Air Canada vs. CIR (2005) – Palanca-Enriquez, J. [CTA Case] Petitioner: Air Canada Respondent: Collector of Internal Revenue Concept: Gross Income and Exclusions: Income from whatever source Brief Facts: Air Canada was granted an authority to operate as an off-line carrier by the Civil Aeronautics Board (CAB), and then it entered into a Passenger General Sales Agency (GSA) Agreement with Aerotel Ltd., Corporation for operation in the Philippines. On 2002, Air Canada filed its administrative claim for refund of Php 5,185,676.77 with the BIR, contending that the revenue derived by it from its sales of tickets in the Philippines on its off-line flights through its local General Sales Agent cannot be subject to income tax because the same is not sourced within the Philippines. Doctrine: A foreign airline company selling tickets in the Philippines through their local agents shall be considered as resident foreign corporation engaged in trade or business in the country. The absence of flight operations within the Philippine territory cannot alter the fact that the income received was derived from activities within the Philippines. The test of taxability is the source, and the source is that activity which produced the income. FACTS: 1. Air Canada is a foreign corporation organized and existing under the laws of Canada. 2. Air Canada was granted an authority to operate as an off-line carrier by the Civil Aeronautics Board (CAB) subject to certain conditions, on April 24, 2000, with said authority to expire on April 24, 2005. 3. On July 1, 1999, Air Canada and Aerotel Ltd., Corporation entered into a Passenger General Sales Agency (GSA) Agreement for operation the Philippines. 4. On November 28, 2002, Air Canada filed its administrative claim for refund with the Bureau of Internal Revenue (BIR) in the total amount of Php 5,185,676.77. 5. Air Canada contends that it erroneously paid income taxes from the Q3 2000 up to the Q2 2002. 6. With no response received from the BIR, Air Canada elevated its claim to the CTA on November 29, 2002. 7. Air Canada: The revenue derived by it from its sales of tickets in the Philippines on its off-line flights through its local General Sales Agent cannot be subject to income tax because the same is not sourced within the Philippines.
RATIO: 1. YES. Such revenue constitutes taxable income. This issue has already been laid to rest in a number of cases by the SC, one of which is the landmark case of CIR v. British Overseas Airways Corporation. Although Air Canada is not liable to pay the tax as an international air carrier (2.5% on gross Phil. Billings), it is still liable to pay income tax as a resident foreign corporation. An off-line international carrier with a General Sales Agent (GSA) in the Philippines may be considered a resident foreign corporation taxable at 32% on taxable income derived from Philippine sources. The GSA’s functions include, among others, solicitation, promotion and sale of air passenger services. o Such activities show continuity of commercial dealings and the exercise of functions in pursuit of commercial gain. Moreover, Revenue Regulations No. 6-78 has elaborated that the phrase “doing business in the Philippines” includes “regular sale of tickets in the Philippines by off-line international airlines, either by themselves or through their agents.” o On the other hand, income from sale of tickets in the Philippines is considered Philippine sourced. The test of taxability is the “source” and the source of an income is the activity which produced the income. o The sale of tickets in the Philippines is the activity that produces the income. Further, by appointment of a GSA whose premises are used as outlet for selling tickets, the off-line carrier may be deemed to have a permanent establishment in the Philippines, hence taxable on Philippine sourced income. DISPOSITIVE: The petition is DENIED and DISMISSED. Digested by: André
ISSUES: 1. WON the revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation, while having no landing rights in the country, constitutes income of said international air carrier from Philippine source, and accordingly, taxable under Sec. 24(b)(2) of the National Revenue Code. (YES) 1
