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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.

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)

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