COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. AMERICAN AIRLINES, INC. AND COURT OF TAX APPEALS, RESPONDENTS.

Petitioner Commissioner of Internal Revenue comes to this Court
seeking the reversal of the decision of the Court of Tax Appeals (CTA, for
short), promulgated on April 16, 1984
in CTA Case No. 3046.  Respondent
American Airlines, Inc. was absolved in said decision of liability for the tax
imposed under Section 24(b)(2) of the National Internal Revenue Code, as amended
by Presidential Decree No. 69 promulgated on November 24, 1972. 
The provision reads:

“(2)    Resident corporations.  – A corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade and business
within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from
all sources in the Philippines: Provided, however, That
international carriers shall pay a tax
of two and one-half per cent on their gross Philippine billings.”

Said
section 24(b)(2) was further amended by Presidential Decree No. 1355,
promulgated on April 21, 1978, stating that:

“x x x ‘Gross Philippine Billings’ include gross revenue
realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail, provided
the cargo or mail originates from the Philippines.  The gross revenue realized from the said
cargo or mail (shall) include the gross freight charge up to final destination.  Gross revenue from chartered flights
originating from the Philippines
shall likewise form part of ‘Gross Philippine Billings’ regardless of the place
of sale or payment of the passage documents. 
For purposes of determining the taxability of revenues from chartered
flights, the term ‘originating from the Philippines’ shall include flight of
passengers who stay in the Philippines for more than forty-eight (48) hours
prior to embarkation.”

There is no dispute that
respondent airline company was duly organized under the laws of the United States of America.  It
is an off-line international carrier without any flight originating from the Philippines. 
However, by virtue of BOI Certificate of Authority No. 267 and a license
issued by the Securities and Exchange Commission dated August 2,
1973, a liaison office was established by it in this
country for passenger and flight information and reservation and to render
ticketing services.^[1]

In early 1979, petitioner
assessed respondent company for deficiency income tax, interest and compromise
penalty for the year 1974, amounting to P298,521.30.  On August 8, 1979, private respondent received from petitioner
a letter of demand with notice of assessment dated July 31, 1979.^[2] On the gross Philippine billings which, upon
investigation, was in the amount of P8,400,617.00, the assessment was
arrived at under the following computation:

Income tax due
thereon (2-1/2%)…………………. P210,015.00

Add: 14% interest per annum

from 4-16-75 to 7-31-79………………    
88,206.30

Compromise
penalty, for

failure to file return

and late payment of

the tax …………………………………          300.00

Total amount due ………………………………….. P298,521.30

In subsequent submissions, petitioner prays that respondent be
ordered to pay, in addition to the aforesaid amount of P298,521.30, “5% surcharge
and interest at the rate of 14% per annum from July 31, 1979 up to July 31,
1980 and interest at the rate of 20% per annum from August 1, 1980 to July 31,
1982 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended by P.D.
No. 1705 which took effect on August 1, 1980.” ^[3]

Private respondent protested the assessment on August 20, 1979 asking that the same be
withdrawn and cancelled.  Petitioner, in
his letter dated September 14, 1979,
denied the request informing the respondent that such letter was the final
decision on the protest.  A copy thereof
was received by private respondent on October
25, 1979.^[4]

Consequently, private respondent filed a petition for review with
respondent court on November 23, 1979
contending that it was not doing business in the Philippines
and that selling tickets is not an activity subject to the assessed tax on
gross Philippine billings.^[5]
An answer rebutting the allegations in
the petition was filed by petitioner with respondent court on April
24, 1980.^[6]

As earlier mentioned,
respondent court reversed the appealed decision of petitioner, relying on its
earlier rulings where it held that “the acts of a foreign corporation in the
business of international air carriage and of selling passage tickets in the
Philippines through its agent; in maintaining of (sic) an office in the
Philippines for promotion and information purposes; and the receipt of payments
for passage tickets sold in the Philippines from passengers from the
Philippines do not make such international air carrier engaged in business in the Philippines x x x .”^[7]

The controversy is now
before this Court, elevated by petitioner on the issue of whether or not
respondent American Airlines, Inc., which is an off-line international carrier
without flight operations in this country but rendering ticketing services
herein, is liable to pay the 2-1/2% tax on its gross Philippine billings
pursuant to Section 24(b)(2), as amended, of the tax code.

We have already had the occasion to rule on this
issue in two previous cases involving the British Overseas Airways Corporation
and Air India, generated by similar factual backgrounds although of different
taxable periods.^[8]

In said cases, foreign
airline companies which sold tickets in the Philippines through their local agents, whether called
liaison offices, agencies or branches, were considered resident foreign
corporations engaged in trade or business in the country.  Such activities show continuity of commercial
dealings or arrangements and performance of acts or works or the exercise of
some functions normally incident to and in progressive prosecution of
commercial gain or for the purpose and object of the business organization.^[9]

It was likewise declared
that for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activities within this country.  In
the case of these airline companies, the absence of flight operations within
Philippine territory cannot alter the fact that the income was derived from
activity within this jurisdiction for, as lucidly explained by Mme. Justice Melencio-Herrera in the British Overseas
Airways Corporation case:

“x x x the
sale of tickets in the Philippines
is the activity that produces the income. 
The tickets exchanged hands here and payments for fares were also made
here in Philippine currency.  The situs of the source of payments is the Philippines.  The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government.  In consideration
of such protection, the flow of wealth should share the burden of supporting
the government.

“A transportation ticket is not a mere piece of paper.  When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier.  It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding obligation of the
carrier to transport the passenger upon the terms and conditions set forth thereon.  The ordinary ticket issued to members of the travelling public in general embraces within its terms all
the elements to constitute a valid contract, binding upon the parties entering
into the relationship.

“True, Section 37(a) of the Tax Code, which enumerates items
of gross income from sources within the Philippines, namely:  (1) interest, (2) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal
property, does not mention income from the sale of tickets of international
transportation.  However, that does not
render it less an income from within the Philippines.  Section 37, by its language, does not intend
the enumeration to be exclusive.  It
merely directs that the types of income listed therein be treated as income
from sources within the Philippines.  A cursory reading of the section will show
that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be considered.”^[10]

The 2-1/2% tax on gross Philippine billings imposed under the
proviso added by Presidential Decree No. 69 to Section 24(b)(2) is an income
tax levied on the presumed gain of the airline companies.  Such proviso and the statutory definition of
gross Philippine billings provided by Presidential Decree No. 1355 ensured that
international airlines are taxed on the income they derive from Philippine
sources.  The revenues from the sale of
tickets having been derived from Philippine sources, there is no cogency to the
contention that said airlines are not subject to the aforestated
tax.

The inexorable conclusion, therefore, is that respondent American
Airlines, Inc., being a resident foreign corporation engaged in business in the
Philippines and
deriving income from Philippine sources, the assessment of the aforestated deficiency tax against it was correct and
valid.

The assessment of the additional amount of P88,206.30 by way of
deficiency interest is also proper. 
Under Section 51(d) of the tax code then in force, interest of 14% per
annum was prescribed, but with the qualification that the maximum amount that
may be collected as interest on the tax deficiency should not exceed such
interest corresponding to three (3) years, or a maximum of 42%.  This was the interest rate at the time of the
accrual of the tax liability of respondent, several years before the changes
brought about by Presidential Decree No. 1705 which took effect on August 1, 1980.

Private respondent is likewise liable to pay the interest
provided in Section 51(e)(2) of the code in addition to the interest under
Section 51(d).  Such additional interest
shall be computed from the date when petitioner demanded payment of the tax
deficiency and shall be based upon the entire amount of the unpaid liability
inclusive of the previous interest.  But,
again, the aforesaid additional interest shall in no case exceed the amount
corresponding to a period of three (3) years. 
In the present case, the maximum should be 54%, broken down into 14% for
the first year and 20% for the next two (2) years thereafter.  At the time the demand letter was received by
respondent on August 8, 1979, the rate of interest under Section 51(e)(2) was
14% per annum until it was increased to 20% per annum on August 1, 1980 by the
amendments introduced by Presidential Decree No. 1705.  Thus, the additional interest is P161,039.50.

We also find it justified to grant the prayer for the 5%
surcharge authorized in Section 51(e)(3) for non-payment of the tax deficiency
within thirty (30) days after notice and demand.  The surcharge in this case is P10,500.75, or
5% of the actual deficiency income tax, which surcharge is payable in addition
to all other increment provided by the tax code.

ACCORDINGLY the decision of the Court of Tax Appeals,
dated April 16, 1984, is
hereby SET ASIDE.  Private respondent
shall pay the deficiency income tax of P210,015.00, deficiency interest of P88,206.30 provided under
Section 51(d), P161,039.50 by way of interest imposed by Section 51(e)(2), and
surcharge of P10,500.75 prescribed in Section 51(e)(3), all of the tax code, or
a total liability of P469,761.55. 
Without pronouncement as to costs.

SO ORDERED.

Melencio-Herrera, (Chairman),
Padilla, and Sarmiento,
JJ., concur.

Paras, J., no part, son is partner of Sycip, et al.

^[1]
Rollo, 31-33.

^[2]
Ibid., 40.

^[3]
Brief for Petitioner, 15; Rollo, 143.

^[4]
Ibid., 32.

^[5]
Ibid., 31-34.

^[6]
Ibid., 36-38.

^[7]
Ibid., 47-48.

^[8]
Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, et al., 149 SCRA 395 (1987); Commissioner of Internal Revenue vs.
Air India, et
al., 157 SCRA 648 (1988).

^[9]
Id.; id;
see also Sec. 1, R.A. No. 5455.

^[10]
Supra, 407-408.