCode(Commonwealth
Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a
standardU.S.textonfederalincometaxation:

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 allinclusive,
they serve as useful guides in any inquiry into whether a particular item is from "source within the
UnitedStates"andsuggestaninvestigationintothenatureandlocationoftheactivitiesorproperty
whichproducetheincome.Iftheincomeisfromlabor(services)theplacewherethelaborisdone
shouldbedecisiveifitisdoneinthiscounrty,theincomeshouldbefrom"sourcewithintheUnited
States."Iftheincomeisfromcapital,theplacewherethecapitalisemployedshouldbedecisiveifit
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.Muchconfusionwillbeavoidedbyregardingtheterm"source"inthisfundamentallight.Itis
notaplaceitisanactivityorproperty.Assuch,ithasasitusorlocationandifthatsitusorlocation
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
1909and1913basisoftaxingnonresidentaliensandforeigncorporationsandtomakethetestof
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
thesourceoftheincomemaybesaidtohaveasitusinthiscountry.Theunderlyingtheoryisthatthe
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
activitiesandpropertyprotectedbythisGovernmentorobtainedbypersonsenjoyingthatprotection.
5

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
contractsofserviceand(b)thesourceruleapplicableinrespectofsalesofpersonalproperty.

Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows:theincomeissourcedintheplacewheretheservicecontractedforisrendered.Section37(a)(3)ofour
TaxCodereadsasfollows:

Section37.IncomeforsourceswithinthePhilippines.

(a)GrossincomefromsourceswithinthePhilippines.Thefollowingitemsofgrossincomeshallbe
treatedasgrossincomefromsourceswithinthePhilippines:

xxxxxxxxx

(3) Services. Compensation for labor or personal services performed in the

Philippines...(Emphasissupplied)

Section37(c)(3)oftheTaxCode,ontheotherhand,dealswithincomefromsourceswithoutthePhilippinesin
thefollowingmanner:

(c)GrossincomefromsourceswithoutthePhilippines.Thefollowingitemsofgrossincomeshall
betreatedasincomefromsourceswithoutthePhilippines:

(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
Regulationstoacontractforservices.Thus,Section37(e)oftheTaxCodeprovidesasfollows:

(e)Income form sources partly within and partly without the Philippines. Items of gross income,
expenses,lossesanddeductions,otherthanthosespecifiedinsubsections(a)and(c)ofthissection
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)
transportationorotherservicesrenderedpartlywithinandpartlywithoutthePhilippines,or(2)from
thesaleofpersonnelpropertyproduced(inwholeorinpart)bythetaxpayerwithinandsoldwithout
the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the
Philippines,shallbetreatedasderivedpartlyfromsourceswithinandpartlyfromsourceswithoutthe
Philippines....(Emphasissupplied)

ItshouldbenotedthattheaboveunderscoredportionofSection37(e)wasderivedfromthe1939U.S.TaxCode
which"wasbaseduponarecognitionthattransportationwasaserviceandthatthesourceoftheincomederived
therefromwastobetreatedasbeingtheplacewheretheserviceoftransportationwasrendered.7

Section37(e)oftheTaxCodequotedabovecarriesastrongwellnighirresistible,implicationthatincomederived
fromtransportationorotherservicesrenderedentirelyoutsidethePhilippinesmustbetreatedasderivedentirely
from sources without the Philippines. This implication is reinforced by a consideration of certain provisions of
RevenueRegulationsNo.2entitled"IncomeTaxRegulations"asamended,firstpromulgatedbytheDepartment
ofFinanceon10February1940.Section155ofRevenueRegulationsNo.2(implementingSection37oftheTax
Code)providesinpartasfollows:

Section155.Compensationforlabororpersonnelservices.Grossincomefromsourceswithinthe
PhilippinesincludescompensationforlabororpersonalserviceswithinthePhilippinesregardlessof
theresidenceofthepayer,oftheplaceinwhichthecontractforserviceswasmade,oroftheplace
ofpayment(Emphasissupplied)
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Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular
speciesofforeigntransportationcompaniesi.e.,foreignsteamship companies deriving income from sources
partlywithinandpartlywithoutthePhilippines:

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
existingbetweenitandthegrossincomefromallports,bothwithinandwithoutthePhilippinesofall
vessels, whether touching of the Philippines or not, should be determined as the basis upon which
allowabledeductionsmaybecomputed,.(Emphasissupplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementingSection37oftheTaxCode)withprovidesasfollows:

Section 164. Telegraph and cable services. A foreign corporation carrying on the business of
transmissionoftelegraphorcablemessagesbetweenpointsinthePhilippinesandpointsoutsidethe
PhilippinesderivesincomepartlyformsourcewithinandpartlyfromsourceswithoutthePhilippines.

...(Emphasissupplied)

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
incomewhollyfromsourcesoutsidethePhilippines,andthereforenotsubjecttoPhilippineincometaxation.

Weturntothe"sourceofincome"rulesrelatingtothesaleofpersonalproperty,upontheonehand,andtothe
purchaseandsaleofpersonalproperty,upontheotherhand.

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
outsidethePhilippines,theincomederivedtherefromwillberegardedassourcedentirelyoutsidethePhilippines,
although the personal property had been produced outside the Philippines, or if the sale of the property takes
placeoutsidethePhilippinesandthepersonalwasproducedinthePhilippines,then,theincomederivedfromthe
salewillbedeemedpartlyasincomesourcedwithoutthePhilippines.Inotherwords,theincome(andtherelated
expenses,lossesanddeductions)willbeallocatedbetweensourceswithinandsourceswithoutthePhilippines.
Thus,Section37(e)oftheTaxCode,althoughalreadyquotedabove,maybeusefullyquotedagain:

(e)IncomefromsourcespartlywithinandpartlywithoutthePhilippines....Gains,profitsandincome
from(1)transportationorotherservicesrenderedpartlywithinandpartlywithoutthePhilippinesor
(2)fromthesaleofpersonalpropertyproduced(inwholeorinpart)bythetaxpayerwithinandsold
withoutthePhilippines,orproduced(inwholeorinpart)bythetaxpayerwithoutandsoldwithinthe
Philippines,shallbetreatedasderivedpartlyfromsourceswithinandpartlyfromsourceswithoutthe
Philippines....(Emphasissupplied)

Incontrast,incomederivedfromthepurchaseandsaleofpersonalpropertyi.e.,tradingis,undertheTax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax
Codeprovidesinpartasfollows:

(e)IncomefromsourcespartlywithinandpartlywithoutthePhilippines...Gains,profitsandincome
derivedfromthepurchaseofpersonalpropertywithinanditssalewithoutthePhilippinesorfromthe
purchaseofpersonalpropertywithoutanditssalewithinthePhilippines,shallbetreatedasderived
entirelyfromsourceswithinthecountryinwhichsold.(Emphasissupplied)

Section159ofRevenueRegulationsNo.2putstheapplicablerulesuccinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of personal
propertyshallbetreatedasderivedentirelyfromthecountryinwhichsold.Theword"sold"includes
"exchange."The"country"inwhich"sold"ordinarilymeanstheplacewherethepropertyismarketed.
ThisSectiondoesnotapplytoincomefromthesalepersonalpropertyproduced(inwholeorinpart)
by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the
taxpayerwithoutandsoldwithinthePhilippines.(SeeSection162oftheseregulations).(Emphasis
supplied)

4.ItwillbeseenthatthebasicproblemisoneofcharacterizationofthetransactionsenteredintobyBOACinthe
Philippines.Thosetransactionsmaybecharacterizedeitherassalesofpersonalproperty(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"rulesdifferdependinguponwhichcharacterizationisgiventotheBOACtransactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service,i.e.,carriageofpassengersorcargobetweenpointslocatedoutsidethePhilippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a
matteroftaxlaw.Theairlineticketinandofitselfhasnomonetaryvalue,evenasscrappaper.Thevalueofthe
ticketlieswhollyintherightacquiredbythe"purchaser"thepassengertodemandaprestationfromBOAC,
whichprestationconsistsofthecarriageofthe"purchaser"orpassengerfromtheonepointtoanotheroutside
thePhilippines.Theticketisreallytheevidenceofthecontractofcarriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not
receiveundertakentobedeliveredbyBOAC.The"purchasepriceoftheairlineticket"isquitedifferentfromthe
purchasepriceofaphysicalgoodorcommoditysuchasapairofshoesofarefrigeratororanautomobileitis
really the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the
Philippines.

ThecharacterizationoftheBOACtransactionseitherassalesofpersonalpropertyoraspurchasesandsalesof
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,

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BOACwasnotpurchasingticketsoutsidethePhilippinesandsellingtheminthePhilippines.Considernextsales:
canBOACberegardedas"selling"personalpropertyproducedormanufacturedbyit?Inapopularorjournalistic
sense,BOACmightbedescribedas"selling""aproduct"itsservice.However,forthetechnicalpurposesofthe
law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of
"sourcerules"specificallyandpreciselyapplicabletotherenditionofservicesmustprecludetheapplicationhere
of"sourcerules"applyinggenerallytosales,andpurchasesandsales,ofpersonalpropertywhichcanbeinvoked
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
includingtheactivityofselling)orfromthehereinvolvedisincometaxation,andnotasalestaxoranexciseor
privilegetax.

5.ThetaxationofinternationalcarriersistodayeffectedunderSection24(b)(2)oftheTaxCode,asamendedby
Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355,
promulgatedon21April1978,inthefollowingmanner:

(2)Residentcorporations.Acorporationorganized,authorized,orexistingunderthelawsofany
foreigncountry,engagedintradeorbusinesswithinthePhilippines,shallbetaxableasprovidedin
subsection(a)ofthissectionuponthetotalnetincomereceivedinthepreceedingtaxableyearfrom
allsourceswithinthePhilippines:Provided,however,Thatinternationalcarriersshallpayataxoftwo
andonehalfpercentontheirgrossPhilippinebillings."GrossPhilippinesofpassagedocumentssold
therein, whether for passenger, excess baggege or mail, provide the cargo or mail originates from
thePhilippines.Thegrossrevenuerealizedfromthesaidcargoormailshallincludethegrossfreight
chargeuptofinaldestination.GrossrevenuesfromcharteredflightsoriginatingfromthePhilippines
shalllikewiseformpartof"grossPhilippinebillings"regardlessoftheplaceofsaleorpaymentofthe
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
Philippinesformorethanfortyeight(48)hourspriortoembarkation.(Emphasissupplied)

Under the abovequoted proviso international carriers issuing for compensation passage documentation in the
Philippinesforupliftsfromanypointintheworldtoanyotherpointintheworld,arenotchargedanyPhilippine
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
treatedinexactlythesamewayasinternationalcarriersnotservinganyportorpointinthePhilippines.Thus,the
sourceofincomeruleapplicable,asabovediscussed,totransportationorotherservicesrenderedpartlywithin
and partly without the Philippines, or wholly without the Philippines, has been set aside. in place of Philippine
incometaxation,theTaxCodenowimposesthis2percenttaxcomputedonthebasisofbillingsinrespectof
passengers and cargo originating from the Philippines regardless of where embarkation and debarkation would
betakingplace.This2percenttaxiseffectivelyataxongrossreceiptsoranexciseorprivilegetaxandnota
tax on income. Thereby, the Government has done away with the difficulties attending the allocation of income
andrelatedexpenses,lossesanddeductions.Becausetaxesaretheverylifebloodofgovernment,theresulting
potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees of
consciousness,consideredinchoosingfromamongcompetingpossiblecharacterizationsunderorinterpretation
oftaxstatutes.Itishenceperhapsusefultopointoutthatthedeterminationoftheappropriatecharacterization
here that of contracts of air carriage rather than sales of airline tickets entails no downtheroad loss of
incometaxrevenuestotheGovernment.Inlieuthereof,theGovernmenttakesinrevenuesgeneratedbythe2
percenttaxonthegrossPhilippinebillingsorreceiptsofinternationalcarriers.

IwouldvotetoaffirmthedecisionoftheCourtofTaxAppeals.

SeparateOpinions

TEEHANKEE,C.J.,concurring:

IconcurwiththeCourt'smajorityjudgmentupholdingtheassessmentsofdeficiencyincometaxesagainst
respondentBOACforthefiscalyears19591969to19701971andthereforesettingasidetheappealedjoint
decisionofrespondentCourtofTaxAppeals.Ijustwishtopointoutthattheconflictbetweenthemajorityopinion
pennedbyMr.JusticeFelicianoastothepropercharacterizationofthetaxableincomederivedbyrespondent
BOACfromthesalesinthePhilippinesofticketsfoeBOACformtheissuedbyitsgeneralsalesagentinthe
PhilippinesgasbecomemootafterNovember24,1972.BoothopinionsstatethatbyamendmentthroughP.D.
No.69,promulgatedonNovember24,1972,ofsection24(b)(2)oftheTaxCodeprovidingdortherateofincome
taxonforeigncorporations,internationalcarrierssuchasrespondentBOAC,havesincethenbeentaxedata
reducedrateof2%ontheirgrossPhilippinebillings.Thereis,therefore,nolongerantsourceofsubstantial
conflictbetweenthetwoopinionsastothepresent2%taxontheirgrossPhilippinebillingschargedagainst
suchinternationalcarriersashereinrespondentforeigncorporation.

FELICIANO,J.,dissenting:

Withgreatrespectandreluctance,irecordmydissentfromtheopinionofMme.JusticeA.A.MelencioHerrera
speakingforthemajority.Inmyopinion,thejointdecisionoftheCourtofTaxAppealsinCTACasesNos.2373
and2561,dated26January1983,iscorrectandshouldbeaffirmed.

ThefundamentalissueraisedinthispetitionforreviewiswhethertheBritishOverseasAirwaysCorporation
(BOAC),aforeignairlinecompanywhichdoesnotmaintainanyflightoperationstoandfromthePhilippines,is
liableforPhilippineincometaxationinrespectof"salesofairtickets"inthePhilippinesthroughageneralsales
agent,relatingtothecarriageofpassengersandcargobetweentwopointsbothoutsidethePhilippines.

1.TheSolicitorGeneralhasdefinedasoneoftheissueinthiscasethequestionof:

2.Whetherornotduringthefiscalyearsinquestion1BOAC[was]aresidentforeigncorporationdoingbusinessinthe
Philippinesor[had]anofficeorplaceofbusinessinthePhilippines.

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Itisimportanttonoteattheoutsetthattheanswertotheabovequotedissueisnotdeterminativeofthelialibityof
theBOACtoPhilippineincometaxationinrespectoftheincomehereinvolved.TheliabilityofBOACtoPhilippine
incometaxationinrespectofsuchincomedepends,notonBOAC'sstatusasa"residentforeigncorporation"or
alternatively,asa"nonresidentforeigncorporation,"butratheronwhetherornotsuchincomeisderivedfrom
"sourcewithinthePhilippines."

A"residentforeigncorporation"orforeigncorporationengagedintradeorbusinessinthePhilippinesorhaving
anofficeorplaceofbusinessinthePhilippinesissubjecttoPhilippineincometaxationonlyinrespectofincome
derivedfromsourceswithinthePhilippines.Section24(b)(2)oftheNationalInternalRevenueCODE("Tax
Code"),asamendedbyRepublicActNo.2343,approved20June1959,asitexistedupto3August1969,read
asfollows:

(2)Residentcorporations.Aforeigncorporationengagedintradeorbusinesswithinthe
Philippines(expectforeignlifeinsurancecompanies)shallbetaxableasprovidedinsubsection(a)of
thissection.

Section24(a)oftheTaxCodeinturnprovides:

Rateoftaxoncorporations.(a)Taxondomesticcorporations....andaliketaxshallbelivied,
collected,andpaidannuallyuponthetotalnetincomereceivedinthepreceedingtaxableyearfrom
allsourceswithinthePhilippinesbyeverycorporationorganized,authorized,orexistingunderthe
lawsofanyforeigncountry:....(Emphasissupplied)

RepublicActNo.6110,whichtookeffecton4August1969,madethisevenclearerwhenitamendedoncemore
Section24(b)(2)oftheTaxCodesoastoreadasfollows:

(2)ResidentCorporations.Acorporation,organized,authorizedorexistingunderthelawsofany
foreigncounrty,exceptforeignlifeinsurancecompany,engagedintradeorbusinesswithinthe
Philippines,shallbetaxableasprovidedinsubsection(a)ofthissectionuponthetotalnetincome
receivedintheprecedingtaxableyearfromallsourceswithinthePhilippines.(Emphasissupplied)

ExactlythesameruleisprovidedbySection24(b)(1)oftheTaxCodeuponnonresidentforeigncorporations.
Section24(b)(1)asamendedbyRepublicActNo.3825approved22June1963,readasfollows:

(b)Taxonforeigncorporations.(1)Nonresidentcorporations.Thereshallbelevied,collected
andpaidforeachtaxableyear,inlieuofthetaximposedbytheprecedingparagraphuponthe
amountreceivedbyeveryforeigncorporationnotengagedintradeorbusinesswithinthe
Philippines,fromallsourceswithinthePhilippines,asinterest,dividends,rents,salaries,wages,
premium,annuities,compensations,remunerations,emoluments,orotherfixedordeterminative
annualorperiodicalgains,profitsandincomeataxequaltothirtypercentumofsuchamount:
provided,however,thatpremiumsshallnotincludereinsurancepremiums.2

Clearly,whethertheforeigncorporatetaxpayerisdoingbusinessinthePhilippinesandthereforearesident
foreigncorporation,ornotdoingbusinessinthePhilippinesandthereforeanonresidentforeigncorporation,itis
liabletoincometaxonlytotheextentthatitderivesincomefromsourceswithinthePhilippines.Thecircumtances
thataforeigncorporationisresidentinthePhilippinesyieldsnoinferencethatalloranypartofitsincomeis
Philippinesourceincome.Similarly,thenonresidentstatusofaforeigncorporationdoesnotimplythatithasno
Philippinesourceincome.Conversely,thereceiptofPhilippinesourceincomecreatesnopresumptionthatthe
recipientforeigncorporationisaresidentofthePhilippines.Thecriticalissue,forpresentpurposes,istherefore
whetherofnotBOACisderivingincomefromsourceswithinthePhilippines.

2.Forpurposesofincometaxation,itiswelltobearinmindthatthe"sourceofincome"relatesnottothephysical
sourcingofaflowofmoneyorthephysicalsitusofpaymentbutrathertothe"property,activityorservicewhich
producedtheincome."InHowdenandCo.,Ltd.vs.CollectorofInternalRevenue,3thecourtdealtwiththeissueof
theapplicablesourcerulerelatingtoreinsurancepremiumspaidbyalocalinsurancecompanytoaforeignreinsurance
companyinrespectofriskslocatedinthePhilippines.TheCourtsaid:

Thesourceofanincomeistheproperty,activityorservicesthatproducedtheincome.The
reinsurancepremiumsremittedtoappellantsbyvirtueofthereinsurancecontract,accordingly,had
fortheirsourcetheundertakingtoindemnifyCommonwealthInsuranceCo.againstliability.Said
undertakingistheactivitythatproducedthereinsurancepremiums,andthesametookplaceinthe
Philippines.[T]hereinsurance,theliabilitiesinsuredandtheriskoriginallyunderwrittenby
CommonwealthInsuranceCo.,uponwhichthereinsurancepremiumsandindemnitywerebased,
wereallsituatedinthePhilippines.4

TheCourtmaybeseentobesayingthatitistheunderlyingprestationwhichisproperlyregardedastheactivity
givingrisetotheincomethatissoughttobetaxed.IntheHowdencase,thatunderlyingprestationwasthe
indemnificationofthelocalinsurancecompany.SuchindemnificationcouldtakeplaceonlyinthePhilippines
wheretheriskswerelocatedandwherepaymentfromtheforeignreinsurance(incasethecasualtyinsured
againstoccurs)wouldbereceivedinPhilippinepesosunderthereinsurancepremiumspaidbythelocal
insurancecompaniesconstitutedPhilippinesourceincomeoftheforeignreinsurances.

Theconceptof"sourceofincome"forpurposesofincometaxationoriginatedintheUnitedStatesincometax
system.Thephrase"sourceswithintheUnitedStates"wasfirstintroducedintotheU.S.taxsystemin1916,and
wassubsequentlyembodiedinthe1939U.S.TaxCode.Asiscommonlyknown,ourTaxCode(Commonwealth
Act466,asamended)waspatternedafterthe1939U.S.TaxCode.Itthereforeseemsusefultorefertoa
standardU.S.textonfederalincometaxation:

TheSupremeCourthassaid,inadefinitionmuchquotedbutoftendebated,thatincomemaybe
derivedfromthreepossiblesourcesonly:(1)capitaland/or(2)laborand/or(3)thesaleofcapital
assets.Whilethethreeelementsofthisattemptatdefinitionneednotbeacceptedasallinclusive,
theyserveasusefulguidesinanyinquiryintowhetheraparticularitemisfrom"sourcewithinthe
UnitedStates"andsuggestaninvestigationintothenatureandlocationoftheactivitiesorproperty
whichproducetheincome.Iftheincomeisfromlabor(services)theplacewherethelaborisdone
shouldbedecisiveifitisdoneinthiscounrty,theincomeshouldbefrom"sourcewithintheUnited
States."Iftheincomeisfromcapital,theplacewherethecapitalisemployedshouldbedecisiveifit

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isemployedinthiscountry,theincomeshouldbefrom"sourcewithintheUnitedStates".Ifthe
incomeisfromthesaleofcapitalassets,theplacewherethesaleismadeshouldbelikewise
decisive.Muchconfusionwillbeavoidedbyregardingtheterm"source"inthisfundamentallight.Itis
notaplaceitisanactivityorproperty.Assuch,ithasasitusorlocationandifthatsitusorlocation
iswithintheUnitedStatestheresultingincomeistaxabletononresidentaliensandforeign
corporations.TheintentionofCongressinthe1916andsubsequentstatuteswastodiscardthe
1909and1913basisoftaxingnonresidentaliensandforeigncorporationsandtomakethetestof
taxabilitythe"source",orsitusoftheactivitiesorpropertywhichproducetheincome....Thus,if
incomeistotaxed,therecipientthereofmustberesidentwithinthejurisdiction,orthepropertyor
activitiesoutofwhichtheincomeissueorisderivedmustbesituatedwithinthejurisdictionsothat
thesourceoftheincomemaybesaidtohaveasitusinthiscountry.Theunderlyingtheoryisthatthe
considerationfortaxationisprotectionoflifeandpropertyandthattheincomerightlytobelevied
upontodefraytheburdensoftheUnitedStatesGovernmentisthatincomewhichiscreatedby
activitiesandpropertyprotectedbythisGovernmentorobtainedbypersonsenjoyingthatprotection.
5

3.Weturnnowtothequestionwhatisthesourceofincomeruleapplicableintheinstantcase.Therearetwo
possiblyrelevantsourceofincomerulesthatmustbeconfronted(a)thesourceruleapplicableinrespectof
contractsofserviceand(b)thesourceruleapplicableinrespectofsalesofpersonalproperty.

Whereacontractfortherenditionofserviceisinvolved,theapplicablesourcerulemaybesimplystatedas
follows:theincomeissourcedintheplacewheretheservicecontractedforisrendered.Section37(a)(3)ofour
TaxCodereadsasfollows:

Section37.IncomeforsourceswithinthePhilippines.

(a)GrossincomefromsourceswithinthePhilippines.Thefollowingitemsofgrossincomeshallbe
treatedasgrossincomefromsourceswithinthePhilippines:

xxxxxxxxx

(3)Services.Compensationforlabororpersonalservicesperformedinthe
Philippines...(Emphasissupplied)

Section37(c)(3)oftheTaxCode,ontheotherhand,dealswithincomefromsourceswithoutthePhilippinesin
thefollowingmanner:

(c)GrossincomefromsourceswithoutthePhilippines.Thefollowingitemsofgrossincomeshall
betreatedasincomefromsourceswithoutthePhilippines:

(3)CompensationforlabororpersonalservicesperformedwithoutthePhilippines...(Emphasis
supplied)

ItshouldnotbesupposedthatSection37(a)(3)and(c)(3)oftheTaxCodeapplyonlyinrespectofservices
renderedbyindividualnaturalpersonstheyalsoapplytoservicesrenderedbyorthroughthemediumofa
juridicalperson.6Further,acontractofcarriageoroftransportationisassimilatedinourTaxCodeandRevenue
Regulationstoacontractforservices.Thus,Section37(e)oftheTaxCodeprovidesasfollows:

(e)IncomeformsourcespartlywithinandpartlywithoutthePhilippines.Itemsofgrossincome,
expenses,lossesanddeductions,otherthanthosespecifiedinsubsections(a)and(c)ofthissection
shallbeallocatedorapportionedtosourceswithinorwithoutthePhilippines,undertherulesand
regulationsprescribedbytheSecretaryofFinance....Gains,profits,andincomefrom(1)
transportationorotherservicesrenderedpartlywithinandpartlywithoutthePhilippines,or(2)from
thesaleofpersonnelpropertyproduced(inwholeorinpart)bythetaxpayerwithinandsoldwithout
thePhilippines,orproduced(inwholeorinpart)bythetaxpayerwithoutandsoldwithinthe
Philippines,shallbetreatedasderivedpartlyfromsourceswithinandpartlyfromsourceswithoutthe
Philippines....(Emphasissupplied)

ItshouldbenotedthattheaboveunderscoredportionofSection37(e)wasderivedfromthe1939U.S.TaxCode
which"wasbaseduponarecognitionthattransportationwasaserviceandthatthesourceoftheincomederived
therefromwastobetreatedasbeingtheplacewheretheserviceoftransportationwasrendered.7

Section37(e)oftheTaxCodequotedabovecarriesastrongwellnighirresistible,implicationthatincomederived
fromtransportationorotherservicesrenderedentirelyoutsidethePhilippinesmustbetreatedasderivedentirely
fromsourceswithoutthePhilippines.Thisimplicationisreinforcedbyaconsiderationofcertainprovisionsof
RevenueRegulationsNo.2entitled"IncomeTaxRegulations"asamended,firstpromulgatedbytheDepartment
ofFinanceon10February1940.Section155ofRevenueRegulationsNo.2(implementingSection37oftheTax
Code)providesinpartasfollows:

Section155.Compensationforlabororpersonnelservices.Grossincomefromsourceswithinthe
PhilippinesincludescompensationforlabororpersonalserviceswithinthePhilippinesregardlessof
theresidenceofthepayer,oftheplaceinwhichthecontractforserviceswasmade,oroftheplace
ofpayment(Emphasissupplied)

Section163ofRevenueRegulationsNo.2(stillrelatingtoSection37oftheTaxCode)dealswithaparticular
speciesofforeigntransportationcompaniesi.e.,foreignsteamshipcompaniesderivingincomefromsources
partlywithinandpartlywithoutthePhilippines:

Section163Foreignsteamshipcompanies.Thereturnofforeignsteamshipcompanieswhose
vesselstouchpartsofthePhilippinesshouldincludeasgrossincome,thetotalreceiptsofallout
goingbusinesswhetherfreightorpassengers.Withthegrossincomethusascertained,theratio
existingbetweenitandthegrossincomefromallports,bothwithinandwithoutthePhilippinesofall
vessels,whethertouchingofthePhilippinesornot,shouldbedeterminedasthebasisuponwhich
allowabledeductionsmaybecomputed,.(Emphasissupplied)

AnothertypeofutilityorserviceenterpriseisdealtwithinSection164ofRevenueRegulationsNo.2(again
implementingSection37oftheTaxCode)withprovidesasfollows:
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Section164.Telegraphandcableservices.Aforeigncorporationcarryingonthebusinessof
transmissionoftelegraphorcablemessagesbetweenpointsinthePhilippinesandpointsoutsidethe
PhilippinesderivesincomepartlyformsourcewithinandpartlyfromsourceswithoutthePhilippines.

...(Emphasissupplied)

Oncemore,averystronginferencearisesunderSections163and164ofRevenueRegulationsNo.2that
steamshipandtelegraphandcableservicesrenderedbetweenpointsbothoutsidethePhilippinesgiveriseto
incomewhollyfromsourcesoutsidethePhilippines,andthereforenotsubjecttoPhilippineincometaxation.

Weturntothe"sourceofincome"rulesrelatingtothesaleofpersonalproperty,upontheonehand,andtothe
purchaseandsaleofpersonalproperty,upontheotherhand.

Weconsiderfirstsalesofpersonalproperty.Incomefromthesaleofpersonalpropertybytheproduceror
manufacturerofsuchpersonalpropertywillberegardedassourcedentirelywithinorentirelywithoutthe
PhilippinesorassourcedpartlywithinandpartlywithoutthePhilippines,dependingupontwofactors:(a)the
placewherethesaleofsuchpersonalpropertyoccursand(b)theplacewheresuchpersonalpropertywas
producedormanufactured.Ifthepersonalpropertyinvolvedwasbothproducedormanufacturedandsold
outsidethePhilippines,theincomederivedtherefromwillberegardedassourcedentirelyoutsidethePhilippines,
althoughthepersonalpropertyhadbeenproducedoutsidethePhilippines,orifthesaleofthepropertytakes
placeoutsidethePhilippinesandthepersonalwasproducedinthePhilippines,then,theincomederivedfromthe
salewillbedeemedpartlyasincomesourcedwithoutthePhilippines.Inotherwords,theincome(andtherelated
expenses,lossesanddeductions)willbeallocatedbetweensourceswithinandsourceswithoutthePhilippines.
Thus,Section37(e)oftheTaxCode,althoughalreadyquotedabove,maybeusefullyquotedagain:

(e)IncomefromsourcespartlywithinandpartlywithoutthePhilippines....Gains,profitsandincome
from(1)transportationorotherservicesrenderedpartlywithinandpartlywithoutthePhilippinesor
(2)fromthesaleofpersonalpropertyproduced(inwholeorinpart)bythetaxpayerwithinandsold
withoutthePhilippines,orproduced(inwholeorinpart)bythetaxpayerwithoutandsoldwithinthe
Philippines,shallbetreatedasderivedpartlyfromsourceswithinandpartlyfromsourceswithoutthe
Philippines....(Emphasissupplied)

Incontrast,incomederivedfromthepurchaseandsaleofpersonalpropertyi.e.,tradingis,undertheTax
Code,regardedassourcedwhollyintheplacewherethepersonalpropertyissold.Section37(e)oftheTax
Codeprovidesinpartasfollows:

(e)IncomefromsourcespartlywithinandpartlywithoutthePhilippines...Gains,profitsandincome
derivedfromthepurchaseofpersonalpropertywithinanditssalewithoutthePhilippinesorfromthe
purchaseofpersonalpropertywithoutanditssalewithinthePhilippines,shallbetreatedasderived
entirelyfromsourceswithinthecountryinwhichsold.(Emphasissupplied)

Section159ofRevenueRegulationsNo.2putstheapplicablerulesuccinctly:

Section159.Saleofpersonalproperty.Incomederivedfromthepurchaseandsaleofpersonal
propertyshallbetreatedasderivedentirelyfromthecountryinwhichsold.Theword"sold"includes
"exchange."The"country"inwhich"sold"ordinarilymeanstheplacewherethepropertyismarketed.
ThisSectiondoesnotapplytoincomefromthesalepersonalpropertyproduced(inwholeorinpart)
bythetaxpayerwithinandsoldwithoutthePhilippinesorproduced(inwholeorinpart)bythe
taxpayerwithoutandsoldwithinthePhilippines.(SeeSection162oftheseregulations).(Emphasis
supplied)

4.ItwillbeseenthatthebasicproblemisoneofcharacterizationofthetransactionsenteredintobyBOACinthe
Philippines.Thosetransactionsmaybecharacterizedeitherassalesofpersonalproperty(i.e.,"salesofairline
tickets")orasenteringintoaleaseofservicesoracontractofserviceorcarriage.Theapplicable"sourceof
income"rulesdifferdependinguponwhichcharacterizationisgiventotheBOACtransactions.

Theappropriatecharacterization,inmyopinion,oftheBOACtransactionsisthatofenteringintocontractsof
service,i.e.,carriageofpassengersorcargobetweenpointslocatedoutsidethePhilippines.

Thephrase"saleofairlinetickets,"whilewidelyusedinpopularparlance,doesnotappeartobecorrectasa
matteroftaxlaw.Theairlineticketinandofitselfhasnomonetaryvalue,evenasscrappaper.Thevalueofthe
ticketlieswhollyintherightacquiredbythe"purchaser"thepassengertodemandaprestationfromBOAC,
whichprestationconsistsofthecarriageofthe"purchaser"orpassengerfromtheonepointtoanotheroutside
thePhilippines.TheticketisreallytheevidenceofthecontractofcarriageenteredintobetweenBOACandthe
passenger.ThemoneypaidbythepassengerchangeshandsinthePhilippines.Butthepassengerdoesnot
receiveundertakentobedeliveredbyBOAC.The"purchasepriceoftheairlineticket"isquitedifferentfromthe
purchasepriceofaphysicalgoodorcommoditysuchasapairofshoesofarefrigeratororanautomobileitis
reallythecompensationpaidfortheundertakingofBOACtotransportthepassengerorcargooutsidethe
Philippines.

ThecharacterizationoftheBOACtransactionseitherassalesofpersonalpropertyoraspurchasesandsalesof
personalproperty,appearentirelyinappropriatefromotherviewpoint.Considerfirstpurchasesandsales:is
BOACproperlyregardedasengagedintradinginthepurchaseandsaleofpersonalproperty?Certainly,
BOACwasnotpurchasingticketsoutsidethePhilippinesandsellingtheminthePhilippines.Considernextsales:
canBOACberegardedas"selling"personalpropertyproducedormanufacturedbyit?Inapopularorjournalistic
sense,BOACmightbedescribedas"selling""aproduct"itsservice.However,forthetechnicalpurposesofthe
lawonincometaxation,BOACisinfactenteringintocontractsofserviceorcarriage.Theveryexistanceof
"sourcerules"specificallyandpreciselyapplicabletotherenditionofservicesmustprecludetheapplicationhere
of"sourcerules"applyinggenerallytosales,andpurchasesandsales,ofpersonalpropertywhichcanbeinvoked
onlybythegraceofpopularlanguage.Onaslightymoreabstractlevel,BOAC'sincomeismoreappropriately
characterizedasderivedfroma"service",ratherthanfroman"activity"(abroadertermthanserviceand
includingtheactivityofselling)orfromthehereinvolvedisincometaxation,andnotasalestaxoranexciseor
privilegetax.

5.ThetaxationofinternationalcarriersistodayeffectedunderSection24(b)(2)oftheTaxCode,asamendedby
PresidentialDecreeNo.69,promulgatedon24November1972andbyPresidentialDecreeNo.1355,
promulgatedon21April1978,inthefollowingmanner:
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(2)Residentcorporations.Acorporationorganized,authorized,orexistingunderthelawsofany
foreigncountry,engagedintradeorbusinesswithinthePhilippines,shallbetaxableasprovidedin
subsection(a)ofthissectionuponthetotalnetincomereceivedinthepreceedingtaxableyearfrom
allsourceswithinthePhilippines:Provided,however,Thatinternationalcarriersshallpayataxoftwo
andonehalfpercentontheirgrossPhilippinebillings."GrossPhilippinesofpassagedocumentssold
therein,whetherforpassenger,excessbaggegeormail,providethecargoormailoriginatesfrom
thePhilippines.Thegrossrevenuerealizedfromthesaidcargoormailshallincludethegrossfreight
chargeuptofinaldestination.GrossrevenuesfromcharteredflightsoriginatingfromthePhilippines
shalllikewiseformpartof"grossPhilippinebillings"regardlessoftheplaceofsaleorpaymentofthe
passagedocuments.Forpurposesofdeterminingthetaxabilitytorevenuesfromcharteredflights,
theterm"originatingfromthePhilippines"shallincludeflightofpasssengerswhostayinthe
Philippinesformorethanfortyeight(48)hourspriortoembarkation.(Emphasissupplied)

Undertheabovequotedprovisointernationalcarriersissuingforcompensationpassagedocumentationinthe
Philippinesforupliftsfromanypointintheworldtoanyotherpointintheworld,arenotchargedanyPhilippine
incometaxontheirPhilippinebillings(i.e.,billingsinrespectofpassengerorcargooriginatingfromthe
Philippines).Underthisnewapproach,internationalcarrierswhoserviceportorpointsinthePhilippinesare
treatedinexactlythesamewayasinternationalcarriersnotservinganyportorpointinthePhilippines.Thus,the
sourceofincomeruleapplicable,asabovediscussed,totransportationorotherservicesrenderedpartlywithin
andpartlywithoutthePhilippines,orwhollywithoutthePhilippines,hasbeensetaside.inplaceofPhilippine
incometaxation,theTaxCodenowimposesthis2percenttaxcomputedonthebasisofbillingsinrespectof
passengersandcargooriginatingfromthePhilippinesregardlessofwhereembarkationanddebarkationwould
betakingplace.This2percenttaxiseffectivelyataxongrossreceiptsoranexciseorprivilegetaxandnota
taxonincome.Thereby,theGovernmenthasdoneawaywiththedifficultiesattendingtheallocationofincome
andrelatedexpenses,lossesanddeductions.Becausetaxesaretheverylifebloodofgovernment,theresulting
potential"loss"or"gain"intheamountoftaxescollectiblebythestateissometimes,withvaryingdegreesof
consciousness,consideredinchoosingfromamongcompetingpossiblecharacterizationsunderorinterpretation
oftaxstatutes.Itishenceperhapsusefultopointoutthatthedeterminationoftheappropriatecharacterization
herethatofcontractsofaircarriageratherthansalesofairlineticketsentailsnodowntheroadlossof
incometaxrevenuestotheGovernment.Inlieuthereof,theGovernmenttakesinrevenuesgeneratedbythe2
percenttaxonthegrossPhilippinebillingsorreceiptsofinternationalcarriers.

IwouldvotetoaffirmthedecisionoftheCourtofTaxAppeals.

Narvasa,Gutierrez,Jr.,andCruz,JJ.,dissent.

Footnotes

1PartialStipulationofFacts,Annex"E"andAnnex"4",pp.7477and8790,Rollo.

2TheMentholatumCo.,Inc.,etal.vs.AnacletoMangaliman,etal.,72Phil.524(1941)Section1,
R.A.No.5455.

3PacificMicronesianLine,Inc.vs.DelRosarioandPeligon,96Phil.23,30,citingThompsonon
Corporations,Vol.8,3rded.,pp.844847andFisher'sPhilippineLawofStockCorporation,p.415.

4P.11,BOACMemorandump.261,Rollo.

5Section24(b),(2),TaxCode,asamendedbyR.A.6110,approvedon4August1969.

6MadrigalandPaternolvs.RaffertyandConcepcion,38Phil.414(1918).

7MemorandumforPetitioner,p.22p.299,Rollo.

8Mertens,Jr.,Jacob,LawonFederalIncomeTaxation,Vol.8,Section45.27citedinHowden&Co.,
Ltd.vs.CollectorofInternalRevenue,13SCRA601(1965).

914AmJur2d813.

10BritishTrader'sInsuranceCo.,Ltd.vs.CommissionerofInternalRevenue,13SCRA719(1965).

11Howden&Co.,Ltd.vs.CollectorofInternalRevenue,13SCRA601(1965).

12PartialStipulationofFacts,paragraph5,p.89,Rollo.

13ManilaGasCorporationvs.CollectorofInternalRevenue.62Phil.895(1935).

14CommissionerofInternalRevenuevs.U.S.Lines,Co.,5SCRA175(1962).

Feliciano,J.

1I.e.,19591969and1971.

2Underscoringsupplied,RepublicActNo.6110continuedtheabovequotedsubparagraph,except
thatitraisedthetaxratefrom30%to30%

313SCRA601(1965).

413SCRA,at604underscoringsupplied.

58Mertens,LawofFederalIncomeTaxation,Section45.27(1957)underscoringsupplied
footnotesomitted.

6Commissionerv.HawaiianPhilippineCo.,100F.2d988,991(9thCir.1939),wheretheCourtalso
observedthatthesugarmillingservicesrenderedbytherespondentwerenotanylessinthenature

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of"personal"servicesmerelybecause"theywereperformed,inpart,throughtheuseofmachinery,
orbecauseofthemagnitudeofthetaxpayersoperations."Id.

78Mertens,Id.,Section45.43,whichgoesonthestatethat:"ItwastheintentionofCongressunder
the1921lawtoplacethetaxationoftransportationcompaniesuponasounderandmorescientific
basis(ratherthanthespeciesoffranchisetaxpreviouslyimposeduponnonresidentsingeneral),
andsotheprinciplewasadoptedofconsideringincomederivedfromtransportationtobeincomefor
services,withtheresultthattheplacewheretheserviceswererendereddeterminedthesource.The
resultwasincomefromsourcespartlywithinandpartlywithouttheUnitedStates."(Id)(Emphasis
supplied)

TheLawphilProjectArellanoLawFoundation

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