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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.

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 GSAs 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: Andr

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)
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