G.R. No. 60714 ; October 4, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.

FACTS

Respondent Japan Air Lines, Inc. (JAL), a foreign corporation engaged in international air carriage, maintained a Manila office from 1959 to 1963 for promotional activities but did not operate flights to or from the Philippines, as it lacked a CAB certificate. During this period, Philippine Air Lines (PAL) acted as JAL’s general sales agent, selling tickets and cargo reservations in the Philippines for JAL’s international flights. The Commissioner of Internal Revenue assessed JAL for deficiency income tax, including surcharge and interest, for the years 1959 to 1963, arguing that the income from ticket sales in the Philippines constituted income from Philippine sources. JAL protested, contending that as a non-resident foreign corporation with no income from Philippine sources under Section 37 of the Tax Code, it was not liable. The Court of Tax Appeals set aside the assessment, prompting the Commissioner’s petition.

ISSUE

The primary issue is whether proceeds from sales of JAL tickets in the Philippines constitute taxable income from sources within the Philippines, making JAL liable for deficiency income tax.

RULING

The Supreme Court granted the petition, reversing the Court of Tax Appeals. Applying the precedent in Commissioner of Internal Revenue vs. British Overseas Airways Corporation, the Court held that income from ticket sales in the Philippines is derived from sources within the Philippines. The activity of selling tickets occurred within Philippine territory, with payments made in Philippine currency, constituting a flow of wealth protected by the Philippine government and thus subject to income tax. The Court clarified that Section 37 of the Tax Code, which enumerates items of gross income from Philippine sources, is not exclusive. Since JAL engaged in business through its agent PAL, it was a foreign corporation engaged in trade or business in the Philippines, taxable under Sections 24(a) and (b)(2) of the National Internal Revenue Code of 1939. The Court recomputed JAL’s tax liability for 1959-1963, ordering payment of P1,703,177.40, inclusive of surcharge and interest, but disallowed the compromise penalty for bookkeeping violations as improperly imposed. The dismissal of a prior case involving common carrier’s tax was distinguished and held not res judicata, as that case dealt with an excise tax on transportation activity, not income tax.