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

Commissioner of Internal Revenue versus American Airlines

The Case

This is a petition brought by the Commissioner of Internal Revenue against American Airlines, Incorporated, an airline organized under the laws of the United States of America, and against the Court of Tax Appeals. The Commissioner asks the Supreme Court to reverse the tax court's ruling that absolved the airline of liability for the two and one-half percent tax on gross Philippine billings under the National Internal Revenue Code, as amended. The case matters because it settles, for an off-line international carrier with no flights touching Philippine soil, whether selling tickets through a local office is doing business here and whether the income from those ticket sales is taxable Philippine-source income.

Procedural History

The Commissioner assessed the airline for deficiency income tax, interest, and compromise penalty for the year 1974. The airline protested, the Commissioner denied the protest and treated his letter as his final decision, and the airline then filed a petition for review with the Court of Tax Appeals. The tax court ruled in favor of the airline and absolved it of liability, relying on its earlier rulings that an international air carrier which merely sells passage tickets here through an agent, maintains an office for promotion and information, and receives payments for tickets sold here is not engaged in business in the Philippines. The Commissioner elevated the matter to the Supreme Court by petition for review.

Facts

American Airlines is a corporation organized under the laws of the United States of America. It is an off-line international carrier, meaning it has no flight originating from the Philippines. By virtue of a certificate of authority from the Board of Investments and a license from the Securities and Exchange Commission dated August 2, 1973, it established a liaison office in the country for passenger and flight information and reservation and to render ticketing services.

In early 1979, the Commissioner assessed the airline for deficiency income tax, interest, and compromise penalty for 1974, amounting to 298,521 pesos and 30 centavos. The assessment rested on gross Philippine billings of 8,400,617 pesos, computed as income tax at two and one-half percent, plus fourteen percent interest per annum, plus a compromise penalty. The airline received the demand letter with notice of assessment on August 8, 1979.

The airline protested on August 20, 1979, asking that the assessment be withdrawn and cancelled. The Commissioner denied the request in a letter dated September 14, 1979, which he declared to be his final decision on the protest, and a copy was received by the airline on October 25, 1979. The airline then filed its petition for review with the Court of Tax Appeals 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.

Issues

• Whether or not American Airlines, an off-line international carrier without flight operations in the country but rendering ticketing services here, is engaged in trade or business in the Philippines.
• Whether or not the income from its sale of passage tickets in the Philippines is income derived from Philippine sources, taxable under the two and one-half percent tax on gross Philippine billings.
• Whether or not the assessment of deficiency interest, additional interest, and the five percent surcharge against the airline is proper.

Applicable Provisions

Section 24(b)(2) of the National Internal Revenue Code, as amended by Presidential Decree No. 69, provides:

(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.

This is the very provision under which the Commissioner assessed the airline, and its application turns on whether the airline is a resident foreign corporation engaged in trade or business here.

Presidential Decree No. 1355, amending the same section, provides:

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 hours prior to embarkation.

This statutory definition of gross Philippine billings ensured that international airlines are taxed on the income they derive from Philippine sources.

Ruling

On the first issue, the Court held that the airline is a resident foreign corporation engaged in trade or business in the Philippines. It relied on its earlier rulings involving the British Overseas Airways Corporation and Air India, where foreign airline companies that sold tickets in the Philippines through local agents, whether called liaison offices, agencies, or branches, were considered engaged in trade or business in the country. Such activities show continuity of commercial dealings and the performance of acts normally incident to the prosecution of commercial gain.

On the second issue, the Court held that the income is derived from Philippine sources. The absence of flight operations within Philippine territory cannot alter the fact that the income was derived from activity within this jurisdiction. As explained in the British Overseas Airways Corporation case, the sale of tickets in the Philippines is the activity that produces the income; the tickets changed hands here and payments for fares were made here in Philippine currency; the situs of the source of payments is the Philippines. The Court also held that the enumeration in Section 37 of the Tax Code is not exclusive, so the omission of income from international transportation tickets does not remove it from Philippine-source income. The two and one-half percent tax is an income tax levied on the presumed gain of the airline companies.

On the third issue, the Court held that the assessment of additional interest and surcharge was proper. Under Section 51(d) of the tax code then in force, interest of fourteen percent per annum was prescribed, but the maximum collectible as interest on the tax deficiency should not exceed the interest corresponding to three years, or a maximum of forty-two percent. The airline is likewise liable for additional interest under Section 51(e)(2), computed from the date of demand and based on the entire unpaid liability inclusive of previous interest, but again not exceeding the amount corresponding to three years, which in this case is fifty-four percent, broken down into fourteen percent for the first year and twenty percent for the next two years. The Court also found justified the five percent surcharge under Section 51(e)(3) for non-payment of the deficiency within thirty days after notice and demand.

Doctrine

A foreign airline company that sells tickets in the Philippines through a local agent, whether called a liaison office, an agency, or a branch, is a resident foreign corporation engaged in trade or business in the country. The absence of flight operations within Philippine territory does not prevent the income from being considered Philippine-source income, because it is sufficient that the income is derived from activities within the country. The sale of tickets here is the activity that produces the income, and the situs of the source of payments is the Philippines. The two and one-half percent tax on gross Philippine billings is an income tax on the presumed gain of international carriers. Finally, the enumeration of income from sources within the Philippines in Section 37 of the Tax Code is not an all-inclusive list.

Disposition

The Court set aside the decision of the Court of Tax Appeals and ordered American Airlines to pay a total liability of 469,761 pesos and 55 centavos, without pronouncement as to costs.

Remember This

Memorize this line: an off-line international carrier that sells tickets through a local office is doing business in the Philippines, and the income from those ticket sales is Philippine-source income subject to the two and one-half percent tax on gross Philippine billings. Examiners use this case to test the concepts of doing business, source of income, and the non-exclusivity of the statutory enumeration of Philippine-source income.