G.R. No. L-72443. January 29, 1988.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AIR INDIA and THE COURT OF TAX APPEALS, respondents.

FACTS

Air India, a foreign corporation not licensed to do business in the Philippines and operating as an off-line international carrier without landing rights, sold airplane tickets in the Philippines through its general sales agent, Philippine Air Lines, Inc. The transportation services were rendered entirely outside Philippine territory. For the fiscal year ending March 31, 1976, these sales amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed Air India for deficiency income tax, arguing these gross Philippine billings constituted income from sources within the Philippines under Section 24(b)(2) of the National Internal Revenue Code, and imposed a 50% surcharge and interest for alleged willful neglect to file a return.
Air India appealed to the Court of Tax Appeals (CTA), contending it derived no income from Philippine sources as the service—air transportation—was performed outside the country. The CTA ruled in favor of Air India, setting aside the assessment. It held that the income situs for service income is the place of service performance, not the place of payment, and taxing income from services rendered abroad would violate the Tax Code and constitutional due process. The CTA also ruled the surcharge and interest improper, finding no evidence of willful neglect or fraudulent intent to evade tax.

ISSUE

Whether revenue from ticket sales in the Philippines by an off-line international carrier, for transportation services rendered abroad, constitutes taxable income from Philippine sources under Section 24(b)(2) of the National Internal Revenue Code.

RULING

The Supreme Court REVERSED the CTA decision and held Air India liable for deficiency tax. The Court ruled that the gross revenue from ticket sales in the Philippines constitutes income from sources within the Philippines and is subject to the 2.5% tax on gross Philippine billings under Section 24(b)(2). Citing the precedent in Commissioner of Internal Revenue v. British Overseas Airways Corporation, the Court applied the “source of income” rule, which considers the income source as the activity that produced the income. The sale of tickets in the Philippines is the income-producing activity, making the revenue Philippine-sourced, regardless of where the transportation service is physically rendered. The place of sale, not the place of service performance, determines the income situs for tax purposes.
Regarding the surcharge and interest, the Court modified the assessment. It upheld the imposition of a 25% surcharge (not 50%) under Section 72, as there was no finding of willful neglect, but mere failure to file. However, it sustained the imposition of interest on the deficiency, as interest is compensatory, not punitive, compensating the government for the delay in tax payment. The Court recomputed the total liability, including applicable interest under Presidential Decree No. 1705, and ordered Air India to pay the deficiency tax, surcharge, and interest.