Air Canada vs.

CIR (2005)

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: Air Canada is a foreign corporation organized and existing under the
laws of Canada. 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. On July 1, 1999,
Air Canada and Aerotel Ltd., Corporation entered into a Passenger General
Sales Agency (GSA) Agreement for operation the Philippines. 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. Air Canada
contends that it erroneously paid income taxes from the Q3 2000 up to the Q2
2002. With no response received from the BIR, Air Canada elevated its claim to
the CTA on November 29, 2002. 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.

ISSUE:
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)

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.

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.” 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. 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.