CIR vs Air India 157 SCRA 648

Facts:
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. 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. 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.

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

Ruling:
Yes, 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 12 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.