G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

FACTS

The Commissioner of Internal Revenue (CIR) assessed deficiency income taxes against British Overseas Airways Corporation (BOAC) for several fiscal years. BOAC, a British government-owned international airline, sold tickets in the Philippines through a general sales agent but had no landing rights for traffic purposes in the country and did not operate flights to or from the Philippines during the assessment periods. The CIR argued that the revenue from these ticket sales constituted income from Philippine sources and was thus taxable. BOAC protested the assessments, paid under protest in one case, and sought refunds, leading to petitions before the Court of Tax Appeals (CTA).
The CTA ruled in favor of BOAC, holding that the ticket sales proceeds did not constitute Philippine-sourced income because BOAC performed no carriage service within the Philippines. The court concluded that income from transportation is derived from services, and the source is the place where the service is rendered. Consequently, the CTA ordered the CIR to credit the amount paid and cancel the deficiency assessments. The CIR elevated the case to the Supreme Court via certiorari.

ISSUE

The primary issue is whether revenue from ticket sales in the Philippines by an international airline with no flight operations to or from the country constitutes income from sources within the Philippines subject to Philippine income tax.

RULING

The Supreme Court reversed the CTA decision and held BOAC liable for deficiency income tax. The Court ruled that the income from ticket sales in the Philippines is considered income from sources within the Philippines. The legal logic is anchored on the nature of the transaction: the sale of a ticket is not merely a contract of sale but a contract of carriage. The situs of the income is determined by the place where the sale is perfected. Since the tickets were sold in the Philippines through a general sales agent, the income therefrom is considered Philippine-sourced.
The Court further determined that BOAC, by maintaining a general sales agent in the Philippines, was engaged in business within the country, making it a resident foreign corporation subject to income tax on its Philippine-sourced income. The continuity of commercial dealings through an established agent constituted “doing business.” The Court rejected the CTA’s view that the source of income is solely where the transportation service occurs, emphasizing that the sale of the ticket, which creates the obligation to transport, is a distinct income-generating activity. Therefore, BOAC’s revenue from Philippine ticket sales was subject to Philippine income tax for the periods in question.