UP Law F2021 027 CIR v. British Overseas Airways Corp.

Scope & Limitation of Taxation;

Tax 1 Territorial/personal jurisdiction 1987 Melencio-Herrera

SUMMARY
CIR assessed British Overseas Airways Corporation (BOAC) for deficiency income taxes covering the years
BOAC paid said assessments under protest arguing that BOAC’s service of transportation is performed
outside the Philippines, the income derived is from the sources outside the Philippines since BOAC did not
carry passengers or cargo to or from the Philippines. CTA ruled ifo BOAC and held that the proceeds of the
sales of BOAC passage tickets in the Philippines does not constitute income from Philippine sources since
“no service of carriage of passengers or freight was performed by BOAC within the Philippines” and
therefore, not taxable under income tax laws of the Philippines. CIR filed Petition for Review before SC. SC
reversed and set aside ruling of CTA.

FACTS

 BOAC is a 100% British Government owned corporation, organized and existing under the laws of the
UK. It operates air transportation services and sells tickets over the routes of other airlines.
 During the disputed period wherein it was assessed deficiency income tax, it did not have landing rights
in the Philippines, nor did it have a certificate of public convenience and necessity. As such it did not
carry passengers or cargo to or from the Philippines.
 However it had a general sales agent in the PH, Wamer Barnes and Company, which sold tickets on
behalf of BOAC which covered passengers and cargo.
 2 Cases:
o GR No. 65773 (1st Case): CIR, assessed BOAC the aggregate amount of P2,498,358.56 for
deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment for the years 1959-1967
in the amount of P858,307.79. BOAC paid this new assessment under protest.
o BOAC filed a claim for refund. But before said denial, BOAC had already filed a petition for review
with the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of
the amount paid.
o GR No. 65774 (2nd Case): BOAC was assessed deficiency income taxes, interests, and penalty for
the fiscal years 1968-69 to 1970-71 in the aggregate amount of P549,327.43, and the additional
amounts of P1,000 and P1,800 as compromise penalties for violation of Sec. 46 under Sec. 74 of
the NIRC
o BOAC requested that the assessment be set aside. CIR denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000 as compromise penalty under Sec. 74 of
the Tax Code.
o BOAC's request for reconsideration was denied by the CIR. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax
for the years 1969 to 1971.
o Cases were subsequently tried jointly.
 CTA ruled in favor of BOAC and held that the proceeds of the sales of BOAC passage tickets in the
Philippines does not constitute income from Philippine sources since “no service of carriage of
passengers or freight was performed by BOAC within the Philippines” and therefore, not taxable under
income tax laws of the Philippines.
 CIR filed Petition for Review before SC.
RATIO

W/N BOAC is a resident foreign corporation? - YES

W/N ticket sales made in the Philippines, despite BOAC having no landing rights, constitutes income
from PH sources and are thus taxable? - YES
BOAC is a resident foreign corporation. The definition of the same is given under Section 20 of the 1977
Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or
 having an office or place of business therein.

While there is no specific criterion of what constitutes doing or engaging in or transacting business, the
term implies a certain continuity and just one of temporary character. Furthermore, the work done must be
for commercial gain or the furtherance of the purpose and objectives of the business organization.

The court looked into the activities of the General Sales agent, which included selling and issuing tickets,
breaking down whole trips into a series of trips (with each partitioned trip in the series corresponding to a
different airline), and receiving fare for the entire trip. Looking at the activities of the general sales agent
the court had no doubt that BOAC was engaged in business through a local agent.

The court also ruled that the income derived from such sale of tickets was taxable. They ruled that
regardless of the organization of BOAC, it was sufficient that income derived from activities within the
Philippines. They noted that every part of the transaction was performed within the Philippines and as such
enjoyed protection accorded by the Philippine Government. They ruled that since it enjoyed such
protection, it should also share in the burden of supporting the government through payment of taxes.

FALLO

WHEREFORE, the CTA decision set aside. BOAC is ] ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April
16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for
refund in the amount of P858,307.79 is hereby denied.