CTA Case No. 2373 (Decision)

q;PtiBt.lC. 01 T Ul!i tnJLIPl'nn'J :'OIJJ{T OF TAX APP�4\1..8 m.,..., o, ~ .,_�,t~.c / BRIT ISH OVERSEAS AIRWAYS CORPORATION Petitioner , - versus - C. T.A. CASE NO . 2 37 3 COMMISSIONER OF I NTERNAL REVENUE , Respondent. X- -------X BRITISH OVERSEAS AIRWAYS CORPORATION , Petitioner, - versus - C.T .A . CASE NO . 2 56 1 COMMISSIONER OF INTERNAL REVENUE, Respondent . X - - - - - - - - - - - .X DE C I S I 0 N British Overseas Airways Corporation, petit~ner i n the se two cases, poses the question before~ of ,I whether the reve nu e derived by i t from the s;Jes of passage tickets in the Phil ippines-for international � ai r transportation service is income deri ve d f r om s ources within the Philippines subject t o Philippine income tax . Petitione r British Over seas Airways:Corpo rat ion (BOAC for short) _as ser ts tha t its re v enue from the sales of t i c ke ts in the Philippine s is considered i n come fr om sources out side th e Philippines because 24

DECISION - CTA CASES NOS. 2373 & 2561 2 it i s not the activity of selli ng tickets ~hat produced the i ncome sought to be taxed but the service of transportation which was rendered out- side the Philippines. As tresour ce of income is the place where the service is rendered, it follows that the income was derived from sources outside the Philippines and therefore not taxable under Philippine i ncome tax law. In brushing aside this s tand of petiti oner , respondent Commissioner of Internal Revenue, after alleging in his answers to the petitions for r eview that BOAC was engaged in business in the Philippines and derived income from s ources within the country, avers that the revenue derived by BOAC fr om the sales of tickets in the Philippines f or i nternational air tr ansportation service is income derived from sources partly within and partly without the Philip- pines contemplated under Section 3i(e) in relation .to Se ct ion 24(b ) _of the Nationa l Inter nal Revenue Code . Pursuant to Section 152cr Revenue Regulations No. 2, otherwi se known as the Income Tax Regulations, income from sour ces within the Philippin~s subject to Philippine income t~x includ es that derived in full from sources within the Philippines and that I portion of the income der ived partly from sources

uECISION CTA CASES NOS~ 2373 & 2561 3- within and partly from s ources without the Philippines which is allocated or appor tioned to s ources within the Philippines. There is no controversy a s t o the fac ts of these c ases. As narrated by petitioner i n his memorandum dated January 7, 1981 (pp. 164-169, CTA re cords} _and abpted by respondent in his state- men t of facts in his supporting memorandum (p . 217 , id.) :_ CTA CASE NO. 2373 Petitioner British Overseas Airways Corporation (hereinafter called BOAC }, i s a foreign corpor at ion organized and exist i ng under the laws of the Uni ted Kingdom , a member of the International Air Transport Association (lATA) without , prior to April, 1980, any l anding rights for traffic purposes in t he Philippines. On 7 May 1968, petitione r was served with an- assessment letter dated 1 April 1968 of Respondent Commissioner (hereinafter also called Commissione r, f o r short} covering deficiency income taxes f o r � t he ye ars 1959 to 1963 in the aggregate amount of ~2,498, 358.56 (Exh �. "A"}; but Petitioner, having known s aid assessment e ven prior to the receipt of not ice there- of, had already filed through i t s lawyers with Responde nt a l etter dated 6 May 1968 protesting the assessment (Exh. "B"). This l etter was followed by another i etter d a ted 10 May 1 968 p rotesting and request- i ng for a reconsiderationd t he a ssessment (Exh. "C"}. Respondent i ssued, foliowing a further 1nvesti'gation of the matter , a new assessment for the years 1959 to 1967 pe r h is letter dated 16 January 1 970 (Exh . "D") superseding the asses s men t c ontained in the letter dated 1 April 1968, as a 2G )

DECISION - CTA CASES NOS. 2373 & 2561 4- consequence of which petitioner was c ompelled to pay on 28 January 1970 the new a ssessment aggr egating ~858,30 7. 79 under the f ollowing official receipts : Official Amoun t Receipt No. 4100109 ~157,452 .71 (Exh . "E") 4100110 (Exh . "E- 1".) 4100111 206 ,767.69 4100112 600.00 (Exh. "E-2") 410 0113 (Exh . "E-3 " ) 4100114 1 39 , 814 .10 (Exh. " E-4") 4100115 276,721.60 (Exh . "E-5") 4100116 (Exh . "E-6" ) 18,113.51 (Exh. "E-7") TOTAL 12,206 .18 46�632.00 ~858,30 7.79 vvvvvvvvvvv Pet iti oner filed on 7 Oc tober 1970 wi th Respondent a claim for refund of ~858,307 .7 9 pursuant to Sec. 306 of the National I nternal Revenue Code (Exh. " F") . Inasmuch as Petitioner did not rece ive � acknowledgme nt of the r e ceipt of said l etter ��or the refund requested, Pet it i oner reiterated in a letter dated 25 November 1971 its request f or re fund and asked for c ancellat i on of the a ssessment for 1969- 1 97 1 (Exh. "G"). Respondent, in its letter dated 8 Decembe r 1971, stated that it finally realized, after reinvest- igation of the case, that Petit i oner is not subject to payment of Ph ilipp ine i ncome tax (Exh. "H"), but notwi t hstanding sa id ru ling, Responde~t fail~d to final ize petitioner ' s reque st f or r efund. Hence, Petitioner filed t he present pe t it ion docketed as CTA Case No. 2373, alleging t he abovestated facts and praying that this Horrrable Court declare illegal the collecti on o f the amount of ~858,307.79 and order the said amount refunded. ; In his answer, Respondent admitted a lmos t all the material allegations o f the complaint, but alleged that the letter dated 6 December 197 0 had been revo ked. Re spondent furth er denied 2?

DECISION - . CTA CASES NOS. 2373 & 2 561 - 5- that Petitioner was compelled to pay the deficiency i ncome tax o f ~858 , 307.79 and that t he c ol lect ion of said tax was illegal. As defenses , Respondent alleged that Petitioner was eng aged in business in the Philippines, derived income from the Philippines, and is subject to income tax, and the income tax sought to be refunded was imposed on income received from sources within the Philippines. The parties submitted a "Partial Stipulation of Fac ts" dated 10 November 1975 wherein the part ies a dmitte d r among others, that Petitioner is being a foreign corporation organized and exist- ing under the laws of the Uni ted Kingdom and the documentary evidence contained in the pleadings, Annexes "A", "B" 1 "C", "D" I "E" I "E-1." to "E-7." I "F" I "G " I and "H" to the petition; that Petitioner is engaged in the international airline business, a member of the IATA, without landing rights for tr af fic purposes in the Philippines and, consequently, did not (until April, 1980) carry passengers and/or to and from the Philippines for it was not during the period in question granted by the Civil Aeronautics Board (CAB) a certllicate of public convenience and necessity to operate in the Philip- pines, and is, as such, an off-line car rier under Revenue Regulatio~s Nos . 6-66 dated 1 December 1966 ; that Petitioner , during the period covered by the assessment , maintained �a ge neral sales agent in the Philippines which was responsible for selling BOAC tickets covering passengers and cargoes. CTA CASE NO. 256 1 Petition er Brit i sh Overseas Ai~ways Corporation (BOAC . for brevity) is a 100% British government-owned corpoiation, created and existing under the laws of the United Kingdom. It is a member of the International Air Tran sport Asso- ciation (IATA) ~ engaged in international 28

DECISION - . CTA CASES NOS . 2373 & 2561 - 6- airline business, but had no landing rights for traffic purposes in the Philippines (until only in April, 1980) and, consequently, did not carry �passengers and/or cargo to or from the Philippines . On or about 25 November 1971, it was served with an assessment letter from Respondent Commiss ioner of Internal Revenue (here- . inafter also referred to as Commissioner, for brev ity) dated 17 November 197 1 covering deffciency income taxes includ- ing interests and penalty allegedly due from BOAC for t h e fiscal year e nd e d 31 March 1969 through 31 March 1971 inclusive in the aggregate amount of ~549,327.43 and demanding an additional ~1,000.00 as compromise penalty for violation of Sec. 74 of the National I nternal Revenue Code (Exh. "A" ). On 25 November 1971, Petitioner wrote Respondent a letter requesting a ruling that, for reasons stated therein, the Petitioner be held not liable to Philippine income tax and that the assessment be countermanded or s e t aside (Exh. "B") . On 13 December 1 971 , Petitioner received through counsel a letter dated 8 December 1971 from Res:- . pondent stating that, "after reinvestigation of� the case and a careful analysis of the facts and the law involved therein, res- pondent's Office has finally decided that your client (Petitioner) is not subject to the payment of Philip~ine ~ncome tax " and that the assessments dated 17 November 1971 were withdrawn and cancelled (Exh. "C"}. Petitioner, through counsel, recefved ~ ter a letter dated 16 February 1972 from Respondent wherein Respondent denied Petitioner's previous request for .tax refund for certain years prior to the fiscal year 1968/69 and also issued new income tax assessments for the iiscal years ended 31 Mqrch 1969 through 31 March 1971 inc lusive, in the aggregate amount of ~534,132 08 (Exh. "D"). Petitione r in its letter dated 23 March �1972 requested Respondent to recons ider its action in issuing the assessments for de ficiency 2U

DECISION - CTA CASES NOS. 2 3 73 & 2561 - 7- income taxes f o r the fiscal year ended March 31 , 1969 through March 31, 1971 and to de fer t he ac tion on the refund of the taxes paid by Petitioner f or p r i or years unti l this Court shall have decided t he same i ssue of Peti- tioner's liabi l ity for i ncome tax i n CTA Case No. 2373 (Exh e "E " ) . Peti- tioner again wrote Respondent on 17 August 1972 supplementing its arguments on the non-liability of Petitioner for Philippine income t ax (Exh. "F" ). Under da t e o f 15 Dece mber 1972, Petitioner throughmunsel i nqu ireu from Respondent t he status of i ts request for reconsideration (Exh . "G" ) . On 27 September 1973 , Pet itioner i eceived t hrough counsel, a letter dated 24 August 1973 from Responden t denying Petit i oner ' s request f o r reconsideration and reite r- ating the de mand for payme nt c ontained in t he letter dated 16 Febr uary 197 2 (E xh . " H") . Hence , Petitioner f iled its petition f or review dated 10 October 1973, docketed as CTA Case No . 2561 alleging the above facts and p r aying that this Honorable Court rende r j udgmen t to the effect that Petitioner is not liable for Philippine income tax . Respondent in his answer da ted 29 Januar y 1974 denied that Petitione r does not carry passengers or cargo to and from the Phil i ppines and that Peti- tioner is not s ubject to Phil~ppi ne income tax; and alleged as defenses that Petitioner is e ngaged in business in the Philippines a nd derives income from Philippin e sources for whic h it is liable to payment of income tax. Petitioner and Responde nt submitled i n May, 1976 a "Partial Stipulation of Facts" wherein the parties admitte& the documentary evide.nce (Annexes "A", "A-1" to "A-3" , "B", "C" , "D" , "D - 1 " t o " D-3", "E " , "F" , "G " , and "H" to the Petition); that Petitioner is engaged in inte r- national airline service, a member of t he IATA, and du r ing the period covered 30

DECISION - CTA CASES NOS. 237 3 & 2561 8- by the questioned assessment had no l anding r ights for traffic purposes in the Phi lippines , except for a nine-month per i od, partly in 1961 and partly in 1962, when it was granted a temporar y landing permit and that , consequent ly, Petitioner did not carry passenge rs a nd/ o r cargo to and from the Philippines as it was never granted by the Civil Aeronauti c s Bo ard {CAB)a certifi- cate of p ublic conven i e nce and nec e s sity to operate in the Phi l ippines; that Petitioner is c onsidered an off-line carrier under Revenue Regu l ations No. 6-&6 dated 1 December 1966; a nd t hat Petitioner, during t he period covered by the asses sment, maintained a general sal es age n t in the Ph ilippines whic h was respo nsible for se l ling in its own name BOAC ti c kets for air tr a nsport o f passenger a nd mrgoes to and from foreign cities. The t wo (2) ~ases were tried joi ntly . Inasmuch as the two appeals raise the same issue, they are con solidated also in this Decision . In r a ising the question of the taxability of the revenue derived by petitioner from the sales of tickets in the Philippines for international air tran sportation servic e through its -general sales age nt , the Warner Barnes & Co., Ltd., and later by the Qantas Airways, respondent alleges as special and affirmative defenses in his answers to the petitions for review that: (a) During the period in question, petitioner was engaged in business in the Philippines and derived i ncome from sources within the Philippines; 31

DECISION - CTA CASES NOS . 2373 & 2561 -9 (b) Petitioner is a resident foreign corporation liable to income tax on income fr om all sources within the Philippines (Sec. 24(b) (_2) ,_ National I nt ernal Revenue Code)~ (c) In the alternative that petitioner may not be cons idered a resident foreign corporation but a non~resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five percent (35%) ?f its gross income I ,' received from all sources within the Philippines (Sec. 24 (b) (1) '� National Internal Revenue Code) ._ For purposes of income taxation, the taxability o f foreign corpo rations at the time material to this case, whether engaged in trade or business in the Philippines or not engaged in trade or business here depends 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 doing bus i ness in the Philippines is taxable on / income solely from sources within the Philippines, it is permitted to claim deductions from: gross in come but only to th~ extent connected with income earned i n the Philippines. (Sees. 24 (b) (2) _and 37, National Inte rnal Revenue Code.) On the 3 ')/..,; )

DECISION - CTA CASES NOS. 2373 & 2561 - 10 other hand, a foreign corporation not doing busi- ness i n the Philippines is 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 or periodical or casual gains, profits and income and capital gains." (Sec. 24 (b) (1) '� National Internal Revenue Code.) The decisive question, therefore, is whether or not the proceeds of sales in the Philippines of BOAC passage tic kets by the Warner Barnes & Co., Ltd., and later by the Qantas Airways during the period in question, and on which the assess- ments involved herein were based, constitute income of petitioner from Phil ippine sources . The controlling statute is Section 37 o f the National Internal Revenue Code; the pertinent �portions of which during the years in question, reads as foll ows: SEC. 37. Income f rom sources within the Philippines - (a) Gross income f rom sources within the Philip- pines. - The foll,owing items of gross income shall be treated as gross income fr om sources within the Philippines: 33

DECISION - . CTA CASES NOS. 2373 & 2561 - 11 - (1) Interest . - Inte res t derived fr om souices within the Philipp ines, and interest on bonds, notes, or other interest-bearing obligations of resi- dents, corporate or otherwise; (2) Dividends. - .The amount received �as dividends (A) From a domestic corporation; (B) From a foreign corporation unless less 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 f o r such part of such period as the corporation has been in existence) was derived from sources 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 i ncome of the corporation for such period derived from sources within the Philippines bear s to its gross in- come from all sources; (3) Services.- Compensation f or I labor or �personal services per formed in the Philippines; (4) Rentals and royalties.- Rentals and royaities from property located in the Philippines or from any ihtere st in such property, including rentals or royalties for the use of or for the privilege of using in the Philippines patents, copyrights, secret processes and for mulas, goodwill, tr ademar ks, trade brands, franchioe, and other like property; � (5) Sale of real property.- Gains profits, and income from the sale of real property located in the Philippines ; and 34

DECISION - CTA CASES NOS. 2 3 73 & 2561 - 12 - (6) Sale of personal property. - Gains, profits, and income from the sale of personal property, as deter- mined in subsection (e) _of this section . (b) Net income from sources in the Philfppines.- From the items of gross income specified i n subsection (a) of this sect i on there shall be deducted the expenses, losses, and other deductions properly apportioned or allo- cated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross i ncome . The remainder, if any, shall be included i n full as net income from sources within the Philippines . Adverting to the terms of the law, it i s quite apparent that the proceeds of sales of BOAC passage tickets in the Philippines by the Warner Barnes & Co., Ltd. , and later by the Qantas Airways 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 an absence of analogy o r similar i ty between interest, dividends, r entals or royalties and pro- ceeds of sa l es of airline passage tickets . And by no stretch of the imagination cou ld such proceeds of sales of airline passage tickets be compared to income "from the sale of personal prop e rt y p r od~ced (in whole or in part) ~ by petiti o n er cll1d sold with - in the Philippines so as to be treated as income

DECISION - CTA CASES NOS . 2373 & 2561 - .13 - derived partly from sources within and partly from sources withou t t he Philippines under Section 37(e) of the then in f o rce National Internal Revenue Code. (Japan Air Lines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 2480, January 15, 1 982.) It seems already settled that such proceeds of sales of ai rl i ne passage tickets in the Philip- pines of an inter national air carrier of passengers and/or freight ar e considered .,compensation for labor or personal services performed in the Philippines .. , if the servi c e of transportation is performed in the Philippines; that is, compen- sation f or serv ice of carriage of passengers and freight performed within the Philippines. (Japan Air Lines, Inc. vs. Commissioner of Internal Revenue, CTA Ca s e No. 2480, January 15, 1982.) The important factor which determines the source of income, if from services, for purposes of income taxation, is the place where services are actually rendered. (Me r tens, Law of Federal Taxation, Vol. 8, Chap. 45, p. 141.) Income derived from ! transportation is considered to be income from services, with the result that where the services are rendered determines the source. (Daiichi 36 J

DECISION - CTA CASES NOS 2373 & 2561 - 14 Chuo Kisen Kaisha vs. Commissioner of I nternal Revenue, CTA Case No. 1277, May 31 , 1969.) However, it is an admitted fact that peti- tioner did not lift nor land passengers or cargo in the Philippines during the years in question. BOAC was without landing rights for traffic pur- poses i n the Philippines as it was not granted by the then Civil Aercnaut ics Board (CAB) _a cer tif i - cate of public convenience and necessity to operate in the Philippines . Invariably, any leg or portion of the trips serviced by BOAC commenced outside the Philippines and terminated also outside the Philippines. It is thus clear beyond doubt that since no service of carriage of transportation of passengers or freight was performed by petitioner within the Philippines, the income derived by it from the sales of passage tickets i n the Philippines for international air transportation service is not _subject to Philippine income tax . Pursuan t to Section 24(b) (1 ) ?f the Tax Code, as amended, a foreign corporation, whether r esident or non- resident, is taxable only on income from "sources within the Philippines�". We see no signif i cance therefore i n the special and affirmative defenses of re spondent

DECISION - CTA CASES NOS. 2373 & 2561 - 15 - that petitioner i s a resident foreign corporation or a non-r.esident foreign corporation liable to Philippine income tax on income from sources withln the Philippines, considering that the travelled revenue derived by BOAC from sales of tickets in the Philippines for international air service is not income derived from sources within the Philip- pines. Nonetheless, some stress was placed by respondent on the activities of the general sales agent of petitioner of ( 1) _selling and issuing tickets; (2) _breaking down the whole trip into a series of trips - ~ach trip in the series corres- ponding to a different airline company; (3) !eceiving the fare from the whole trip; ( 4) _subsequently allocating to the various airline companies on the basis of their participation in the service ren- dered through the mode of "interline settlement" as prescribed by Article VI of Resolution No. 850 of the lATA Agreement; and (5) other activities of advertising, promotions, public relations, acceptance of payments of tickets, and submitting itself to the jurisdiction of our courts in matters relating to these activities in the Philippines as incontrovertible facts that BOAC was engaged in business within the Philippines o r had an office u'J uil~ (

DEC I S I ON - CTA CASES NOS . 2 37 J & 25 6 1 - 16 - or place of business in the Philippines dur i ng the p er i o d in q ue sti o n . (pp. 2.38 - 23 9 , CTA records . ) . Howeve r, the r u ling in Japan Air Li nes vs. Com- missi on e r of I nter n a l Re venue, CTA Case No . 1 6 34, Novembe r 29 , 19 6 8, o n whi c h petiti o n for review o n certiorar i wa s den i ed by the Supre me Co urt in L-3004 1, Februar y 3, 1 969 , the factual setting o f wh i c h is on all f ou rs wi t h the cas e at bar, to the effect that t he a c ts of a foreign c or po ration engaged i n the busines s o f in t e rnational air carriage of (a ) .selling p assage t i c kets in the Ph i lippines t hro ugh its agen t; (b) ~aintenance of an office in t he Philippines for promo tion a nd i n forma t i on pur - p o ses; a nd (c) .r ece i pt of payme n ts f o r passage t i c kets sold in the Philipp i nes f rom passenge r s f rom the -Philippi ne s do n ot make the taxpayer t he rein engaged i n business in the Philipp ines, r esolves the i d e nt i c al problem now brough t before u s in these pr oceedings. The clear i nte nt of the ab ove arra ngeme n t , as prescr ibed i n the lATA Agree- ment, is to s ave the passenge r the t rouble o f purchasing t icke t s at the p o i n t of depart~r e of e ver y l eg of t he e n tir e � trip. (Ja pan Air Lines v s . Commis s ion e r of Inte r nal Revenue, sup r ~ . ) And even on the a ss ump t ion tha t pe t it i oner i s a resident 39

,. DECISION - . CTA CASES NOS 8 2373 & 2561 - 17 - or non-resident foreign corporation taxable on income from sources within the Philippines, the conclusion that the service of transpor~ation which produced the income sought to be taxed in these appeals took place outside the Philippines foreclosed the non-taxabi lity in the Philippines of the travelled revenue derived by petitioner f rom the sales o f tic kets in the countr y. After taking the position that petitioner is a f oreign corporation, resident or non-resident, liable to income tax on the revenue derived in full from the sales of tickets in the Philippines, res- pendent in his supporting memorandum would now assume a rosture that the travelled revenue derived by BOAC from the sales of tickets in the Philippines for international air transportation service is income derived from sources partly within and partly without the Philippines under Section 37(e) of the Revenue Code. Again, four-square with the cases at bar on this point, by reason of the exact similarity of the factual settings, t he same provision of law involved and the question litig ated, is Japan Air Lines, Inc. vs. Commissioner of Internal Revenue, CTA Ca se No . 2480, Janua ry 15, 1982. In holding 40

DECISION - CTA CASES NOS . 2373 & 256 1 - 18 - that the travelled revenue derived by a fo r eign corporation engaged in the business of i nter - national air carriage, as petitioner herein , from sales of tickets in the Philippines for inter- national air t ransportation service is ~ income derived from sources partly within and partly without the Philippines, this Court made observations as follows: Nevertheless, respondent would attempt to draw support from Section 37(e} of the then in force National Internal Revenue Code which considers 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 Philip- pines. Pursuant to Section 152 of Revenue Regulations No. 2, taxable i ncome from sources within the Philip- pines i ncludes that derived in full from sources within the Philippines and that portion of the income which is derived partly from sources wi t hin and partly from sources without the Philippines which is allocated o r apportioned to sources within. the Philippines. Since income from the bus i ness of transportation s ervice rendered between the Philippi ne s and points outside the Philippines is considered income derived partly from within and partly from without the Philippines under Section 37(e) of the Tax Code, respondent would thus �treat revenue derived by petitioner f rom: sales of passage . tickets in the Philippines for international air , transportation service as i ncome de rived from sources partly within and partlv without the Philippine s . 41

DECISION - CTA CASES NOS . 2373 & 2561 - 19 - The argument misses t he point. In i ts textua l completeness, the applicable statute provides: "Ga ins, profits, and income from ( 1) .trans- portation or other services rendered partly within and partly without the Philippines, x x x x shall be treated as derived partly from sources within and partly from sources without the Philippines ." It deals centrally on transportation service r endered 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 transport- . ation service between points in the Philippines and outside the Philip- pines. (N.V. Reederiz "Amsterdam" and Royal Interocean Lines vs. Com- missioner of Internal Revenue, CTA Case No. 1996, Dece mber 1, 1976; Procter & Gamble Philippine Manuf- . acturing Corporation vs. Commissioner of Internal Revenue, CTA Case No. 2437, January 4, 1977; see also Vol. 3, 1965, Federal Taxes, par. 16,381. ) Since respondent had admitted - .a tact con- firmed by this Court in its amended decision in CTA Case No. 1634 - that petitioner did not have planes t ha t lifted or landed passengers and cargo in the Philippines during the period under review as the Japan Air Lines had not yet been granted by the Civil Aeronautics Board a certificate of public c onvenience and necessity to operate in the Philippines, petitioner could not have carried on a business of transportation service between points in the Philippines and outside the Philippines. Under the circumstances, petitioner durin;v the period under;review ,/ did not r ender or could not have rende r ed , transportati on s~rvice p a rtly wi thin and partly without the Philippines in order to derive income partly from sources within and partly from sources without the Phi lippines under Sect ion 37(e) of the Tax Code. 42

DECISION - CTA CASES NOS. 2373 & 2561 - 20 - Moreover, Section 37(e ) provides that in the case of gross income derived from sources partly within and partly withou t the Philippines, the net income should first be com- puted by deducting the expenses, losses, or other deductions appor- tioned or allocated thereto and a ra table part of any expenses, losses , or other deductions which c annot 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 for mulas of general apportionment prescribed by the Secretary (now Minister) of Finance. As stated earlier, 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 respondent considered income derived in full from sources within the Philippines after deducting sales returns and commissions of the Philippine Air Lines. The fac that the deficiency income tax assessment was based solely on income which respondent considered derived from Philippine sources computed after subtracting deductions to the extent connected with i ncome earned in the Philippines and not on income derived by petitioner from sources pa~tly within and partly without the Philip- pines determined by the formula of general apportionment prescribed i n Section 163 of Revenue Regulations No. 2 in effect negates respondent ' s allegation that the revenue derive d by petitioner fr om sales of passage tickets in the Philippines is income derived from sources partly within ! and partly without the Philippines under Section 37(e) ?f the Tax Code. The fallacy of respondent 's position is his assumption that the source of the income is the 43

DECISION - CTA CASES NOS. 2373 & 2561 - 21 - place where the tr ansportation tickets is sold, treating such passage tickets for i nternational transportation service as goods sold in the Philippines; and undoubtedly, in order to consti- tute such income from the sales of tickets derived from sources partly within and partly without the Philippines under Section 37(e) .of the National Internal Re venue Code, the ti ckets would be con - sidered personal proper ty produced (in whole or in part) by petitioner without and sold within the Philippines. As already shown earlier, income from transportation is income from services (not from sale of personal property)~ with the result that where the services are rendered determines the source. (Daiichi Chuo Kisen Kaisha vs. Com- missioner of Internal Revenue , supr~) And as a foreign transportation company, petitioner derived income partl y from sources within and partly from sources without the Philippines if it was carrying on a business of transportation service between points in the Philippines and outside the Philip- pines. (N.V. Reederiz "Amsterdam" and Royal Inter- : ocean Lines vs. Commissioner of Internal Revenue, CTA Case No. 1996, December 1, 1976; Procter & Gamble Philippine Manufacturing Corporation vs.

DECISION - CTA CASES NOS . 2373 & 2 56 1 - 22 - Comm i ssioner of I nterna l Revenue, CTA Case No. 2437, January 4, 1977; Federal Taxes , Vol. 3, p. 16, 381) This set-up could be better understood by examining the situation exemplified by Exhibit "L" of petitioner which is admitted by respondent. Thus : The BOAC ticket made out by BOAC which is the i~suing airline, through Warner Bar nes to Mr. Neville covers the latter's trip from Manila to certain foreign destinations and then back to Manila. The travel cons ists of several legs or sector s , and for ever y leg the s::arrying airline as spec i fied in the tic ket is different. The fir st leg is fr om Manila to London on Qantas; the second fr o m Lo ndon to Montreal on BOAC; t he third from Montreal to Vancouver on Canadian Pac i fic, then from Vancouver to Hong Kong on Canadian Pacific, and lastly from Hong Kong to Manila on Cathay Pacific. BOAC, the issuing airline has the respon- sibility of making the reser vations and to collect the whole fa re for the whole t r ip. It is, however, Qantas which has, pursuant to the ticket, the r esponsibility of carrying the passenger and. his cargo from Manila to London, and if it is actually Qantas t hat carries the passenger from Manila to London, that portion of the whole fare corresponding to that leg of the trip, from Manila to London, has to be paid by BOAC t o Qan tas thr ough the lATA clearing hous e . Should the passenger, however, for o ne reason or another not ride on Qantas in the first leg of ;his t rip, but takes instead another airline, the fare corresponding to that leg will be paid, not to Qantas, but to the other a irline t hat actually rendered the service of carr yi ng the passenger from 4

DECISION - CTA CASES NOS. 2 3 73 & 25 6 1 - 23 Manila to London. It appears, there- fore, that BOAC, the issuing airline, cannot derive any inc ome from the service of transportation from Manila to London for it is an pff-line carrier. / In the second leg, from London to Mo ntreal, the passenger may take BOAC acc ording to the ticket. If he does so, t h at portion of the wh o le fare corres- ponding to t he leg London to Montreal will be paid to BOAC through the lATA clearing h o use and BOAC will derive the income from the carriage in that leg . But should the passenger for one reason or another fails or does not l ike to ride on a BOAC plane in that leg of his trip, but takes another carrier, the corresponding fare will not be paid to BOAC, but wi ll be re mitted to the carrier that actually rendered the service. The payme nt to the carrying carrier that actually rendered the service of transportation will be paid through the lATA clearing house. In the same way, if the passenger takes a Can ad ian Pac i fic plane in the third leg of his trip fr om Montrea l to Vancouver, the fare corr e sponding to said leg~ll be paid to Canadian Pacific, but if the passenger takes a carrier other than Canadian Pacific, the corresponding fare will be paid not to Canadian Pacific , but to the carrying carrier that rendered actually the service of transportation. The same happens in the fourth leg from Vancouver to Hong Kong, as w~ll as in the fifth leg from Hong Kong to Manila. The passenger may take the carrier as specified in the ti c ket or he may take another plane, but in every case, the fare correspond ing to the leg will be paid through the lATA clearing house to the carrying airline that actually performed the service of transportption. The carrier tha~ actually transports the passenger in e very leg of the trip deta c hes fr o m the ticket issued by BOAC the coupon corresponding to its leg or sector and sends the said cou pon ttl the lATA clearing house where th e c orrcsponJ1ng disburseme n ts are made to the different airline carriers. 46

DECISION - CTA CASES NOS. 2373 & 2561 - 24 - As stated above, the clear intent of this arrangement is to save the passenge r 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 BOAC did not engage in the business of a carrier in the Philippines either directly or with the inter- vention of another carrier that may be considered its extension (Japan Air Lines, Inc. vs. Commissioner of Internal Revenue 1 supra) i. much less rendered transportation service between points in the Philippines and outside the Philippines to derive income from sources partly within and partly with- ou t the Philippines (N.V. Reederiz "Amsterdam" and Royal Interocean Lines vs. Commissioner of Inte rna l Reven ue, supr~; Procter & Gamble Philip- pine Manufacturing Corporation vs. Commissioner of Internal Revenue, ~~; Feder a]. Taxes, supra) �. Accordingly, the decision of respondent dated February 16, 1972, the petition for reconsideration of which was denied on August 24, 19 73: (a) Denying the request of petitioner for the tax refund or tax .cred it of th e aiT,o ..J n t of P858,307e79 paid by it on January 28, 1970 as income tax, surcharges, interest and compromise penalties for the fiscal years 1959-60 to 1967-68, 47

( ,� r. DECISION - CTA CASES NOS. 2 37 3 & 2561 I - 25 - inclusive, subject o f CTA Case No. 2373; and (b) Reinsta ting and reissuing the deficiency income tax assessments issued against petitioner for the fiscal years 1968-69 to 1970-71 in the amount of ~534,132.08, plus 5 0 % surcharge and l % monthly in- terest from April 16, 1972 until fully paid, cover ed in CTA Case No. 2561 cannot be sustained. Respon dent Commissioner of Internal Revenue is therefore ordered to credit petit ione r British Overseas Airways Corpo- ration the sum of ~858,307.79, as well as to counter- mand o r cancel the deficiency income tax assessments issued against petitioner in the amount of ~534,132.08 for the fiscal years 19 68-69 to 1970-71. WHEREFORE, the judgment under review should be as it is hereby reversed. SO ORDERED. Quezon City, Metro Manila, January 26, 1983 � . Chucuv-TL;k/ AMANTE FILLER Presiding Judge WE CONCUR: /-.... � ROAQUIN e J udge 48