G.R. No.

72443 January 29, 1988

The private respondent Air India is a foreign corporation organized under the laws of India. It is not
licensed to do business in the Philippines as an international carrier. Its airplanes do not operate
within Philippine territory nor service passengers embarking from Philippine ports. The firm is
represented in the Philippines by its general sales agent, Philippine Air Lines, Inc., a corporate entity
duly organized under the laws of the Philippines. Air India sells airplane tickets in the Philippine
through this agent. These tickets are serviced by Air India airplanes outside the Philippines. In sum,
Air India's status in the Philippines is that of an off-line international carrier not engaged in the
business of air transportation in the Philippines.

The total sales of airplane tickets transacted by Philippine Air Lines, Inc. for the private respondent
during the fiscal year ending March 31, 1976 amounted to P2,968,156.00. On account of the same,
the herein petitioner Commissioner of Internal Revenue held the private respondent liable for the
payment of P142,471.68. The amount represents the 2.5% income tax on the private respondent's
gross Philippine billings for the said fiscal year pursuant to Section 24 (b) (2) of the National Internal
Revenue Code, as amended, inclusive of the 50% surcharge and interest for willful neglect to file a
return as provided under Section 72 of the same code.

Respondents contention: It cannot be held liable to pay the said imposition because it did not
derive any income from sources with the Philippines during the said fiscal year and that the amount of
P2,968,156.00 mentioned in the assessment made by the petitioner was derived exclusively from
sources outside the Philippines.

Petitioners contention: It was realized in the Philippines and was, therefore, derived from sources
within the Philippines. Petitioner also stressed that in case of any doubt, the presumption is that the
tax assessment is correct.

Court of Tax Appeals ruled in favor of the private respondent and set aside the decision of the
petitioner. The tax court likewise held that the surcharge and interest imposed upon the private
respondent are improper.

ISSUE: Whether or not 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
the said international air carrier from Philippine sources and, accordingly, taxable under Section 24 (b)
(2) of the National Internal Revenue Code.

HELD: Yes.

This issue has been settled in the affirmative in Commissioner of Internal Revenue v. British Overseas
Airways Corporation. This Court, speaking, through Mme. Justice Ameurfina A. Melencio-Herrera, held
that such revenue constitutes taxable income. The pertinent portions of the said Decision are as for
follows-

The Tax Code defines gross income thus:

"Gross Income" includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or
from profession, vocations, trades, business, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such
property; also from interests, rents, dividends, securities or the transactions of any
business carried on for gain or profit, or gains, profits, and income derived from any
source whatever. ...
 The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words "income from any source whatever" disclose a legislative
policy to include all income not expressly exempted within the class of taxable income
under our laws." Income means "cash received or its equivalent"; it is the amount of
money coming to a person within a specific time ...; it means something distinct from
principal or capital. For, while capital is a fund, income is a flow. As used in our income
tax law, "income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's
case, the sale of tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting the government.

BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the services
are rendered determines the source; and since BOAC's service of transportation is
performed outside the Philippines, the income derived is from sources without the
Philippines and, therefore, not taxable under income tax laws, ...

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the income.

The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines.

The revenue derived by the private respondent Air India from the sales of airplane tickets through its
agent Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income. As
correctly assessed by the petitioner, such income is subject to a 2.5% tax pursuant to Presidential
Decree No. 1355, amending Section 24 (b) (2) of the tax code. The total Philippine billings of the
private respondent for the taxable year in question amounts to P2,968,156.00. 2.5% of this amount
or P74,203.90 constitutes the income tax due from the private respondent.

The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue Code is
imposed on a delinquent taxpayer who willfully neglects to file the required tax return within the
period prescribed by the law, or who willfully files a false or fraudulent tax return.

On the other hand, the same Section provides that if the failure to file the required tax return is not
due to willful neglect, a penalty of 25% is to be added to the amount of the tax due from the
taxpayer.

There being no cogent basis to find willful neglect to file the required tax return on the part of the
private respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless,
such failure subjects the private respondent to a 25% penalty pursuant to Section 72.

INTEREST

As for the interest which the private respondent is liable to pay, We find the 42% interest assessed by
the petitioner to be in order. At the time the tax liability of the private respondent accrued, Section 51
(d) of the tax code, before it was amended by Presidential Decree No. 1705 prescribed an interest rate
of 4% per annum, provided that the maximum amount that could be collected as interest on the tax
deficiency will not exceed the amount corresponding to a period of three years. Thus, the maximum
interest rate then was 42%.

DEFICIENCY

Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section 51 (d). This
view can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed in
connection therewith under paragraph (d) of this section" in Section 51 (e) (2). The additional interest
is to be computed upon the entire amount of the tax liability (previous interest included) which
remains unpaid. This is manifested by the use of the phrase "there shall be collected upon the unpaid
amount as part of the tax" in Section 51 (e) (2). However, the same Section provides that the
maximum amount that may be collected as interest cannot exceed the amount corresponding to a
period of three years. In this case, the maximum rate would be 60%.

SURCHARGE

An examination of Section 51 (e) (3) reveals that this surcharge is imposed for the late payment of
the unpaid tax deficiency and/or unpaid interest assessed in connection therewith, in addition to all
other charges. This is confirmed by the use of the words "there shall be collected in addition to the
interest prescribed herein [referring to the entire Section 51 (e)] and in paragraph (d) above
[referring to Section 51 (d)]." The additional surcharge is computed on the amount of tax unpaid,
exclusive of all other impositions. This is confirmed by the phrase "ten per centum of the amount of
tax unpaid." The failure to pay the tax deficiency within the required period of time upon demand is
penalized by this additional surcharge. Upon such failure to pay, the surcharge is automatically due;
its imposition is mandatory.

Under the aforementioned provisions of the tax code, the private respondent became liable to pay the
additional interest provided in Section 51 (e) (2) and the 10% surcharge provided in Section 51 (e)
(3) thirty days after February 20, 1981, the date when the Commissioner of Internal Revenue sought
the payment of the deficiency. More than three years have passed since and yet the account remains
unsettled. Thus, the additional interest and surcharge can be imposed on the private respondent as
asserted by the petitioner. Presidential Decree No. 1705 took effect on August 1, 1980. It was,
therefore, the law in effect when the additional interest and surcharge could be legally imposed on the
private respondent.

The three-year or 60% maximum interest provided in Section 51 (e) (2) calls for application. It is
computed against the total amount unpaid by the private respondent.

The private respondent Air India is hereby ordered to pay the amount of P235,374.94 as deficiency
tax, inclusive of interest and surcharges. We make no pronouncement as to costs.