National Tobacco Administration vs. Commission on Audit

CNA Signing Incentives granted by government-owned and controlled corporations are prohibited signing bonuses when they are not sourced from actual savings generated from cost-cutting measures identified in the CNA. The grant of CNA incentives requires compliance with all conditions under DBM Budget Circular No. 2006-1, including the existence of actual savings from released MOOE allotments, and mere reduction of operating losses or excess of actual expenses over approved budget levels does not constitute valid savings. Payees of disallowed CNA incentives are liable to return the amounts received, and the defense of good faith is not available to recipients of disallowed amounts.

The National Tobacco Administration (NTA) is a government-owned and controlled corporation (GOCC) created and organized pursuant to Executive Order Nos. 116 and 245, Series of 1987. On December 19, 2002, NTA and the Employees Association of the National Tobacco Administration (EANTA), the sole and exclusive negotiating representative of NTA's rank-and-file employees, entered into a CNA effective for five years. The 2002 CNA provided for a "Signing Bonus" under Article XXIV, subject to availability of savings and in accordance with existing guidelines. The parties subsequently executed a renegotiated CNA on March 25, 2010, effective for another five years, which included a stipulation for a CNA Signing Incentive of P50,000.00 each for all rank-and-file employees and management officials.

The National Tobacco Administration (NTA) is a government-owned and controlled corporation created under Executive Order Nos. 116 and 245, Series of 1987. On December 19, 2002, NTA and the Employees Association of the National Tobacco Administration (EANTA), the sole and exclusive negotiating representative of NTA's rank-and-file employees, entered into a CNA effective for five years. Article XXIV of the 2002 CNA provided for a "Signing Bonus" in an amount to be agreed between the agency and the association, subject to availability of savings and in accordance with existing guidelines.

On March 25, 2010, the parties executed a renegotiated CNA effective for another five years. Article XXIII of the 2010 CNA provided for a CNA Signing Incentive of P50,000.00 each to all rank-and-file employees and management officials, with 50% released upon signing and the remaining 50% released upon further determination of corporate savings, subject to availability of funds. On the same day the 2010 CNA was executed, NTA-National paid CNA Signing Incentives amounting to P405,000.00, and within the next three months released additional incentives in the aggregate amount of P4,325,000.00.

Upon post-audit, COA Audit Team Leader Divina M. Telan issued Audit Observation Memorandum No. 10-002 dated May 17, 2010, finding that the CNA Signing Incentive was tantamount to a signing bonus and thus not allowed in audit. The COA Audit Team advised NTA Management to observe strictly the provisions of DBM Budget Circular No. 2006-1 on the grant of CNA Incentives. Consequently, the COA issued ND 10-002(10) dated June 29, 2010 and ND 10-006(10) dated August 11, 2010, disallowing NTA-National's payments totaling P4,325,000.00. The COA Auditor disallowed the amounts due to lack of funding source as required under Item 7.0 of DBM Budget Circular No. 2006-1, noting that although there were savings of P181,943,786.00 from the expenditure budget for CYs 2007-2009, said amount was utilized to cover the deficiency in Personal Services of P210,349,641.00, leaving a deficit balance of P28,405,855.00. The COA Auditor also disallowed payments to Board of Directors members because they were not rank-and-file personnel or EANTA members.

During the pendency of NTA-National's appeal, the COA Auditor issued ND 2011-10-01 dated June 28, 2012, disallowing incentives released by NTA-Isabela on March 29, May 17, and July 1, 2010, in the aggregate amount of P1,300,000.00, similarly for lack of funding source. The COA Auditor held NTA-Isabela personnel liable as certifying officers, approving officer, and payees.

NTA-National appealed both NDs to the COA Director, who affirmed ND 10-006(10) on July 22, 2011, but no longer dealt with ND 10-002(10) in view of a Notice of Finality of Decision. The COA Director affirmed ND 2011-10-01 on November 15, 2013, emphasizing that NTA-Isabela failed to present evidence establishing that the payments were sourced from savings obtained from the time the 2010 CNA was signed. NTA-National and NTA-Isabela elevated the cases to the COA Proper via separate Petitions for Review. The COA Proper denied both petitions, with Decision No. 2013-157 dated October 7, 2013 affirming the disallowance against NTA-National, and Decision No. 2014-447 dated December 29, 2014 dismissing NTA-Isabela's petition for having been filed out of time.

• Grave Abuse of Discretion — Signing Bonus Characterization: NTA-National imputed grave abuse of discretion upon the COA Proper for considering the subject incentives as a Signing Bonus and disregarding the 2002 CNA's existence, arguing that the incentives were granted on account of the 2002 CNA covering prior years' savings from 2007 until 2009, and that the use of the term "signing" in Article XXIII of the 2010 CNA was inadvertent.

• Grave Abuse of Discretion — Reduction of Losses: NTA-National argued that the COA Proper failed to appreciate that the reduction in NTA's prior years' losses satisfied the condition under DBM Circular No. 2006-1 for the grant of CNA Incentives, claiming that the reduction of operating losses alone is sufficient justification.

• Grave Abuse of Discretion — CNA Termination: NTA-National argued that the COA Proper erred in declaring the 2002 CNA as automatically terminated after three years.

• Grave Abuse of Discretion — Good Faith: NTA-National argued that the COA Proper failed to appreciate the good faith on the part of NTA's representatives to justify the grant.

• Adoption of NTA-National's Arguments: NTA-Isabela sought to intervene in the Main Petition instead of filing a separate petition, adopting NTA-National's allegations, issues, and arguments.

• Prohibited Signing Incentive: The COA, represented by the Office of the Solicitor General, maintained that the payments were correctly disallowed because the CNA Incentives granted by NTA-National fall within the "Signing Incentive" granted under Article XXIII of the 2010 CNA, and thus prohibited.

• Lack of Funding Source: The COA argued that the incentives were not sourced from savings of released maintenance and other operating expenses, as required under DBM Budget Circular No. 2006-1.

• Grave Abuse of Discretion: Whether the COA Proper gravely abused its discretion when it upheld the disallowances relative to the payment of CNA Signing Incentive in favor of NTA officials, employees, and members of the governing Board for CY 2007 to 2009.

• Finality of ND 10-002(10): Whether ND 10-002(10) dated June 29, 2010 against NTA-National had become final and executory.

• Prohibited Signing Bonus: Whether the cash incentive under the 2002 CNA was a prohibited signing bonus under DBM Budget Circular No. 2006-1 and PSLMC Resolution No. 04-02.

• Existence of Savings: Whether NTA-National established that the incentives were paid out of valid "savings" as defined under the applicable regulations.

• Liability of Payees: Whether the payees of the disallowed CNA incentives are liable to return the amounts received despite the defense of good faith.

• Finality of ND 2011-10-01: Whether ND 2011-10-01 dated June 28, 2012 against NTA-Isabela had become final and executory due to the late filing of the appeal.

• Grave Abuse of Discretion: No. The arguments raised by NTA-National do not constitute bona fide imputations of grave abuse; at best, they raise mere errors of judgment beyond the scope of the Court's review under Rule 64. The COA Proper rulings are in accord with prevailing rules and jurisprudence.

• Finality of ND 10-002(10): Yes. ND 10-002(10)'s finality is no longer disputed, as the COA Director ruled only to the extent of ND 10-006(10) in view of a Notice of Finality of Decision, and NTA-National did not put the finality in issue.

• Prohibited Signing Bonus: Yes. The cash incentive under the 2002 CNA was a Signing Bonus prohibited by DBM Budget Circular No. 2006-1 and PSLMC Resolution No. 04-02, as declared in Social Security System vs. Commission on Audit and reiterated in Manila International Airport Authority vs. Commission on Audit.

• Existence of Savings: No. NTA-National failed to establish that the incentives were paid out of valid savings; the mere excess of actual operating expenses over the approved level of uses in the COB does not give rise to savings, and NTA had fund deficiencies in Personal Services that had to be augmented first.

• Liability of Payees: Yes. The payees are liable to return the disallowed amounts; the defense of good faith is not available to recipients of a disallowed amount, and the payment of compensation and benefits subsequently disallowed for being unlawful is an erroneous payment giving rise to a quasi-contractual obligation to return.

• Finality of ND 2011-10-01: Yes. ND 2011-10-01 lapsed into finality upon NTA-Isabela's failure to file a timely appeal; the COA Proper could no longer take cognizance of the petition, and a final and executory disallowance is unalterable and immutable.

• Grave Abuse of Discretion: The Court emphasized that the power to review COA decisions via Rule 64 petitions is limited to jurisdictional errors or grave abuse of discretion. Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is equivalent to lack or excess of jurisdiction, exercised in an arbitrary manner by reason of passion, prejudice, or personal hostility. NTA-National's accusations of grave abuse were anchored on the COA Proper's supposed failure to consider the 2002 CNA's existence and misappreciation of evidence — these are not bona fide imputations of grave abuse but mere errors of judgment.

• Finality of ND 10-002(10): The Court observed that the COA Director ruled only to the extent of ND 10-006(10) in view of a Notice of Finality of Decision in relation to ND 10-002(10). NTA-National did not append copies of the Notice of Finality of Decision, and the COA Director's ruling tends to show that NTA-National has not put ND 10-002(10)'s finality in issue. Thus, there is no reason to overturn its final and executory character.

• Prohibited Signing Bonus: The Court found NTA-National's positions conflicting — it relied on the 2002 CNA but denied that the incentives were signing bonuses. The 2002 CNA provides for only one type of cash incentive, expressly referred to as a "Signing Bonus" under Article XXIV, intended "in recognition of the occasion whereby the AGENCY forges the historic and first Agreement with the certified negotiating agent of its rank-and-file employees." Nomenclature aside, the Article XXIV incentive is clearly in the nature of a prohibited signing bonus as declared in Social Security System vs. Commission on Audit and mandated in PSLMC Resolution No. 04-02. The Court reiterated this prohibition in Manila International Airport Authority vs. Commission on Audit, which had similar antecedents. Notably, NTA-National admitted that it refrained from granting incentives under the provision prior to 2010 due to the Social Security System ruling.

• Existence of Savings: The Court rejected NTA-National's selective and skewed interpretation of the guidelines. Item 6.2 of DBM Circular No. 2006-1 is a mere restatement of Section 3 of PSLMC Resolution No. 02-03, which requires that all conditions be met: (a) actual operating income at least meets the targeted operating income in the COB, or for GOCCs with operating losses, the current year's operating loss should have been minimized or reduced compared to prior year's level; (b) actual operating expenses are less than the DBM approved level as to generate sufficient source of funds; and (c) dividends amounting to at least 50% of annual earnings have been remitted to the National Treasury. The Court held that "savings" must be actual — "real or substantial, or something that exists presently in fact, as opposed to something that is merely theoretical, possible, potential or hypothetical." The Court reviewed both CNAs and found no specific cost-cutting measures or plans to improve efficiency identified therein. The COA's findings showed that NTA did not yield sufficient savings in any given year to fund the aggregate incentives, as the surplus in MOOE had to be augmented first to cover Personal Services deficiencies.

• Liability of Payees: The Court held that the defense of good faith is not available to recipients of a disallowed amount. The payment of compensation and benefits subsequently disallowed for being unlawful is an erroneous payment, and the government employee who received the payment by mistake has a quasi-contractual obligation to return it. The recipient may be excused only if: (a) he establishes that the amounts received were "genuinely given in consideration of services rendered," or (b) the Court decides to do so based on undue prejudice, social justice considerations, and other bona fide exceptions. The Court found no reason to exempt the payees, as the payment was devoid of legal basis, released despite the absence of sufficient savings and flagrant violations of relevant rules.

• Finality of ND 2011-10-01: The Court noted that NTA-Isabela did not refute the fact of late filing. The COA Proper dismissed the petition for being filed beyond the reglementary period of appeal under Section 3, Rule VII of the 2009 Revised Rules of Procedure of the COA, in relation to Section 22.1 of the Rules and Regulations on Settlement of Accounts. When the ND lapsed into finality upon failure to file a timely appeal, the COA Proper could no longer take cognizance of the petition, and a final and executory disallowance is unalterable, immutable, and no longer subject to appeal, revision, or modification even by the Court.

• Grave Abuse of Discretion (Rule 64 Review) — Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is equivalent to lack or excess of jurisdiction, exercised in an arbitrary manner by reason of passion, prejudice, or personal hostility; it must be so patent or gross as to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. The Court applied this standard in reviewing COA decisions, holding that mere errors of judgment are beyond the scope of Rule 64 review.

• Prohibition on CNA Signing Bonuses — CNA Signing Bonuses are prohibited under DBM Budget Circular No. 2006-1 and PSLMC Resolution No. 04-02, as declared in Social Security System vs. Commission on Audit. The Court applied this doctrine to hold that the cash incentive under the 2002 CNA, regardless of nomenclature, was a prohibited signing bonus.

• Savings as Funding Source for CNA Incentives — CNA Incentives shall be sourced solely from savings generated during the life of the CNA, specifically from released MOOE allotments for the year under review, generated out of cost-cutting measures identified in the CNAs, and net of priorities in the use thereof. "Savings" must be actual — "real or substantial, or something that exists presently in fact, as opposed to something that is merely theoretical, possible, potential or hypothetical." The Court applied this doctrine to hold that NTA failed to establish valid savings.

• Liability of Payees of Disallowed Amounts — The payment of compensation and benefits subsequently disallowed for being unlawful is an erroneous payment, and the government employee who received the payment by mistake has a quasi-contractual obligation to return it. The defense of good faith is not available to recipients of a disallowed amount, except where: (a) the amounts were "genuinely given in consideration of services rendered," or (b) the Court decides to do so based on undue prejudice, social justice considerations, and other bona fide exceptions.

• Finality of Disallowance — A final and executory disallowance is unalterable, immutable, and no longer subject to appeal, revision, or modification even by the Court. The Court applied this doctrine to hold that ND 2011-10-01 against NTA-Isabela had lapsed into finality due to the late filing of the appeal.

• "Nomenclature aside, the Article XXIV incentive is clearly in the nature of a prohibited signing bonus as declared in Social Security System v. Commission on Audit and mandated in PSLMC Resolution No. 04-02." — This passage articulates the Court's holding that the substance of the incentive, not its label, determines whether it is a prohibited signing bonus.

• "Verily, the rules allow even GOCCs that have accumulated operating losses to grant CNA Incentives. However, to justify the grant, said GOCC must establish that in the year under review: (1) it has reduced its accumulated prior years' losses; and (2) it incurred actual operating expenses less than the amount budgeted for that year." — This passage defines the requirements for GOCCs with operating losses to validly grant CNA Incentives.

• "It is already settled that the payment of compensation and benefits that are disallowed subsequently for being unlawful is an erroneous payment. It follows then that the government employee who received the payment by mistake has the quasi-contractual obligation to return it to the government." — This passage states the controlling rule on the liability of payees of disallowed amounts.

• "A final and executory disallowance is unalterable, immutable and, no longer subject to appeal, revision, or modification even by the Court." — This passage articulates the doctrine of finality of disallowance as applied to NTA-Isabela's untimely appeal.

• Social Security System vs. Commission on Audit, 433 Phil. 946 (2002) — Controlling precedent declaring CNA signing bonuses prohibited; the Court relied on this case to hold that the 2002 CNA's cash incentive was a prohibited signing bonus.

• Manila International Airport Authority vs. Commission on Audit, 681 Phil. 644 (2012) — Followed; reiterated the prohibition on CNA signing bonuses in a case with similar antecedents, where the amount was given as a CNA signing bonus to each employee and member of the Board of Directors.

• Madera vs. Commission on Audit, G.R. No. 244128, September 8, 2020 — Cited for the rule on liability of payees, including the exceptions to liability based on genuine consideration for services rendered or undue prejudice, social justice considerations, and other bona fide exceptions.

• Rotoras vs. Commission on Audit, G.R. No. 211999, August 20, 2019 — Cited for the proposition that the defense of good faith is not available to recipients of disallowed amounts, and that recipients should be considered trustees of the disallowed amounts for the benefit of the government.

• National Transmission Corp. vs. Commission on Audit, G.R. No. 232199, December 1, 2020 — Cited for the rule that payment of compensation and benefits subsequently disallowed for being unlawful is an erroneous payment giving rise to a quasi-contractual obligation to return.

• Araullo, et al. vs. President Aquino III, et al., 737 Phil. 457, 584 (2014) — Cited for the definition of "savings" as actual, real or substantial, as opposed to theoretical, possible, potential, or hypothetical.

• Fontanilla vs. The Commissioner Proper, COA, 787 Phil. 713 (2016) — Cited for the rule that the power to review COA decisions via Rule 64 petitions is limited to jurisdictional errors or grave abuse of discretion.

• Ramiscal vs. Commission on Audit, 819 Phil. 597 (2017) — Cited for the rule that the Court generally upholds the COA's ruling, especially in the clear absence of grave abuse on its part.

• Abpi vs. Commission on Audit, G.R. No. 252367, July 14, 2020 — Cited for the definition of grave abuse of discretion, citing Fortune Life Insurance Company, Inc. vs. Commission on Audit.

• Philippine Health Insurance Corp. vs. Commission on Audit, G.R. No. 222129, February 2, 2021 — Cited for the rule that when a disallowance lapses into finality upon failure to file a timely appeal, the COA Proper could no longer take cognizance of the petition.

• Section 3, Rule VII, 2009 Revised Rules of Procedure of the COA — Provides the period of appeal from the Director's Decision; applied to hold that NTA-Isabela's petition was filed out of time.

• Section 22.1, Rules and Regulations on Settlement of Accounts — Provides that a decision of the Commission Proper, ASB, Director, or Auditor, if not appealed as provided, shall become final and executory; applied to hold that ND 2011-10-01 lapsed into finality.

• Item 7.0, DBM Budget Circular No. 2006-1 — Provides the funding source requirement for CNA Incentives, stating that they shall be sourced solely from savings released MOOE allotments for the year under review; applied to disallow the incentives for lack of funding source.

• Item 6.2, DBM Budget Circular No. 2006-1 — Restates Section 3 of PSLMC Resolution No. 02-03 on the conditions for granting CNA Incentives to GOCCs/GFIs; applied to reject NTA's selective interpretation of the guidelines.

• Section 3, PSLMC Resolution No. 02-03 — Provides the conditions for granting CNA Incentives, including actual operating income meeting targets, actual operating expenses less than approved levels, and dividend remittance; applied to require NTA to establish compliance with all conditions.

• Section 4, Administrative Order No. 135 — Provides that the CNA Incentive shall be sourced only from savings generated during the life of the CNA; applied to require actual savings as funding source.

• Section 1, PSLMC Resolution No. 04-02 — Provides that CNA Incentive may be provided in the CNA only from savings generated after the signing of the CNA; applied to prohibit the signing bonus.

Gesmundo, C.J., Leonen, Caguioa, Hernando, Lazaro-Javier, Zalameda, Gaerlan, Rosario, J. Lopez, and Dimaampao, JJ., concurred. Perlas-Bernabe, Carandang, and M. Lopez, JJ., were on official leave.