CTA Case No. 3046 (Decision)

~EPUBLIC OF THE PHILIPP INES ..; )URT OF TAX APPEALS ( QUEZON CITY AMERICAN AIRLINES , INC . , Petitioner , - ve:rsus - C.T.A. CASE NO. 3046 THE COMMISSI ONER OF INTERNAL REVENUE, Respondent . X- - - - - - - -----X DEC I S I 0 N Petitioner Am~ri can Airlines, Inc. appeals fr om the decision of r espondent Commissioner of Internal Re�ve~ ue de ng i ts protest ainst a de:f iciency incom tax as;sessment f o r 197 � i n the total amount of ' Ei29'8,521 . -3.0-, -in-clu-s-i v-e o-f -i nterest and compromise penalty . The principal question raised in this case is whether or not petitioner is engaged i n trade or business in the Philippines as an i nternational carrier s ubject to income tax under Section 24(b) (2) of the National Inter nal Revenue Code, as amended by Presidential Decree No . 69 e The facts, which are not in dispute , as narrated by petitioner in his .petition f or r eview, admitted by respondent in his answer , and adopted by the parties in t heir respective memorandum , shows that petitioner , 86

DECISION - CTA CASE NO. 3046 - 2- an a irline company organized under the l aws of the United States of America , is an off-line i nternational airline with no flights originating f rom thePhilippines . I t i s, howe ver , duly licensed to establish a lia i son office in the Philippines for passenger and f reight i nformation an d reservation , and t o r e nde�r ticketing ser vices. Sometime on August 8 , 1979, petitione r rece i ved from respondent a l etter of demand , with notice o f ass:es:sment , dated Jul y 31 , 1979 , r equesting it t o pa y the amoun t of P298,521 . 30 , r epresent i ng de f iciency i ncome tax for 1974 , inclusive of interest and compromise penalty , computed on the gross Philippine billings of P8, 400,617.00 at 2 ~ % inc�ome t ax i mpose d unde r Secti on 24 (b) (.2 ) _of t he National I nternal Re- venu e Code , as amended , a s follows : Gross Philippine billings pe r P8,400,617.00 investigation p 210 , 015 . 00 I ncome tax due thereon ( 2~ % ) 88,206 . 30 Add : 14% i nter e s t per annum from 300.00 4-~6- 75 t o 7- 31- 7 9 Compromise , failure t o file return and late payment of the tax. TOTAL AMOUNT DUE On Augus t 20 , 1970, petit i one r p rotested the assessment and request ed that t he same be withdrawn and cancelled 87

DECISI ON - CTA CASE NO. 304G . -3 - On September 14 , 1979 , responden t den ied peti- tioner 's reque st and reiterated his demand f o r pay- ment of t he amount of ~29 8 ,521.30 . In t he same letter , respondent info rmed petitioner t ha t the denial was h is final decision on the p rotest . Hence, thi s appea l. As special and affir ma tive def e nses, r espondent , a mon g othe rs, alleges in his a nswer to the pe tition for review t hat during the period in question, peti- tioner was engaged in business i n the Philippines a nd it derived income f rom s o urces within t he Phi l ipp ines: that petitioner is a r esident fo rei gn corporation liable to the payment of income tax on income f rom all s ources within t he Philippines (Sec . 24(b) ( 2) ~ Nat iona l In ternal Revenue Code )~ that even assuming peti tioner is a non-resident foreign corpo- ration, still , it is liable for the payment of Phi lippine income tax. at the rate of thirty-fi v e per cent (35\) of i ts g ross i ncome received f rom all sources wi th i n the Philippines (Sec . 2 4 (b) (1) '� National I nternal Revenue Cod e) i. that pursuan t to the Fore ign Business Regulations Act of 1968 (R.A. 5455) ~ peti- tioner is engaged , or. is doing business in the Philipp ines, as petitioner maintains an office in the Philippines, promotes goodwill a nd public r elations , 88

DECISION - CTA CASE NO . 30 4 6 . - ,4 - as well as distributes brochures , pamphlets and lite rature regarding its operations; and that the 2~% income tax i n question was i mposed on income r eceived by petitioner from sources within the Philippines . Against this backdrop, the question posed it- s e lf as to whether or not petitioner, during the year 1974 in q uestio n , was engaged in busines s in the Philippines . The question i s not new and respondent's posi- tion is not so dif fere nt fr om the stand taken b y a similarly situated � peti tioner in the recent case of the British Overseas Airways Corporation vs . Commis- sioner of Internal Revenue (CTA Cases Nos . 2373 & 2561 ) ~ the factual setting of which is s imilar t o the case a t bar and where this Cour t in a decision promulgated on January 26, 1983 ruled to the effect that the selling of passage tickets of an i n terna t i onal air carrier , a s well as the maintenance of an office f or promotion and i nfo rmation purpose~ is n ot considered as engagemen t in bus iness in the Philippines . Because the decision in the aforesaid cases disposed of the s ame defenses and c ontentions of respondent in this a ppeal, we will quote at l eng~h fr om said deci s ion to wit : 89

DECISION - CTA CASE NO . 3046 . -� 5 - For purposes of income taxation, t he t axability of foreign c orporations at the time material t o this case, whether engaged in t rade or business in the Phil i ppines or not engaged in t rade or business here depends on whet her the income is derived f rom sources within the Philippines . (Sec. 24 , National Internal Revenue Code ; Sees . 16 & 60, Rev . Reg . No . 2) While a f oreign corporation doing busines~ in the Philippines is tax able: on income solely from sou r ces within the Philippines, it is permi tted to claim deductions from gross i ncom~ but only t o the extent c onnected with i ncome earned in the Philippines. (Sees. 24(b ) ( 2) a nd 37 , Nat i onal In t ernal Revenue Code. ) . On t he other hand , a f oreign corporation not doing business in the Philippines is t axable on income "from all sources within the Philip- p in es , as i nterest , divid~nds , rents, sala- r ies , wages, premiuws , ann~ iti es, compen - . sations , remunerattons , em9luments , or other f ixed or determinable annual or period i cal o r casual gains, profits and i ncome and c a pital gains . " (S~c . 24 ( b ) (1) , National I nterna l Revenue Code .) �� The decisive question, therefore, is whether or not the proceeds of sales i n t he Ph i lippines of BOAC pas sage ti ckets by the Wa r ner Barne s & Co., Ltd ., and l ate r by t he Qan tas Ai rways during the period i n question, and o n which the a s s essments in- volved herein were based , constitute i ncome of petitioner from the Philippine soutces . The controlling statute is Section 37 of the National Internal Revenue Cod e, the pe rtinent portions of which during t he years in question, read s as follows : "SEC . 37. Income f rom sources within the Philippine s - ( a ) Gross i ncome fr om sources wi th in the Ph il ipp ines . - The following i tems o f gross i ncome shall be treated as gross i ncome from sources within the Philipp i nes: (1) Intere st . - In t erest derived from sources within t he 90

DECISION - CTA CASE NO. 3046 � - 6- Philippines, and interest on bonds 6 notes , or other interest- bearing obligations o f r esident~ corporate or otherwise ; (2) Dividends . - The amount received 'as dividends � (A) From a domestic corpo- r ation; (B) From a foreign corpo- r ation unless less than fifty per centum of the gross income of such foreign cor porat i on 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 corpo- ration has been i n e xistence) � was derived from sources with!n t he Philippines as determined under the provisions of this s ec- t ion; but only i n an amount which bears the same r atio to such divi- dends as the g ros s i ncome of the corporation f or such period de- r ived from sources with in the Philippines bears to i t s gross in- come from al l sources ; (3 ) Services . - Compensation for labor or personal services pe rformed in the Philippines; (4 ) Rentals and r oyalties . - Rentals and royalties f rom pro- . perty located in the Philippines or f rom any interes t i n such pro- . perty 1 including rentals or royal- ties for the use of or for the privilege of using i n the Philip- . pines patents, copyrights , secret processes and formulas , goodwill, trademarks ; trade brands , fran- chiseg and other l ike property; ( 5) . Sale of rea l p r operty . - Gains profits , and income from 91

DECISION - CTA CASE NO. 3046 . -7 - the sale of real property located in the Philippines; and (6) Sale of personal pro- . perty . - �Gains, profits, and in- come from the sale of person~l property , as determined in S4P- section (e) ?f this section . (b) Net income from sources in the P~ilippines . - From the items of gross income specified in subsection (a) of this section there shall be deducted the expen- ses, losses , a nd othe r deductions properly apportioned or allocated thereto and a ratable part of any � expense s, losses, o r other deduct- io n s wh i ch cannot definitely be allocated to some item or class of gross income. The remai nder , if any , shall be included in full as net ihcome from sources within the Philippines. Adverting to the terms of the law, it is quite apparent that the proceed s of sales of BOAC passage tickets in be Philippines by the Warne r Barnes & Co. , Ltd . , and later by the Qantas Airways during the period in question could not be considered as interest , div idends or rentals and royalties derived from sources within t he Philippines . There is patently . an absence of analogy or similarity between interest, div i dends , rentals or r oyalti es and proceeds of sales of airline passage tickets . And by no stretch of t he i magination could such proceeds of sales of air�line passage tickets be compared to income "from the sale of personal property produced (in whole or in part) ~ by petitione r and sol~ within the Philippines so as to be trea~ed as income derived partly from sources within and partly from s ources without t he Philippines under Section 37(e ) of the then in force National Internal Revenue Code. (Japan Air Lines , Inc . v s . Commissioner of I nte~nal Revenue , CTA Case No. 2480, January 15 , 1982 .) 92

DECISION - CTA CASE NO . 3046 - 8- It seems already settled that such proceeds of sales of airline passage t ickets in the Philippine s of an international air car r ier of passengers and/or freight are considered "compensation for labor or per- sonal services per formed i n the Philippines", i f the service of t ransportation i s per- formed within t he Philippines . (Japan Air Lines , Inc . vs . Commissioner o f I nternal Revenue , CTA Case No . 2480, J anuar y 15 , 1982. ) The importan t factor wh i ch deter - mine s the source of i ncome , i f f rom ser- . vice s, f or purposes of income t a xation , is the place where s ervices are actually ren- de r ed. (Mertens , Law o f Federal Taxation, Vol . 8 , Chap . 45 , p . 141 .) Income derived from transportation is considered to be in- come f rom servi ces , with t he result that � where the services are r endered determines t he source . (Daiich i Chuo Kise n Kaisha vs . Commissioner of Interna l Revenue , CTA Case No � 1 2 7 7 , May . 31 , 19 6 9 � ) . However , it is an admitted fact that peti t ioner did not lift nor l~nd passengers or car g_o in the Philippines during the years in qu e stion. BOAC was without l andin~_ rights for traffic purpose s in the Philippines as it wa� not granted by the then Civil Aero- . nautics Board (CAB) a certificate of public conven i ence and necess i t y to operate in the Philippines . Invariably , any leg or portion of the trips serviced by BOAC commenced out- . side the Philippines and t erminated alS'o out- .. side the Philippines . It i s thus clea'r be- yond doubt that since no servi ce of carriage of transportation of passengers or freight was performed by petitioner within the Philip- pines , the income derived by i t from the sales o f passage tickets in the Philippines for international air transportation service is not subject to Philippine i ncome t ax . Pur - suant to Section 2 4(b) ( 1 ) of the Tax Code , a s amended , a foreign corporation , whether resident or non-resident , is taxable o nly on . . income from "solirc:es within the Philippines" � We see no significance therefore in the s pecial affirmat ive defenses of respondent 93 \

DECISION - CTA CASE NO. 3046 . -9 - t hat petitioner is a resident fore i gn corpo- ration liable to Ph i lippine income tax on i ncome from sources within the Philippines, c ons i dering that the travelled revenue derived by BOAC fro m sales of ti cket s i n the Philippines for international air ser- vice is no t i ncome derived from sources within the Philippines . x x x . (Unde rl ining SUJ?pli ed. ). Respondent also argued that pursuant t o Fo reign Business Regulations Act of 1968 (R.A. 5455) ~ p et i- tioner i s eng a ged in or doing business i :1 the Philippines , as petitioner maintains an office in the Phi l ippines , promotes goodwill, and public rel- ations , as we ll as distributes broch ure s , p amphlets and lite rature regarding i t s operation. Th is argument calls to mind the decision of thi3 Court in the c ase of Japan Air Lines vs . Commi ss ioner of Intern al Revenue , CTA Case No. 1634 , November 29 , 1968 , on which an appe al by cert iorari by responden t Commissioner of Internal Revenue was den ied by the Supreme Court on Februar y 3 , 1969 in L-3 0041 , and t he f actual setting o f which is similar to the case a t bar , t o the effect tha t the acts of a f o reign corpo- ration in e ngag i ng in the business of international air carriage and of selling passage tickets in the Phi l ippines through its agent; in maintaining of an of fice in the Philippines for � promotion and inform- ation purposes; and the r eceipt of payments for

� DECISION - CTA CASE NO . 3 0 46 - 10 - passage ticke ts sold i n the Philippines from pas- sengers from t he Philippines do not make such inter- nationa l air carrier engaged in business i n the Philippine s, resolves the i dentical problem now brought before us in th i s proceed i ng . On the argument of respondent tha t as an inter- national carrier, petitioner herein i s now subject to income tax based on gross Philippine billings, suffice i t to state tha t this Court i n the case of ~ a pa n Air Lines, Inc . vs . Commissioner of Internal Reve nue , CTA Case No . 2480, Januar y 15 , 1982, made t his observation : At this j uncture , it may be stated that under the p resent law as introduced by Presidential Decree No . 69 , effective J anuary 1, 1973, amplified by Presidential Dec ree No. 135~ , approved April 21 , 1978; a nd i ncorporated i n Section 24 (b) (2) of - the 1977 National I nternal Revenue Code, international ~arri e rs are not t axable on their .. gr o ss Phil i ppine billing s , The term . "gross Philippine billings" i ncludes gross r evenue realized from upl i fts any- where i n the wor l d by any international carr i er do ing business in the Philippines of passage documents sold t herein , whether for passenger , excess baggage or mail , provided� the cargo or reai l originates from t he 'Philipp i nes . The gross revenue r ealized from said cargo or mail includes the gross freight charge up to final des- I ., tination . Like o ther statutes, however , tax laws operate prospectively, whether they enact, amen~ or r epeal , unless t he l egis lative intent to give retrospect i ve effec t is expressly declared or may clearly be implied from the l anguage used . (Lorenzo 95

DECISION - CTA CASE NO. 3046 � - 11 - vs . Posadas, 64 Phil. 353; Commiss ioner of Internal Revenue vs . Filipinas Cia de Seguros, 107 Phil. 1055 ; Cebu Port- land Cement Company vs. Collector of I nternal Revenue , L-20563 , October 29, 1968 , 25 SCRA 789 .) And there i s no th- ing in Presidential �Decree No . 3355 or the 1977 Nationa l Interna l Revenue Code which provides expressly or from which it can neces s arily be implied that Sec- tion 24(b) (2) thereof should be given retroactive effect . (Underlining ours.) We see no cogent reason to hold otherwise. I N VIEW OF ALL THE FOREGOING, the appe aled deci- �sion of the Comm issioner of Internal Revenue should be , as it i s hereby, reversed . Without pronouncement as to costs. SO ORDERED. Quezon City, Metro Manila, April 1;6, 1984. WE CONCUR: "-.... � ROAQU IN AMAN TE F Presidin Judge / 96