CTA Case No. 2480 (Decision)

�, r, !�'~-'~ � ! . 1'�: 01" TU!t PHIU1i>Pif'l~~ �..:O'd !'�- ~ ~~:Y Tz\.X APPEJ.'l.J...~. �~ � � tt~�.'Jrl CITV JAPAN AIR LINES,-� INC. , Petitioner,/ - .versus - C.T.A. CASE NO. 2480 COMMISSIONER OF INTERNAL REVENUE, Respondent . X - .- ---- ---X DE C I S I 0 N Petitioner Japan Air Lines, Inc. appeals from a decision of respondent Commissioner of Inter al Revenue denying its protest against a de~icien~y income tax assessment fo r the years 1959 , 196 0 , 196~ , 1962 and 1963 in the total amount of P2,099,687.52, inclusive of 50% sur- charge and interest, plus compromise penalty.of Pl,500.00 as penalty of P300.00 per year from 1959 to 1963 for failure to keep books of accounts in the Philippines. The basic question presented in this appeal is whether or not the proceeds of sales in the Philipp i nes of petitioner's inter- national air line passage tickets during the years in question, on which the deficis ncy income tax assessment was based after deduc tion of sales returns and commissions, constituted income of petitioner from sources within the Philippines ......... � :"" ,. I( I � 1 i. . ... .. ,. ..

-- -- - �- -.......... . - - - - l j DECISION - CTA CASE NO. 2480 -2 - subject to income tax. Appropriate to mention here, at the outset, is CTA Case No . 1634, Jap~n Air Lines vs. Com- missioner of I ternal Revenue, involving the same parties. In this CTA Case No. 1634 , this Court was asked to say whether during the period from January, 1959 to September, 1964, which is within the period covered in the instant case, the Japan Air Lines was engaged in business as a common carrier in the Philippines subject to the 2% percentage tax imposed by Section 192 (now Section 207) _of the National Internal Revenue Code. Answer- ing the query in the negative, this Court ruled that the mere sale in the Philippines of airline passage tickets of a non-resident fore ign inter- national ai~ transportation company by a local airline, unaccompanied by phy3ical act of carriage or transportation is no t considered engaged in business in the Philippines subject to the 2% common carrier's tax. Since CTA Case No. 1634 and CTA Case No. 2480 involve the same parties and cover the s~me activities done or transacted under the s~me factual setting during the same period, they may be considered as companion cases dealing on the sarne proceedings, the business tax aspect 'I 2

DECISION - CTA CASE NO. 2480 - 3 -� having been treated in CTA Case No. 1634 and the income tax angle in the instant appeal. There is no controversy as to the facts of the case . As narrated in the amended decision in CTA Case No. 1634 (Exh. "F") :_ "Petitioner, Japan Air Lines (or JAL for short), is a foreign corporation engaged in the �business of international air carriage. JAL did not have plane s that lifted or landed passengers and cargo in the Philippines during the period under review. It had not been granted by the Civil Aeronautics Board (CAB) a certificate of public convenience and n~cessity to operate here (Exh. A, p. 19, CTA rec.). However, on two occasions, JAL's �planes landed here on chartered flights - one on September 23-26, 1963 carrying the Prime Minister of Japan on a state visit and the other a small plane, Beechcraft, that came here on January 14-17, 1964 (see pp. 24- 25, t.s.n.; Exhs. B, B-1 & B-2, pp. 20-22, CTA rec.). In November, 1967 its appli- cation to �operate in the Philippines was finally approved by the CAB (see Peti- tioner1s Reply Memo.) "Since mid-July, 1957, JAL had maintained an office at the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was maintained merely for the promotion of the company's public relations and to hand out brochures, literature and other information playing up the attractions of Japan as a tourist spot and the services ~njoyed in JAL planes (Exh. I, p. 54, BIR rec.) �. "On July 17, 1957, JAL constituted the Philippine Air Lines (PAL for short} its general sales agent in the Philip- pines (Exh. E, pp. 51 - 57, CTA rec.; ..... . ,J : 3

~ ~. r. . DECISION - CTA CASE NO. 2480 - 4- pp. 12 & 21, t.s.n.). As an agent, PAL, among other thirigs, sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL. Although PAI, was the exclusive general sales agent in the Philippines, sales of JAL tickets were done also by travel agencies but all such sales were under the direct supervision of PAL which was responsible to JAL for the settlement, accounting and liquidation of said sales. "For the period from January, 1959 to September 1964, PAL paid, for and in behalf of JAL, 2% common carrier's tax based on the 'on line' portion of the fares on the tickets sold by PAL on behalf of JAL. The 'on line' portion refers to the fares corresponding to the leg carried on a JAL plane (Exh. 1, pp. 1-3, BIR rec.; pp. 17-19, t.s.n.)~ On June 2, 1972, petitioner received defi- ciency income tax assessment notices and a demand letter, all dated February 28, 1972, for a total amount of ~2,099,687.52 inclusive of 50% surcharge and interest, for. years 1959 through 1963, corn- puted as follows: 1959 1960 . Net income per P476,671.48 1961 Pl35 I 001.00 investigation El472,025.16 .El734,812.77 67,500.50 El212,444.00 Tax due thereon Pl3 3 ,608.00 106,222.00 Add: 50% surch. 66,804.00 ~.. r239.9~ 1/2% rno. in t. ( 3 yr s.) � ___1i~~l_1_2_.4_i Tota l due ,.

r ' DECISION - CTA CASE NO. 2480 - 5- 1962 -1-9-63- SUHfvlP,RY Net income per investigation IH, 065,641.63 f.ll,550,230.48 Il224, 461.44 PI 4b7,069.00 226,801.68 Tax due thereon p 311,692.00 356,905.92 228,534.50 523,642.56 Add: 50% surch. 155,846.00 767,875.92 82,272.4~ 1/2% mo.int. (3 yrs.) __ 56,104.56 Total due Compromise 1,500.00 On June 19, 1972, petitioner contested said assessments on the main ground that as a nonresident foreign corporaticn, it was taxable only on income derived from Phil1~pine source s as determined under Section 37 of the Tax Cede, and there bei~g no such income during the period in question, it was not liable for the deficiency income tax liabilities assessed. However, on January 17, 1973, petitioner received the final decision of respondent dated December 21, 1972, denying the aforementioned protest, and reiterating the demand for payment of the sum of P2,099,687.52 . Hence the present appeal fi~ed on February 11, 1973. As special and affirmative defenses, respon- dent, among others, alleges in his answer to the petition for review: That during the period in question, petitioner was engaged in business in the Philippines and 5

r DECISION - CTA CASE NO. 2480 - 6- it derived income fro~ sources within the Philippines; That petitioner is a resident foreign cor- poration liable to the payment of income tax on income from all sources within the Philippines (Sec. 24 (b) (2) l~ational Internal Revenue Code};_ That in the alternative that petitioner may not be considered a resident foreign corporation but a non-resident foreign cor9oration, still it is liable to the payment of Philippine income tax at the rate of thirty-five percent (35%) ?f its gross income received from all sources within the Philippines (Sec. 24 (b) (1) National Internul Revenue Code) ;_ That the income tax in question was imposed on income received by petitioner from sources with- in the Philippines. As elucidated in the decision of respondent appealed from (Exh . "C"; Exh. "3", p. 76, BIR records; Annex "B", petition for review) andre- iterated in respondent's memorandum (p. 128, CTA records)~ petitioner Japan Air Lines was, during the years involved, a foreign corporation 8ngaged in bus iness in tle Philippines by its acts of- (1 ) _Selling passage tickets in the Philippines through its agent the Philippine Air Lines; .. .. ~ ... t � � j 6

DECISION - CTA CASE NO . 2480 - 7- (2) Maintiin ing an off ice in the Philippines '� even if only for promotion and information purposes; and (3) Receiving payments for passage tickets a. sold in the Philippines, b. in Philippine currency, and �� from passengers coming or origi- nating from the Philippines. Admittedly, the deficiency income tax under consideration and the 50% surcharge amounting to a total of ~1,874,715.00, exclusive of interest, was based on the proceeds of sales in the Philippine s of petitioner's airline passage tickets by its local agent, the Philipp i ne Airlines. (Exh. "J~J" , pp. 22-24, BIR records.) Was petitioner during the years in question engaged in business in the Philippine~? Respondent's position is not in any way different from the stand taken by him in CTA Case No. 1634, Japan Air Lines vs. Commissioner of Internal Revenue, supr a, the factual setting of which is , ~s s~ a t e d earlier, exactly on all four w~ th t he case at ba r, and where t his Court ruled tha t the s e lling of passage tickets of peti t ioner in tho Philip] lnes by the Philippine Air Lines, as well as the maintenance of an office for promotion and infornat ion pu r poses, was not considered

DECISION - CTA CASE NO. 2480 - 8- engaged in business in the Philippines. BecDuse the amended decision in the said case, the petition for rev iew on certiorari of which was denied for lack of merit by the Supreme Court in L-30041, Februar y 3, 1969, disposed of the same defenses a n d cont ent ions of respondent in this appeal, we will quote at length from said amended decision. Pet i tioner contends that its activity or busines s as a common carrier was confine( o u tside the Philippines and as such it was not liable for common carrier's tax. Res- pondent , ~owevc r , counters that petitioner was engaged in t1e business of common carrie r in the Phi lippines through its agent, the Philippine Air Lines. In the light of the additional evidence it now appears that, for its survival and proper regulation, the airline industry has fo r me d an organization known as the Interna t 1onal Air Transport Association (IATA f or short). IATA has promulgated agreeme nts and r~solutions to implement the practices of the industry which become bindin~ upon all its members once approved by their respective government. In the Philippines, they are submitted to the Civil Aeronautics Board for approval. Som ~ of these agreements or resolutions are the Traffi c Conference Resolutions (Exh. M) and the Interline Agreements (Exh. S). tol the administration of air traffic, IA~A has divided the world into three traffic conference areas~ actions of each traffi conference are done in the form of reso- lutions known as Traffic Conference Resol� Itions. JAl~ and PAL belong to Traffic Conference No. 3 (see Exh. T-~; pp . 18 2-18 4 , t. s � n. ) �. With r espect to the activity of carrying passengers and cargo, there has evol v~ d in the airline business, 8

DECISION - CTA CASE NO. 2480 -9 - primarily for the conven.imce of pass- engers, the practice of honoring ticket s issued by other airlines. This means that a passenger buying a ticket from one particular airline could be accepted as a passenger in the planes of other airlines by simply using the ticket of the issuing airline (Exhs. F, R-2-a, N-2-b & Q-1). This practice is governed by a binding �agreeme nt among lATA airline members, designated as Traffic Conference Resolution No. 850, othenvise known as the Interl i 1e Traffic Agreement (Exhs. H-3 & S-5; pp. 171-181, t.s.n.). The airline which carries a passeng~r holding ticket of another airline is designated as the "carrying airline", while the airline to which the ticket belongs is known as the "issuing airline" (Exhs.L to L-6-a & M-3; pp. 188-189, t.s.n.) ~ x x�. XXX }'XX XXX XXX �As stated earlier JAL did not have planes that lifted or landed passengers and cargo in this country. It however maintained an office in Manila for the promot i on of the comoany's public � relations and to hand out brochures, literatures and other informations playing up the attractions of Japan as a tourist spot and the services enjoyed in JAL planes. JAL dit not sell tickets in said office. Instead, taking adv anta ge of the IATA agreements, on July 17, 1957, JAL constituted the Phil ipp ine Ai : Lin e s (PAL for short) its =, gen er~_ sale s a gent in the Philippin~s (Ex t. pp. Sl -57, CTA rec.; pp. 12 & 21, c.J .n.). As an agent, PAL, among ot h"r : hing~ . s e lls for and in behalf of '- r_. plan e tickets and reservations for r �:go spoce s which are used by t he passp g ers or customers on the faci- liti e s of JAL . Although PAL was the - ,;J exclusive general sales agent in the Philippines , sale of JAL tickets was

DECISION - CTA CASE NO. 2480 - 10 - done also by travel agencies but all such sales were under the direct supervision of PAL which was respon- sible to JAL for the settlement, accounting and liquidation of said sales. As general sales agent, PAL issued JAL tickets in which case JAL was the issuing airline. When PAL carried the passenger in its leg of the flight from the Philippines to the country where JAL planes took over, it became the carrying airline for said leg. In this connection, PAL, like other airlines, performed dual functions: (a) the activity of selling transport- aticin of other airlines and (b) the activity of transporting in its �own planes passengers and cargo from one place to another. One deals with the sale of tickets and travel documents, for and in behalf of other airlines, and the other deals with the physical act of transporting passengers and cargo from one place to anothe r by means of aircraft (pp. 228-238, t.s.n.) .. XXX XXX XXX XXX XXX XXX The practice of, and arrangement between, JAL and PAL is well exemplified in the�situation represented by Exhibit F. The passenger, Ong Sin, bought a JAL ticket from a PAL office in Manila bound for Seoul via Taipe h and Tokyo. From Manila to Taipeh, the first leg, he was lifted by a PAL plane under the Jl\L ticket. In Taipeh, a J�~L plane took over and carried him to Tokyo , Seoul and then back to Tokyo under the same JAL ticket. The situation created by the JAL ticket aforesaid may be stated this wise:. When Passenger Ong Sin boa rded the PAL plane in Manila, beari ng a JAL ticket, his contract of tran spo rtation was with PAL, the "carry- ing-air line", up to the end of the first leg o f the flight - Taipeh. From Taipeh, where JAL plane took over, his contract 10

DECISION - CTA CASE NO. 2480 - 11 - of trarisportation was transferred to JAL, the new carrying airline, and also up to the particular line of the flight - Tokyo. The clear intent of the arrange- ment is to save the passenger the trouble of purchasing tickets at the point of departure of every leg of the entire trip. Under this set-up the conclusion is obvious that JAL did not engage in the business of a car~ier in the Philippines either directly or with the intervention of another carrier that may be considered its extension. The practice in the airline industry on the apportionment of commissions between t he issuing and the carrying airline reflects the foregoing legal relationship between them. In the sale of tickets for and in behalf of JAL, PAL is entitled to two commissions, namely: (a) 7% sales commission if it itself sold the ticket, based on the fare for the whole ticket; and {b) 3% overriding commission, based on the "'on-line" portion or legs actua l ly carried by JAL planes. In turn, JAL for issuing the ticket and giving business to PAL, gets the 7% interline commission, based on the fare pertaining to those legs actually carried by PAL (Exhs. E, N to N-2-b, 0 to 0-5, U & V; pp. 63-64, 127- 137 & :L46-156, t.s . n.). The issuing airline obviousJ.y acts �as a mere sales agent of tickets for the leg covered by the plan~ of the carrying ai=line which is the sole carrier. We find no merit in respondent's contention_ that international air transportation companies should be considered engaged i n business wherever they derive fares or freight and are taxable as carrier in said place, that is, for purposes of taxation the situs is said place. It is to be admitted that CTA Case No. 1634 involves business tax, while the case at bar covers

DFCISION - CTA CASE NO. 2 ~ 80 - 12 - income tax. Nonetheless, the ruling enunciated therein that petitioner was not ~ngaged in busi- ness in the Philippines during the years under review by its acts of (a ) selling passage tickets in the Philippines through the Philippine Air Lines; (b) the maintenance of an office in the Philippines for promotion and information purposes; and (c) the receipt of payments for passage tickets sold in the Philippines from passengers from the Philippines resolves the identical problem brought before us in this proceeding. For purposes of income taxation, the taxability of foreign corporations, including an international air carrier of passengers a~ freight like peti- tioner herein, at the time material to this case, whether engaged in trade or business in the Philip- pines or not engaged in trade or business here depends, however, on whether the income is derived from sources within the Philippines. (Sec. 24, National Internal Revenue Code; Sees. 16 & 60, Rev. Reg. No. 2. ) While a foreign corporation do in~ business in the Philippines is taxable on income solely from sources within the Philippines, it is permitted to claim deductions from gross income but only to the extent connected with 12

DECISION - CTA CASE NO. 2480 - 13 - income earned in the Philippines. (Sees. 24 (b) (2) and 37, National Internal Revenue Code.) On the other hand, a foreign corporation not doing busi- ness in the Philippines i s taxable on income "from all sources within the Philippines, as interest , dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual o r periodical or casua l gains, profits and income and capital gains . " (Sec. 2 4 (b) (_1) '� National Internal Revenue Code.) The decisive quest i on, therefore, as posed by petitioner, is whether or not the proceeds of sales in the Philippines of Japan Air Lines passage tickets by the Philippine Air Lines during the period in question, and on which the assessment was based (after deducting sales returns and PAL's commissions) constituted income of petitioner from Philippine source. The controlling statute is Section 37 of the National Internal Revenue Code, the pertinent port ion s of which durin~ the years in question, read <.1s fo llo'/.'S: SEC. 37 . Income from sources within t~ e Philip p i ne s - (a) Gross i ncome frow sources within t~e Philip- p ines. - The following items of gross

DECISION - CTA CASE NO. 2480 - 14 - income shall be treated as gross income from sources within the Philippines : (1) Interest.- Interest derived from s ouices within the Ph ilippines, and interest on bonds, notes, or other interest-bearing obligations of resi- dents , corporate or otherwise; (2) Div idends.- The amount received as dividends (A) From a domestic corporation; (B) From a fo~eign corporation unless l~ss than fifty per centum of the gross income of such foreign corpo- ration for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from so1rces within the �Philippines as determined under the provisions of this section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such perlod derived from sources within the Philippi! es bears to its gross in- come f~om al l sources; (3) Services.- Compensation for labor or personal services performed in the Philippines; (4) Re ntals and r oya lti es .- Ren ta ls and roya1tie s from property located in the Philirpinos or from any inte~est in such property, including rentals or royal tie~:.,for the use of or for the privi lCJ0 of using in the Philippines pate n,_-.:, r~opyr i~fi1ts , secret processes and r-:~u l as, go ,dw ill, trademarks, tr ade - �.:md :;>, f c2 mcbise, and other like prop 0-~- i ; (5) Sale o f real property.- Gains, profit s, a nd income from the sale of 14

DECISION - CTA CASE NO. 2 4 80 -- 15 - real property located in the Philip- pines; and (6) Sale of personal property.- Gains, piofits, and income from the sale of personal property, as deter- mined in subsection (e) _of this section. (b) Net income from sources in the Phil{ppines.- From the items of gross income specified in subsection (a) of this section there s~all be ded~cted the expenses, losses, and other deductions properly apportioned or allo- cated there to and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some frem or class of gr.oss income. The remainder, if any, shall be i~cluded in full as net income from sources within the Phil ippines. Adverting to the terms of the law, it is quite apparent that the proceeds of sales of Japan Air Lines passage t ickets in the Philippines by the Philippine Air Line s during the period in question could not be considered as interest, dividends or rentals and royalties derived from sources within the Philippines. There is patently the absence of analogy or similarity between interest, dividends, rentals or royalties and proceeds of sales of air- \ line passage tickets. And by no stretch of th ~ : ~magination c ou.ld such p r oceeds of sales of air.l ino p~ssage tickets be compared to income "from the sale of personal property produced (in whale or in part)". by petitioner and sold with in the Philippines so as to be treated as income derived 15

DECISION - CTA CASE NO. 2480 - 16 - partly from sources within and partly from sources without the Philippines under Section 37 (e) _o f the then in for ce Nationill Internal Revenue Code. As an international air carrier of pass- engcrs and freight, perhaps, such proceeds of sale of airline passage tickets in the Philippines may be classified as "compensation for labor or personal services performed in the Philippines"; that is, compensation for service of carriage of pass e ngers and fr~ight performed within the Philip- p i nes. However, it 1s an admi t ted fact and con- firmed by this Court 1n its amended decision in CTA Case No. 1634 , Japan Air Lines vs. Commissioner of Internal Revenue, that petitioner did not lift nor land passengers or cargo in the Philippines during the years in question. Invariably, any leg or portion of the trips serviced by the Japan Air Lines commenced ~~side the Ph.!.lippines ana terminated also outside of the Philippines. To re i terate: "W e find no merit in respondent's content ion thil t international air trans- p o r _t~L io n c ~ mpanies should be considered e ng o�.J2 d in 't'usines~:; wh~ rever they der i V(' fares or freight and are taxable as car - rier in said plac e, that is, for purpos e';, of taxat ion the ::.i.tus is said place." (Japan Air L ines v~. Commissioner of Internal ~e7 unue , CTA Case No. 16 34.) 16

DECISION - CTA CASE NO. 2480 - 17 - At this j unctur2, it may be stated that under the prese n t law as introduced by Pres~ idential Decree No. 69: effective January 1, 1973; amplified by Presidential Decree No. 1355, approved April 21, 1978 ; and incorporated in Section 24(b) (2) of the 1977 National Internal Revenue Code, inter- national carriers are now taxable on their gross Philippine billings. The term ''gross Philippine billings'' includes gross r evenue realized from unlifts anywhere in the world by any international carrier doing business in the Philippines of passage documents s old ther ein, whether for passenger, excess baggage or mail, provided the cargo or mail origin- ates from the Philippines. The gross revenue realized from the said cargo or mail includes the gross freight charge up to final destination. Like other statutes, however, tax laws operate pros- pectiveJ.y, whether they enact, amen d or repe al, unless the legislative intent to give retrospective effect is expcessly declared or may clearly be implied from the language used. (Lorenzo vs. Posad ~�: 64 Phil. 333;'Commissioner of In ternal Revr r,uc vs . F ;ltpinas Cia de Seguros, 107 Phil. 1055; Cebu Portland CL men t Company vs. Co l lecto r of Internal Revent1e, ~-205 63, October 29, 1968, 17

DECISION - CTA CASE NO. 2480 - 18 - 25 SCRA 789.) And th er e is nothing in Presidenti a l Decree No. 69, Presiden tia l Decree No. 1355 or the 197 7 National Internal Re v e n ue Code which provides expressly or from which i L can necessarily be implied that Section 24 (b} (2) there:� should be given retroactive effect . Not much need be said on respondent 1 s point that when the Philippine Air Lines (PAL) lifted a passenger fr om th e Philippines on a Japan Ai r Lines passage ticket, it acted as "agent" or "sub- contractor" for pet it ioneL Japan Air Lines. In its amended dec i ~lon in CTA Case No. 1634, as quoted lengthily above, t hi s Court dispo sed o f the same charge and contention in clear and un- equivocal terms in the following wi se: "x x x. When PAL carried the passen~er in its leg of ~he fli ght from the Philippines to the country whe re JAL planes took over, it became the �~ing airline for said le�_. In thi s connec tion , PAL, like other airlines, perfbrmcd d ual functions: (a) the a ctivi ty of selling trans portation of other airlines and (b) -~IJ~...!:2:_yity of_trat~Eorti_!}5l_in i t s o wn pla.~ pa.ssengers and cargo fro.!_ll one place to another. One deals with the sale of tickets and t r avel documents, for ~ nd in behalf of other airlines, and the othe r de als with the physical act of tr ansport ing passengers and cargo fr om one place to another by means of aircraft." {pp. 9 -10; emphasis supplied.) 18

DECISION ~ CTA CASE NO . 248 0 - 19 - " X X X "x x x. It now appears that PAL acted merely as a sales agent when it issued JAL tickets and that when it carried passengers with ,JAL ticKe'f.-(:)"j=} l b; leg- or the f..r lp, 1 t acted as "prri1- crparwrtFisore r e sponST5TITty-forffie tr 1p anai101:-- as agertt carr ler or:-�J~ X X X. 11 (pp . 11-12, emphasis SUpplied.) Respondent would however unwrap a theory that the airline passage ticket purchased in the Philip- pines is a compl ete written contract between peti- tione r and t he passenger since it has all the elements of a complete contract, i.e., consent; cause or consideration which is the full or entire f a re paid by the passenger; and object which is the transportation of the passenger to the place of destination via the routes of other airlines as stated in the ticket. The consideration of the con t racf between petitioner and its patron being entire and single, the said contract then could not be held to be divisible, irrespective of the division of the obligation to be performed by several successive carrie r s. Respondent would thus consider the service of petitioner a continuous one or i ginating from the Philippines to the pass- enger's final de stination without service inter- ruption. (pp. 130-131, CTA records.) 19 J

Df:CISION - CTA CASE NO. 2480 -- 20 - Respondent's position again calls to mind CTA Case No. 1634, where this Court in its amended decision, answering the same argument and contention, unambiguously disposed of this question in the following words: "The practice of, and arrangement between, JAL and PAL is well exemplified in the situation represented by Exhibit F. The passenger, Ong Sin, bought a JAL ticket from a PAL office in Manila bound for Seoul via Taipeh and Tokyo. From Manila to Taipeh, the first leg, he was lifted by a PAL plane under the JAL ticket. In Taipeh, a JAL plane took over and carried him to Tokyo, Seoul and then back to Tokyo under the same JAL ticket. The situation created by the JAL ticket aforesaid may be stated this wise: \.-Jhen Passenger Ong Sin boarded the PAL plane in Manila, bear- ing a JAL ticket, his contract of trans- portation was with PAL, the 'carrying airline', up to the end of the first leg of the flight - Taipeh. From T~ipeh, where JAL plane took over, his contract of transportation was transferred to JAL, the new carrying airline, and also up to the particular line of the flight - Tokyo. The clear intent of the ar~ange ment is to save the passenger the trouble of purchasing tickets at the point of departure of every leg of the entire trip. Under this set-up the conclusion is obvious that JAL did not engage in tl c Jusiness of a carrier in the Philip- p ines either directly or with the inter- vent ion of ano':her carrier that may be considered its extension." (pp. 12-13, Amended Decision, Japan Air Lines vs. Commissi oner of In r:e rnal Revc:nue r -~LU,JL.�_.) We find no cogent reason to modify, much less depart from, the concJ.usion reached in CTA Case

DECISION - CTA CASE NO. 2480 - 21 - No. 1634, as expressed in the amended decision of this Court there, the petition for review on certiorari thereof filed by respondent, as stated earlier, was denied by the Supreme Court for lack of merit. The same should therefore resolve the identical problem now again brought before us in this proceeding. Nevertheless, respondent would attempt to draw support from Section 37(e) of the then 1n force National Internal Revenue Code which con- siders income from transportation or other services rendered partly within and partly without the Philippines as income derived from sources partly within and partly without the Philippines. Pursuant to Section 152 of Revenue Regulations No. 2 1 tax- able income from sources within the Philippines includes that derived in fu ll from sources with~r1 the Philippines and that portion of the income which is derived partly from sources within and partly from scJr ces without the Philippines which is allocated or apport i oned to sources within the Philippines. S ince in c~me from the business of transportation service rendered between t he Philippines and points outside the Philippines 21

DECISION - CTA CASE NO. 2480 - 22 - is considered income derived partly from within and partly from without the Philippines under Section 37(e) .o f the Tax CodP, respondent would thus treat revenue derived by petitioner from sales of pas sage tickets in the Philippines for international air transportation service as income derived f~om sources partly within and partly without the Philipp ines. (pp. 133-135, CTA records.) The argument misse s the point. In its textual completeness, the applicable statute provides: "Gains, profits, and income from (l) transportation or other services rendered partly within and partly without the Philippines, x x x x shall be t reated as derived partly from sources within and partly from source:;;; without the Philippines . " It deals centrally o,n transportation service rendered partly within and partly without the Philippines. A foreign transportation company derives income partly from sources within and partly from sources. without the Philippines if it is carrying on a business of transportation service between points in the Philippines and outside the Pltilippi: >~'.,. (N.V. Recderiz "Amsterdam" and Royal Inter oc<;;i.,:1 Lines vs. Commissioner of Internal Revenue, CTA Case No. 1996, December 1, 1976; Procter & Gamble 22

DECISION - CTA CASE NO. 2480 - .23 - Philippine Manufacturing Corporation vs. Com- mi ssio n er of Internal Revenue, CTA Case No. 2437, January 4, 1977: see also Vol. 3, 1365, Federal Taxe s, par. 16 , 381.) Since r e spondent had admit- ted - a fact confirmed by this Court in its amended dec i sion in CTA Cas e No. 1634 - tha t petitioner did not have planes that lifted or landed passengers and cargo in the Philippines during the period under revi ew as the Jnpan Air Lines haJ not yet been gran ted by the Civil Aeronautics Board a certi ficate of public con- venience and necessity to operate in the Philippines, petitioner could not have c ar r ied on a business of transportation service be tween points in the Phil ip- pines and outside the Philippines. Under the circumstances, petitioner during the period under review did not render, or c ould not have render ed, transportation service partly within and pv rtly without the Philippines in order to derive income partly from sources wit hin an~ partly fr0m sources without the Ph ilippi nes under Sec tion 37(e) of the Moreover , Sectio11 37{e) provides that in the case of gross income derived from sources partly within and partly witl1out the Phi lippines, the net 23

DECISION - CTA CASE NO. 2480 - 24 - income should first be computed by deducting the expenses, losses, or other deductions apportioned or a l located thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some items or class of gross income. The portion of such net income attributable to sources within the Philippines may then be determined by processes or formul a s of general a pportionment prescribed by the Secretary (now Hinister) .of Fincmce. As stated earli e r, the deficiency income tax assessment under review was based solely on the proceeds of sales of Japan Air Lines passage tickets in the Philippines, which re s pondent considered income de rived in full from s ou~c es within the Philippines after deducting sales returns and commissions of the Philipp i ne Air Lines. The fact that the deficiency i nc o me tax assessment was based solely on income whi c h respondent considered derived from Ph i lipp ine sourc e s computed afte r subtracting deductions to the extent connected with income earned in the Philippines and not on income derived by petitioner from sources partly within and partly without the Philippines determined by the formula of ge neral a pportionment prescribed in Section 163

DECISION -- CTA CASE NO. 2480 - 25 - of Revenue ~egulations No. 2 in effect negates res)cndent �s allegation t hat the revenue derived by petitioner from sales of passage tickets in the Philip?ines is income derived from sources partly within and partly without the Philippines under Section 37(e) of the Tax Code. The net re sult is that the deficiency income tax assessment in quest ion cannot be sustained. The decision of resp0!1dent Commissioner of Internal Revenue dated December 21, 1972 holding petitioner Japan Air Lines liable f or the payment of the amounts of P224,461.44, P226,801.68, P356,905.92, ~523 , 642.56 and P767,875.92 or a to tal of ~2,099,687.52 as deficiency income tax, inclusive of surcharge an .J ;,,,,,,.,..,.;L for the years 1959, 1960, 1961, 1962 and 1963, p~us the sum of ~1,500.00 as compromise penalty, or ~300.00 per year from 1959 to 1963, fo r violation of the bookkeepeing r egulations is therefore of no legal effect. With this con- elusion, it becomes unnecessary to pass upon the issue whether or not the assessment for 1963 has been barred by prescribtion or the question whether or not the 50t surcharge or compromise I penalty may be properly imposed. 25

-- DECISION - CTA CASE NO. 2480 - 26 - WHEREFORE , the decision appealed from should be as it is hereby reversed. SO OHDERED. Quezon City, Metro Manila, January 15, 1982. vm CONCUR: .A 1 .---' ;: ;.. /:-).. ) Q' .-.--.,,�.�.�,:;'_,-;.�..A'7~-~ .-:;> /-Z , ~I'E1 Y~_E..S.,r� ....tt?' � ). ~ . Associate Judge .-~ .. 26