8/31/2016 G.R.No.

60714

TodayisWednesday,August31,2016

RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.60714March6,1991

COMMISSIONEROFINTERNALREVENUE,petitioner
vs.
JAPANAIRLINES,INC.,andTHECOURTOFTAXAPPEALS,Respondents.

TheSolicitorGeneralandAttys.F.R.Quiogue&F.T.Dumpit,forrespondents

PARAS,J.:

This petition for review seeks the reversal of the decision* of the Court of Tax Appeals in CTA Case No. 2480
promulgated on January 15, 1982 which set aside petitioner's assessment of deficiency income tax inclusive of
interest and surcharge as well as compromise penalty for violation of bookkeeping regulations charged against
respondent.

Theantecedentalfactsofthecaseareasfollows:

RespondentJapanAirLines,Inc.(hereinafterreferredtoasJALforbrevity),isaforeigncorporationengagedin
the business of international air carriage. From 1959 to 1963, JAL did not have planes that lifted or landed
passengersandcargointhePhilippinesasithadnotbeengrantedthenbytheCivilAeronauticsBoard(CAB)a
certificate of public convenience and necessity to operate here. However, since midJuly, 1957, JAL had
maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was
maintainedmerelyforthepromotionofthecompany'spublicrelationsandtohandoutbrochures,literatureand
otherinformationplayinguptheattractionsofJapanasatouristspotandtheservicesenjoyedinJALplanes.

OnJuly17,1957,JALconstitutedthePhilippineAirLines(PAL),asitsgeneralsalesagentinthePhilippines.As
anagent,PAL,amongotherthings,soldforandinbehalfofJAL,planeticketsandreservationsforcargospaces
whichwereusedbythepassengersorcustomersonthefacilitiesofJAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from petitioner
CommissionerofInternalRevenue(hereinafterreferredtoasCommissionerforbrevity),alldatedFebruary28,
1972,foratotalamountofP2,099,687.52inclusiveof50%surchargeandinterest,foryears1959through1963,
computedasfollows:

195919601961

NetincomeperP472,025.16P476,671.48P734,812.77
investigation

Taxduethereon133,608.00135,001.00212,444.00

Add:50%surch.66,804.0067,500.50106,222.00
1/2%mo.int.

(3yrs.)24,049.4424,300.1838,239.92

TotaldueP224,461.44P226,801.68P356,905.92

=================================

19621963SUMMARY

NetincomeperP1,065,641.63P1,550,230.48P224,461.44

investigation

Taxduethereon311,692.00457,069.00226,801.68

Add:50%surch.155,846.00228,534.50356,905.92

1/2%mo.int.523,642.56

(3yrs.)

56,104.5682,272.42767,875.92

TotaldueP523,642.56P767,875.92P2,099,687.52

======================================

CompromisePenaltyP1,500.00
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On June 19, 1972, JAL protested said assessments alleging that as a nonresident foreign corporation, it was
taxableonlyonincomefromPhilippinesourcesasdeterminedunderSection37oftheTaxCode,andtherebeing
no such income during the period in question, it was not liable for the deficiency income tax liabilities assessed
(Rollo, pp. 5355). The Commissioner resolved otherwise and in a letterdecision dated December 21, 1972,
deniedJAL'srequestforcancellatonoftheassessment(Ibid.,p.29).

JALtherefore,elevatedthecasetotheCourtofTaxAppealswhich,inturn,reversedthedecision(Ibid.,pp.51
76) and thereafter denied the motion for reconsideration filed by the Commissioner (Ibid., p. 77). Hence, this
petition.

Petitionerraisestwoissuesinthiswise:

1.WHETHERORNOTPROCEEDSFROMSALESOFJAPANAIRLINESTICKETSSOLDINTHEPHILIPPINES
ARETAXABLEASINCOMEFROMSOURCESWITHINTHEPHILIPPINES.

2.WHETHERORNOTJAPANAIRLINESISAFOREIGNCORPORATIONENGAGEDINTRADEORBUSINESS
INTHEPHILIPPINES.

Thepetitionisimpressedwithmerit.

TheissuesinthecaseatbarhavealreadybeenlaidtorestinnolessthanthreecasesresolvedbythisCourt.
Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British Overseas Airways
Corporation(G.R.No.L6577374,April30,1987,149SCRA395)hascategoricallyruled:

"TheTaxCodedefines`grossincome'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,ordealingsinproperty,whetherrealorpersonal,growingoutoftheownership
oruseoforinterestinsuchpropertyalsofrominterests,rents,dividends,securities,orthetransactionof
anybusinesscarriedonforgainorprofit,orgains,profitsandincomederivedfromanysourcewhatever"
(Sec.29(3)Emphasissupplied)

"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'itistheamountofmoneycomingtoapersonwithinaspecifictimexxxitmeanssomething
distinctfromprincipalorcapital.For,whilecapitalisafund,incomeisaflow.Asusedinourincometaxlaw,
`income' refers to the flow of wealth (Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil. 414
[1918]).

"xxxxxx

"xxxxxx

"Thesourceofanincomeistheproperty,activityorservicethatproducedtheincome.Forthesourceof
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
producestheincome.Theticketsexchangedhandshereandpaymentsforfareswerealsomadeherein
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.Inconsiderationofsuchprotection,theflowofwealthshouldsharetheburdenofsupporting
thegovernment.

"xxxxxx

"True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines.

Section 37, by its language does not intend the enumeration to be exclusive. It merely directs that the types of
incomelistedthereinbetreatedasincomefromsourceswithinthePhilippines.Acursoryreadingofthesection
willshowthatitdoesnotstatethatitisanallinclusiveenumeration,andthatnootherkindofincomemaybeso
considered(BritishTradersInsuranceCo.,Ltd.vs.CommissionerofInternalRevenue,13SCRA719[1965]).

"xxxxxx

"TheabsenceofflightoperationstoandfromthePhilippinesisnotdeterminativeofthesourceofincomeor
thesitusofincometaxation.xxxThetestoftaxabilityisthe`source'andthesourceofanincomeisthat
activityxxxwhichproducedtheincome(Howden&Co.,Ltd.vs.CollectorofInternalRevenue,13SCRA
601[1965]).Unquestionably,thepassagedocumentationsinthesecasesweresoldinthePhilippinesand
therevenuetherefromwasderivedfromabusinessactivityregularlypursuedwithinthePhilippines.xxx
The word `source' conveys one essential Idea, that of origin, and the origin of the income herein is the
Philippines(ManilaGasCorporationvs.CollectorofInternalRevenue,62Phil.895[1935])."

TheaboverulingwasadoptedentotointhesubsequentcaseofCommissionerofInternalRevenuevs.AirIndia
and the Court of Tax Appeals (G.R. No. L72443, January 29, 1988, 157 SCRA 648) holding that the revenue
derivedfromthesalesofairplaneticketsthroughitsagentPhilippineAirLines,Inc.,hereinthePhilippines,must
beconsideredtaxableincome,andmorerecently,inthecaseofCommissionerofInternalRevenuevs.American
Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was likewise
declared that for the source of income to be considered as coming from the Philippines, it is sufficient that the
incomeisderivedfromactivitieswithinthiscountryregardlessoftheabsenceofflightoperationswithinPhilippine
territory.

Verily, JAL is a residentforeigncorporation under Section 84 (g) of the NationalInternalRevenue Code of1939.
Definitionofwhata resident foreign corporation is was likewise reproduced under Section 20 of the 1977 Tax
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Code.

TheBOACDoctrinehasexpressedinunqualifiedterms:

"UnderSection20ofthe1977TaxCode:

"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade or business
withinthePhilippinesorhavinganofficeorplaceofbusinesstherein.

"(i) the term `nonresident foreign corporation' applies to a foreign corporation not engaged in trade or
businesswithinthePhilippinesandnothavinganyofficeorplaceofbusinesstherein."

"xxx.Thereisnospecificcriterionastowhatconstitutes`doing'or`engagingin'or`transacting'business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies
continuityofcommercialdealingsandarrangements,andcontemplates,tothatextent,theperformanceof
actsorworksortheexerciseofsomeofthefunctionsnormallyincidentto,andinprogressiveprosecution
ofcommercialgainorforthepurposeandobjectofthebusinessorganization(TheMentholatumCo.,Inc.,
etal.vs.AnacletoMangaliman,etal.,72Phil.524(1941)Section1,R.A.No.5455).Inorderthataforeign
corporation may be regarded as doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of a local agent, and not one of a
temporary character (Pacific Micronesian Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing
ThompsononCorporations,Vol.8,3rded.,pp.844847andFisher'sPhilippineLawofStockCorporation,
p.415).

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be no
conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines. Indeed, the
saleofticketsistheverylifebloodoftheairlinebusiness,thegenerationofsalesbeingtheparamountobjective
(Commissioner of Internal Revenue vs. British Overseas Airways Corporation, supra). The case of CIR vs.
AmericanAirlines,Inc.(supra)sumsitupasfollows:

"x x x, foreign airline companies which sold tickets in the Philippines through their local agents, whether
called liaison offices, agencies or branches, were considered resident foreign corporations engaged in
trade or business in the country. Such activities show continuity of commercial dealings or arrangements
andperformanceofactsorworksortheexerciseofsomefunctionsnormallyincidenttoandinprogressive
prosecutionofcommercialgainorforthepurposeandobjectofthebusinessorganization."

Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Internal Revenue Code of
1939",theapplicablelawinthecaseatbar,residentforeigncorporationsaretaxedthirtypercentum(30%)upon
theamountbywhichtheirtotalnetincomeexceedonehundredthousandpesos.JALisliabletopay30%ofits
totalnetincomefortheyears1959through1963ascontradistinguishedfromthecomputationarrivedatbythe
Commissionerasshownintheassessment.Apparently,theCommissionerfailedtospecifythetaxbaseonthe
totalnetincomeofJALinfiguringoutthetotalincomedue,i.e.,whether25%or30%level.

HavingestablishedthetaxliabilityofrespondentJAL,theonlythinglefttodetermineistheproprietyofthe50%
surchargeimposedbypetitioner.Itappearsthatthismustbeansweredinthenegative.AsheldinthecaseofCIR
vs.AirIndia(supra):

"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
prescribedbythelaw,orwhowillfullyfilesafalseorfraudulenttaxreturn,xxx.

"xxxxxx

"Ontheotherhand,thesameSectionprovidesthatifthefailuretofiletherequiredtaxreturnisnotdueto
willfulneglect,apenaltyof25%istobeaddedtotheamountofthetaxduefromthetaxpayer."

NowhereintherecordsofthecasecanbefoundthatJALdeliberatelyfailedtofileitsincometaxreturnsforthe
yearscoveredbytheassessment.Therewasnotevenanattemptbypetitionertoprovethesameorjustifythe
impositionofthe50%surcharge.Allthatpetitionerdidwastocitetheprovisionoflawuponwhichthesurcharge
wasbasedwithoutexplainingwhyitwasapplicabletorespondent'scase.Suchcannotbecountenancedformere
allegationsaredefinitelynotacceptable.Thewillfulneglecttofiletherequiredtaxreturnorthefraudulentintentto
evade the payment of taxes, considering that the same is accompanied by legal consequences, cannot be
presumed (CIR vs. Air India, supra). The fraud contemplated by law is actual and constructive. It must be
intentionalfraud,consistingofdeceptionwillfullyanddeliberatelydoneorresortedtoinordertoinduceanotherto
giveupsomelegalright.Negligence,whetherslightorgross,isnotequivalenttothefraudwithintenttoevade
thetaxcontemplatedbythelaw.Itmustamounttointentionalwrongdoingwiththesoleobjectofevadingthetax
(Aznarv.CourtofTaxAppeals,G.R.No.L20569,August23,1974,58SCRA519).Thiswasnotproventobeso
inthecaseofJALasitbelievedingoodfaiththatitneednotfilethetaxreturnforithadnotaxableincomethen.
The element of fraud is lacking. At most, only negligence may be imputed to JAL for not ascertaining the
dispensabilityoffilingthetaxreturns.Assuch,JALmaybesubjectedonlytothe25%surchargeprescribedbythe
aforequotedlaw.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code then in force which
states:

(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall be assessed at the
sametimeasthedeficiencyandshallbepaiduponnoticeanddemandfromtheCommissionerofInternal
Revenueandshallbecollectedasapartofthetax,attherateofsixpercentumperannumfromthedate
prescribedforthepaymentofthetaxxxxPROVIDED,Thatthemaximumamountthatmaybecollected
asinterestondeficiencyshallinnocaseexceedtheamountcorrespondingtoaperiodofthreeyears,the
presentprovisionsregardingprescriptiontothecontrarynotwithstanding.

The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly computed such
interestequivalenttothreeyearswhichisthemaximumsetbythelaw.

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On the other hand, the compromise penalty amounting to P1,500.00 for violation of bookkeeping regulations
appears to be without support. The particular provision in the said regulations allegedly violated was not even
specified. Furthermore, the term "compromise penalty" itself is not found among the penal provisions of the
Bookkeeping Regulations (Revenue Regulations No. V1, as amended, March 17, 1947, pp. 836837, Revenue
Regulations Updated by Prof. Eustaquio Ordono, 1984). The compromise penalty is therefore, improperly
imposed.

In sum, the following schedule as recomputed illustrates the total tax liability of the private respondent for the
years1959through1963

NetIncome30%ofNetIncomeasAdd25%surchargeAdd6%interestperSummary of Total Income Tax Due

underunderSec.72NIRCannumforamaximumTaxDuefromthe
Secs.24(a)and(b)of1939of3yearsunderPrivateRespondent
(2)NIRCof1939Sec.51(d)NIRCof
1939

1959P472,025.16P141,607.54P35,401.88P25,489.35P202,498.77

1960476,671.48143,001.4435,750.3625,740.25204,492.05

1961734,812.77220,443.8355,110.9539,679.88315,234.66

19621,065,641.63319,692.4879,923.12399,615.60

19631,550,230.48465,069.14116,267.28581,336.42

P1,703,177.40

Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE MILLION
SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVENAND FORTY CENTAVOS
(P1,703,177.40) The dismissal for lack of merit by this Court of the appeal in JAL v. Commissioner of Internal
Revenue(G.R.No.L30041)onFebruary3,1969isnotresjudicatatothepresentcase.TheTaxCourtruledin
thatcasethatthemeresaleoftickets,unaccompaniedbythephysicalactofcarriageoftransportation,doesnot
renderthetaxpayerthereinsubjecttothecommoncarrier'stax.Thecommoncarrier'staxisanexcisetax,being
ataxontheactivityoftransporting,conveyingorremovingpassengersandcargofromoneplacetoanother.It
purportstotaxthebusinessoftransportation.Beinganexcisetax,thesamecanbeleviedbytheStateonlywhen
theacts,privilegesorbusinessesaredoneorperformedwithinthejurisdictionofthePhilippines(Commissioner
ofInternalRevenuev.BritishOverseasAirwaysCorporation,supra).

Thesubjectmatterofthecaseunderconsiderationisincometax,adirecttaxontheincomeofpersonsandother
entities"ofwhateverkindandinwhateverformderivedfromanysource."Sincethetwocasestreatofadifferent
subjectmatter,thedecisioninG.R.No.L30041cannotberesjudicatawithrespecttothiscase.

PREMISESCONSIDERED,(a)thepetitionisGRANTED(b)thedecisionoftheCourtofTaxAppealsinCTACase
No. 2480 is SET ASIDE and (c) private respondent JAL is ordered to pay the amount of P1,703,177.40 as
deficiencytaxesforthefiscalyears1959to1963inclusiveofinterestandsurcharges.

SOORDERED.

Fernan,C.J.,Narvasas,MelencioHerrera,Gutierrez,Jr.,Cruz,Paras,Feliciano,Gancayco,Padilla,Bidin,
Sarmiento,Aquino,Medialdea,Regalado,andDavide,Jr.,JJ.,concur.

Footnotes
*
PennedbyPresidingJudgeAmanteFillerandconcurredinbyAssociateJudgesConstanteC.Roaquin
andAlexZ.Reyes

TheLawphilProjectArellanoLawFoundation

UncheckedArticle

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