FISHER V TRINIDAD

Separate Opinions
STREET, J., concurring:
I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed. Instead of demurring
the defendant should have answered and alleged, if such be the case, that the stock dividend which was the subject
of taxation represents the amount of earnings or profits distributed by means of the issuance of said stock dividend;
and the case should have been tried on that question of fact.
In this connection it will be noted that section 25 (a) of Act No. 2833, of the Philippine Legislature, under which this
tax was imposed, does not levy a tax generally on stock dividends to the extend of the part of the stock nor even to
the extend of its value, but declares that stock dividends shall be considered as income to the amount of the earnings
or profits distributed. Under provision, before the tax can be lawfully assessed and collected, it must appear that he
stock dividend represents earning or profits distributed; and the burden of proof is on the Collector of Internal
Revenue to show this.
The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as authority for the proposition that
it is incompetent for the Legislature to tax as income any property which by nature is really capital — as a stock
dividend is there said to be. In that case the Supreme Court of the United States held that a Congressional Act taxing
stock dividends as income was repugnant to that provision of the Constitution of the United States which required that
direct taxes upon property shall be apportioned for collection among the several states according to population and
that the Sixteenth Amendment, in authorizing the imposition by Congress of taxes upon income, had not vested
Congress with the power to levy direct taxes, on property under the guise of income taxes. But the resolution
embodied in that decision was evidently reached because of the necessity of harmonizing two different provisions of
the Constitution of the United States, as amended. In this jurisdiction our Legislature has full authority to levy both
taxes on property and income taxes; and there is no organic provision here in force similar to that which, under the
Constitution of the United States, requires direct taxes on property to be levied in a particular way.
It results, under the statute here in force, there being no constitutional restriction upon the action of the law making
body, that the case before us presents merely a question of statutory construction. That the problem should be
viewed in this light, in a case where there is no restriction upon the legislative body, is pointed our in Eisner vs.
Macomber, supra, where in the course of his opinion Mr. Justice Pitney refers to the cases of the Swan Brewery Co.
vs. Rex ([1914] A. C. 231), and Tax Commissioner vs. Putnam (227 Mass., 522), as being distinguished from Eisner
vs. Macomber by the very circumstance that in those cases the law making body, or bodies were under no restriction
as to the method of levying taxes. Such is the situation here.
OSTRAND, J., dissenting:
In its final analysis the opinion of the court rests principally, if not entirely on the decision of the United States
Supreme Court in the case of Eisner vs. Macomber (252 U.S., 189), a decision which, for at least two reasons, is
entirely inapplicable to the present case.
In the first place, there is a radical difference between the definition of a taxable stock dividend given in the United
States Income Tax Law of September 8, 1916, construed in the case of Eisner vs. Macomber, and that given in Act
No. 2833 of the Philippine Legislature, the Act with which we are concerned in the present case. The former provides
that "stock dividend shall be considered income, to the amount of its cash value;" the Philippine Act provides that
"Stock dividend shall be considered income, to the amount of the earnings or profits distributed." The United State
statute made stock dividends based upon an advance in the value of the property or investment taxable as income
whether resulting from earning or not; our statute make stock dividends taxable only to the amount of the earning and
profits distributed, and stock dividends based on the increment income and are not taxable. Though the difference
would seem sufficiently obvious, we will endeavor to make it still clearer by borrowing one of the illustrations with
which the opinion of the court is provided. The court says:
A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000. At the end of
the first year, by reason of business conditions and the increase of the value of both real estate and
personal property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year has
received nothing from the farm or the cattle. His books at the beginning of the year show that he had
property of the value of P10,000. His books at the close of the year show that he has property of the value of
P20,000. A is not a corporation. The assets of his business are not shown therefore by certificate of stock.
His books, however, show that the value of his property has increased during the year by P10,000. Can the
P10,000, under any theory of business or law, be regarded as an "income" upon which the farmer can be
required to pay an income tax? Is there any difference in law in the conditions of A in this illustration and the
conditions of A and B in the immediately preceding illustration? Can the increase of the value of the property
in either case be regarded as an 'income' and be subjected to the payment of the income tax under the law?
I answer no. And while the increment if in the form of a stock dividend would have been regarded as income under
the United States statute and taxes as such, it is not regarded as income and cannot be so taxes under our statute
because it is not based on earnings or profits. That is precisely the difference between the two statutes and that is the
reason the illustration is not in point in this case, though it would have been entirely appropriate in the Eisner vs.
Macomber case. It is also one of the reasons why that case is inapplicable here and why most of the arguments in
the majority opinion are beside the mark.
But let us suppose that A had sold the products of the farm during the year for P10,000 over and above his expense,
and had invested the money in buildings and improvements on the farm, thus increasing its value to P20,000. Why
would not the P10,000 earned during the year and so invested in improvements still be income for the year? And why
would not a tax on these earnings be an income tax under the definition given in Black's Law Dictionary, and quoted
with approval in the decision of the court, that "An income tax is a tax on the yearly profits arising from the property,
professions, trades, and offices?" There can be but one answer. There is no reason whatever why the gains derived
from the sale of the products of the farm should not be regarded as income whether reinvested in improvements upon
the farm or not and there is no reason way a tax levied thereon cannot be considered an income tax.
Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash. Black's Law
Dictionary says — and I am again quoting from the decision of the court — "An income is the return in money from
one's business, labor, or capital invested; gains profits, or private revenue." As will be seen in the secondary sense of
the word, income need not consist in money; upon this point there is no divergence of view among the
lexicographers. If a farmer stores the gain produced upon his farm without selling, it may none the less be regarded
as income.
In the Eisner vs. Macomber case, the United States supreme Court felt bound to give the word "income" a strict
interpretation. Under article 1, paragraph 2, clause 3, and paragraph 9, clause 4 of the original Constitution of the
United States, Congress could not impose direct taxes without apportioning them among the States according to
population. As it was thought desirable to impose Federal taxes upon incomes and as a levy of such taxes by
appointment among the States in proportion to population would lead to an unequal distribution of the tax with
reference to the amount of taxable incomes, the Sixteenth Amendment was adopted and which provided that "The
Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment
among the several states, and without regard to any census or enumeration."
The United States Supreme Court therefore says in the Eisner vs. Macomber case:
A proper regard for its generis, as well as its very clear language, requires also that this Amendment shall
not be extended by loose construction, so as to repeal or modify, except as applied to income, those
provisions of the Constitution that require an apportionment according to population for direct taxes upon
property, real and personal. This limitation still has an appropriate and important functions, and is not to be
overridden by Congress or disregarded by the courts.
In order, therefore, that the clauses cited from Article I of the constitution may have proper force and effect,
save only as modified by the Amendment, and that the latter also may have proper effect, it becomes
essential to distinguish between what is and what is not "income," as the term is there used; and to apply the
distinction as cases arise, according to truth and substance, without regard to form. Congress cannot by any
definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which
alone it derives its power to legislate, and within whose limitations alone that power can be lawfully
exercised.
That, in the absence of the peculiar restrictions placed by the Constitution upon taxing power of Congress, the
decision of the court might have been different is clearly indicated by the following language:
Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of the position of the
Government.
Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend Duties Act of Western Australia,
which provided that "dividend" should include "every dividend, profit, advantage, or gain intended to be paid
or credited to or distributed among any members or director of any company," except etc. There was a stock
dividend, the new shares being alloted among the shareholders pro rata; and the question was whether this
was a distribution of a dividend within the meaning of the act. The Judicial Committee of the Privy Council
sustained the dividend duty upon the ground that, although "in ordinary language the new shares would not
be distribution of a dividend," yet within the meaning of the act, such new share were an "advantage" to the
recipients. There being no constitutional restriction upon the action of the lawmaking body, the case
presented merely a question of statutory construction, and manifestly the decision is not a precedent for the
guidance of this court when acting under a duty to test an act of Congress by the limitations of a written
Constitution having superior force.
 In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th Amendment to the
constitution of Massachusetts, which conferred upon the legislature full power to tax incomes, "must be
interpreted as including every item which by any reasonable understanding can fairly be regarded as
income" (pp. 526, 531); and that under it a stock dividend was taxable as income. . . . Evidently, in order to
give a sufficiently broad sweep to the new taxing provision, it was deemed necessary to take the symbol for
the substance, accumulation for distribution, capital accretion for its opposite; while a case where money is
paid into the hand of the stockholder with an option to buy new shares with it, followed by acceptance of the
option, was regarded as identical in substance with a case where the stockholder receives no money and
has no option. The Massachusetts court was not under an obligation, like the one which binds us, of
applying a constitutional provisions that stand in the way of extending it by construction.
The Philippine Legislature has full power to levy taxes both on capital or property and on income, subject only to the
provisions of the Organic Act that "the rule of taxation shall be uniform." In providing for the income tax the
Legislature is therefore entirely free to employ the term "income" in its widest sense and is in nowise limited or
hampered by organic limitations such as those imposed upon Congress by the Constitution of the United States. This
is the second reason why the rule laid down in Eisner vs. Macomber has no application here.
The majority opinion in discussing this question, says:
There is no question that the Philippine Legislature may provide for the payment of an income tax, but it
cannot, under the guise of an income tax, collect a tax on property which is not an "income." The Philippine
Legislature cannot impose a tax upon "income" only . The Philippine Legislature has no power to provide a
tax upon "automobiles," only, and under that law collect a tax upon a carreton or bull cart. Constitutional
limitations upon the power of the Legislature are not stronger than statutory limitations, that is to say, a
statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose which
is entirely distinct and different. A statute providing for an income tax cannot be construed to cover property
which is not, in fact, income. The Legislature cannot, by a statutory declaration, change the real of a nature
of a tax which it imposes. A law which imposes an importation tax on rice only cannot be construed to
impose an importation tax on corn.
These assertions while in the main true are, perhaps, a little to broadly stated; much will depend on the
circumstances of each particular case. If the Legislature cannot do the things enumerate it must be by reason of the
limitation imposed by the Organic Act, "That no bill which may be enacted into law shall embrace more than on
subject, and that subject shall be expressed in the title of the bill." Similar provisions are contained in most State
Constitutions, their object being to prevent "log-rolling" and the passing of undesirable measures without their being
brought properly to the attention of the legislators. Where the prevention of this mischief is not involved, the courts
have uniformly given such provisions a very liberal construction and there are few, if any, cases where a statute has
been declared unconstitutional for dealing with several cognate subjects in the same Act and under the same title.
(Lewis Sutherland on Statutory Construction, 2d ed., pars 109 et seq.: Government of the Philippine Island vs.
Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia, 32, Phil., 634). Certainly no income tax
statute would be declared unconstitutional on that ground for treating dividends as income and providing for their
taxation as such.
Reverting to the question of the nature of income, it is argued that a stock certificate has no intrinsic value and that,
therefore, even it is based on earnings instead of increment in capital it cannot be regarded as income. But neither
has a bank check or a time deposit certificate any intrinsic value, yet it may be negotiated, or sold, or assigned and it
represents a cash value. So also does a stock certificate. A lawyer might take his fee in stock certificates instead of in
money. Would it be seriously contended that he had received no fee and that his efforts had brought no
income?1awph!l.net
Some of the members of the court agree that stock dividends based on earnings or profits may be taxed as income,
but take the view that in an action against the Collector of the Internal Revenue for recovering back taxes paid on
non-taxable stock dividends, the plaintiff need not allege that the stock dividends are not base on earnings or profits
distributed, but that question of the taxability or non-taxability of the stock dividends is a matter of defense and should
be set up by the defendant by way of answer.
I think this view is erroneous. If some stock dividends are taxable and others are not, an allegation that stock
dividends in general have been taxed is not sufficient and does not state a cause of action. the presumption is that
the tax has been legally collected and the burden is upon the plaintiff both to allege and prove facts showing that the
collection is unlawfully or irregular. (Code of Civil Procedure, sec. 334, subsec. 14 and 31.)
Malcolm, J., concurs.
————
JOHNS, J., dissenting:
We have studied and analyzed with care the able and exhaustive majority opinion written by Mr. Justice Johnson.
In the final analysis, the question involved is whether the words "which stock dividend shall be considered income, to
the amount of its cash value" are to be construed as meaning the same things as the words "stock dividend shall be
considered income, to the amount of the earnings or profits distributed," as the majority opinion says. The first is an
Act of Congress defining what is a stock dividend, and that the word dividend shall be construed as income to the
amount of its cash value. It is upon that construction and that definition that the majority opinion is founded. That is
the definition of the words as used in an Act of Congress. The other is an Act defining the meaning of the words as
used in an Act of Congress. The other is an Act defining the meaning of the words by the Legislature of the Philippine
Islands, and it says: "Stock dividend shall be considered income, to the amount of the earnings or profits distributed."
It is true, as the majority opinion says, that in enacting the Income Tax Law of the Philippine Islands, the Legislature
had before it the Act of Congress. But it is also true that by the Act of the Philippine Legislature "Stock dividend shall
be considered income, to the amount of the earnings or profits distributed." One law is founded upon the actual cash
value of the stock and the other is founded upon distributed earnings and profits.
Much is said in the textbooks and by the numerous decisions cited in the majority opinion as to the meaning of the
word income, and the decision in the United States are founded upon the meaning of that word, as it is used in the
Act of Congress, and to the effect that the word is to be construed in its usual and ordinary meaning. But assuming
that to be true, it must also be conceded that the Legislature of the Philippine Islands has a legal right to define the
meaning of the word "income" by a legislative act, and when its meaning is defined by legislative act, it is the duty of
the courts to follow that definition regardless of whether it is the usual and ordinary meaning of the word, and therein
lies the distinction between the two acts and the reason why the authorities cited in the majority opinion are not in
point. Act No. 2833 of the Philippine Legislature specifically says that "Stock dividend shall be considered income, to
the amount of the earnings or profits distributed." The Act of Congress is founded upon the "cash value of the stock,"
and the Act in question is founded upon "the amount of the earnings or profits distributed."
Hence, then, we have the meaning of the words defined in the legislative act, and it is very apparent that the purpose
and intent of the legislative act was to avoid the meaning and construction of such words which is now given to them
in the majority opinion. The Legislature had the power to define the meaning of the words, did define them, and it is
the duty of the courts to follow and adopt the meaning and definition of the words given to them in the legislative act.
As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the legislative power for taxation
purposes, which exist in the United States, does not exist in the Philippine Islands. There is no organic law here
similar to the provisions of the Constitution of the United States which require direct taxes on property to be levied in
a specific way, in other words, the restrictions and limitations placed on the power to levy an income tax under the
Constitution of the United States do not exist in the Philippine Islands. Hence, it must follow that the authorities cited
in the majority opinion are not in point the instant case. They are founded upon different language, different organic
powers, different conditions, and the different meaning of the same words as defined in the different legislative acts.
The Philippine Legislature had a legal right to define the meaning of the words "dividend" and "income," and it
expressly says "Stock dividend shall be considered income, to the amount of the earnings or profits distributed." In
the instant case, the earnings and profits of the corporation were distributed among the existing stockholders of the
company upon a pro rata basis, and they were made exclusively out of "distributed earnings and profits." The
declaring of the dividend was a matter in the sole discretion of the stockholders, but when such a dividend is made
from and out of "earnings or profits distributed," it then becomes and is an income within the meaning of Act No.
2833, and should be subject to an income tax.
For such reason, I dissent.
CIR V BOAC & CTA
Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision
of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent BOAC from the
sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the Philippines gas become
moot after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on foreign corporations,
international carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-½% on their
gross Philippine billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as
to the present 2-½% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC),
a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for
Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of the
BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC to Philippine income
taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or alternatively,
as a "non-resident foreign corporation," but rather on whether or not such income is derived from "source within the
Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an
office or place of business in the Philippines is subject to Philippine income taxation only in respect of income
derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"),
as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. — A foreign corporation engaged in trade or business with in the
Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied,
collected, and paid annually upon the total net income received in the preceeding taxable year from
all sources within the Philippines by every corporation organized, authorized, or existing under the
laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more
Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life insurance company, engaged in trade or 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 within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative
annual or periodical gains, profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign
corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to
income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine
source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC
is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical
sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which
produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign
reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had
for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines. — [T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. —4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was
theindemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system.
The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was
subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text
on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the activities or property
which produce the income. If the income is from labor (services) the place where the labor is
done should be decisive; if it is done in this counrty, the income should be from "source within the
United States." If the income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from "source within the United
States". If the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the activities or property
which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue or is derived must
be situated within the jurisdiction so that the source of the income may be said to have a situs in
this country. The underlying theory is that the consideration for taxation is protection of life and
propertyand that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two
possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows:
the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code
reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. — The following items of gross income shall
be treated as gross income from sources within the Philippines:
xxx xxx xxx
 (3) Services. — Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the
following manner:
(c) Gross income from sources without the Philippines. — The following items of gross income shall
be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a juridical
person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue Regulations
to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines. — Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the Philippines,
or (2) from the sale of personnel property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and partly from sources
without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code
which "was based upon a recognition that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived
from transportation or other services rendered entirely outside the Philippines must be treated as derived entirely
from sources without the Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first promulgated by the Department of
Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:
Section 155. Compensation for labor or personnel services. — Gross income from sources within
the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for services
was made, or of the place of payment — (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species
of foreign transportation companies — i.e., foreign steamship companies deriving income from sources partly within
and partly without the Philippines:
Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines of
all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship
and telegraph and cable services rendered between points both outside the Philippines give rise to income wholly
from sources outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the
purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the Philippines
or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the place where the
sale of such personal property occurs; and (b) the place where such personal property was produced or
manufactured. If the personal property involved was both produced or manufactured and sold outside the Philippines,
the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the personal
property had been produced outside the Philippines, or if the sale of the property takes place outside the Philippines
and the personal was produced in the Philippines, then, the income derived from the sale will be deemed partly as
income sourced without the Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the Philippines. Thus, Section 37 (e) of the
Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code
provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the Philippines or
from the purchase of personal property without and its sale within the Philippines, shall be treated
as derived entirely from sources within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the property is
marketed. This Section does not apply to income from the sale personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in
part) by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the
Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales of airline
tickets") or as entering into a lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service,
i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter
of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies
wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from BOAC, which
prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the
Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really
the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC
properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be
regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules"
specifically and precisely applicable to the rendition of services must preclude the application here of "source rules"
applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized as derived
from a "service", rather than from an "activity" (a broader term than service and including the activity of selling) or
from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by
Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated
on 21 April 1978, in the following manner:
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceeding taxable year
from all sources within the Philippines: Provided, however, That international carriers shall pay a
tax of two and one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide 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 revenues 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 to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers
who stay in the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis
supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or points in the Philippines are treated
in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly
without the Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income taxation,
the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2-½
per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the amount
of taxes collectible by the state is sometimes, with varying degrees of consciousness, considered in choosing from
among competing possible characterizations under or interpretation of tax statutes. It is hence perhaps useful to point
out that the determination of the appropriate characterization here — that of contracts of air carriage rather than sales
of airline tickets — entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint decision
of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority opinion penned by
Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent BOAC from the
sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the Philippines gas become
moot after November 24, 1972. Booth opinions state that by amendment through P.D. No.69, promulgated on
November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on foreign corporations,
international carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-½% on their
gross Philippine billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as
to the present 2-½% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC),
a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for
Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of the
BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC to Philippine income
taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or alternatively,
as a "non-resident foreign corporation," but rather on whether or not such income is derived from "source within the
Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an
office or place of business in the Philippines is subject to Philippine income taxation only in respect of income
derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"),
as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. — A foreign corporation engaged in trade or business with in the
Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied,
collected, and paid annually upon the total net income received in the preceeding taxable year from
all sources within the Philippines by every corporation organized, authorized, or existing under the
laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more
Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life insurance company, engaged in trade or 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 within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative
annual or periodical gains, profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign
corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to
income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine
source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC
is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical
sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which
produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign
reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had
for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines. — [T]he reinsurance, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. —4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was
theindemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax system.
The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was
subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text
on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item is from "source within the
United States" and suggest an investigation into the nature and location of the activities or property
which produce the income. If the income is from labor (services) the place where the labor is
done should be decisive; if it is done in this counrty, the income should be from "source within the
United States." If the income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from "source within the United
States". If the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent
statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of the activities or property
which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue or is derived must
be situated within the jurisdiction so that the source of the income may be said to have a situs in
this country. The underlying theory is that the consideration for taxation is protection of life and
propertyand that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two
possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows:
the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code
reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. — The following items of gross income shall
be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. — Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the
following manner:
(c) Gross income from sources without the Philippines. — The following items of gross income shall
be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a juridical
person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue Regulations
to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines. — Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the Philippines,
or (2) from the sale of personnel property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and partly from sources
without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code
which "was based upon a recognition that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived
from transportation or other services rendered entirely outside the Philippines must be treated as derived entirely
from sources without the Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first promulgated by the Department of
Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:
Section 155. Compensation for labor or personnel services. — Gross income from sources within
the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for services
was made, or of the place of payment — (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species
of foreign transportation companies — i.e., foreign steamship companies deriving income from sources partly within
and partly without the Philippines:
Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines of
all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship
and telegraph and cable services rendered between points both outside the Philippines give rise to income wholly
from sources outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the
purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the Philippines
or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the place where the
sale of such personal property occurs; and (b) the place where such personal property was produced or
manufactured. If the personal property involved was both produced or manufactured and sold outside the Philippines,
the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the personal
property had been produced outside the Philippines, or if the sale of the property takes place outside the Philippines
and the personal was produced in the Philippines, then, the income derived from the sale will be deemed partly as
income sourced without the Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the Philippines. Thus, Section 37 (e) of the
Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code
provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the Philippines or
from the purchase of personal property without and its sale within the Philippines, shall be treated
as derived entirely from sources within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the property is
marketed. This Section does not apply to income from the sale personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in
part) by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the
Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales of airline
tickets") or as entering into a lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service,
i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter
of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies
wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from BOAC, which
prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the
Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really
the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC
properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be
regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules"
specifically and precisely applicable to the rendition of services must preclude the application here of "source rules"
applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized as derived
from a "service", rather than from an "activity" (a broader term than service and including the activity of selling) or
from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by
Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated
on 21 April 1978, in the following manner:
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceeding taxable year
from all sources within the Philippines: Provided, however, That international carriers shall pay a
tax of two and one-half per cent on their gross Philippine billings. "Gross Philippines of passage
documents sold therein, whether for passenger, excess baggege or mail, provide 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 revenues 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 to revenues
from chartered flights, the term "originating from the Philippines" shall include flight of passsengers
who stay in the Philippines for more than forty-eight (48) hours prior to embarkation. (Emphasis
supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or points in the Philippines are treated
in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly
without the Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income taxation,
the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2-½
per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the amount
of taxes collectible by the state is sometimes, with varying degrees of consciousness, considered in choosing from
among competing possible characterizations under or interpretation of tax statutes. It is hence perhaps useful to point
out that the determination of the appropriate characterization here — that of contracts of air carriage rather than sales
of airline tickets — entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.