GR 67938; (December, 1989) (Digest)
G.R. No. 67938 December 19, 1989
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AMERICAN AIRLINES, INC. and COURT OF TAX APPEALS, respondents.
FACTS
The Commissioner of Internal Revenue assessed American Airlines, Inc., a foreign corporation organized under U.S. laws, for deficiency income tax for the year 1974 amounting to P298,521.30. This assessment was based on Section 24(b)(2) of the National Internal Revenue Code, as amended, which imposes a 2.5% tax on the “Gross Philippine Billings” of international carriers engaged in business within the Philippines. American Airlines maintained a liaison office in the Philippines authorized for passenger information, reservations, and ticketing services. However, it was an “off-line” carrier with no flight operations originating from the Philippines. The airline contested the assessment, arguing that its ticketing activities did not constitute “doing business” in the Philippines and thus its revenues were not subject to the tax.
ISSUE
Whether an off-line international carrier, which sells tickets in the Philippines through a liaison office but conducts no flight operations therein, is engaged in trade or business in the Philippines and is thus liable for the 2.5% tax on its Gross Philippine Billings.
RULING
The Supreme Court ruled in favor of the Commissioner, reversing the Court of Tax Appeals. The Court held that American Airlines was engaged in trade or business in the Philippines. The legal logic is anchored on the nature and continuity of its commercial activities within the country. By establishing a liaison office and systematically selling tickets, the airline performed acts incident to the progressive prosecution of commercial gain. The situs of the income is the Philippines because the income-producing activity—the sale of tickets and receipt of payment in Philippine currency—occurred within Philippine territory. The absence of actual flight operations is immaterial; the source of income is the activity conducted locally, not the location of the transportation service. Consequently, the airline’s gross revenue from ticket sales constitutes “Gross Philippine Billings” subject to the 2.5% tax. The Court also upheld the imposition of deficiency interest and a 5% surcharge for non-payment, computed according to the rates prescribed under the Tax Code. The total liability was adjusted to P469,761.55.