G.R. No. 238846

G.R. No. 238846, February 25, 2025,
♦ Decision, Dimaampao, [J]
♦ Dissenting Opinion, Leonen, [J]
♦ Concurring Opinion, Caguioa, [J]
♦ Concurring Opinion, Jhosep Y, Lopez, [J]
♦ Concurring Opinion, Hernando, [J]

SHELL PHILIPPINES EXPLORATION B.V. AND CHEVRON MALAMPAYA LLC, PETITIONERS,
vs.
COMMISSION ON AUDIT, RESPONDENT.

PNOC EXPLORATION CORPORATION, PETITIONER,
vs.
COMMISSION ON AUDIT, RESPONDENT.

THELMA M. CERDEÑA AND NORA A. TUAZON, PETITIONERS,
vs.
COMMISSION ON AUDIT, RESPONDENT.

Impugned in these consolidated1 Petitions for Certiorari2 are Decision No. 2015-1153 (assailed Decision) and Decision No. 2018-0754 (challenged Resolution) of the Commission on Audit (COA), which affirmed Notice of Charge No. 2010-01-151(09).5 The crux of the controversy is the purported undercollection of the government's share in the Malampaya Natural Gas Project from 2002 to December 2009 amounting to PHP 53,140,304,739.86.

On December 11, 1990, the Government of the Republic of the Philippines, represented by then President Corazon C. Aquino, executed a Service Contract6 with Occidental Philippines, Inc. and Shell Exploration B.V., the predecessors-in-interest of Shell Exploration B.V. (SPEX), PNOC Exploration Corporation (PNOC-EC), and Chevron Malampaya LLC (Chevron), collectively referred to as the Contractors. Dubbed as the Malampaya Natural Gas Project, this Service Contract was entered into pursuant to Presidential Decree No. 87,7 which was promulgated to hasten the discovery and production of indigenous petroleum through the utilization of government and/or private resources, local and foreign.8

Under the Service Contract, the Contractors were responsible to execute all operations for searching and obtaining petroleum in the contract area. They were obliged to furnish the necessary technology and financing, including the required services for petroleum operations, and assume all exploration risks without being entitled to reimbursement even if no petroleum in commercial quantity is discovered and produced. The agreement was subject to the control and supervision of the then Office of Energy Affairs (now the Department of Energy [DOE]).9

Section 7.3 of the Service Contract provides that 60% of the net proceeds of the petroleum operations shall be remitted to the government. Section 7.4 allots to the Contractors the 40% retention fee of the net proceeds.10

Under Section 12(a) of Presidential Decree No. 87, the Contractors are exempted from payment of all taxes except income tax. However, Section 19 provides that the Contractors shall be liable each taxable year for the Philippine income tax on income derived from petroleum operations under its Contract of Service, computed based on Sections 20 to 25 of the same law.11

The above Section 12(a) of Presidential Decree No. 87 is spelled out in Section 6.3 of the Service Contract:

The OFFICE OF ENERGY AFFAIRS shall assume and pay on behalf of CONTRACTOR and its parent company, on the first transaction in each instance where the tax is imposed, all income taxes payable to the Republic of the Philippines based on income and profits and, with respect to CONTRACTOR, on the first transaction in each instance where the tax is imposed, all dividends, withholding taxes and other taxes imposed by the Government of the Philippines on the distribution of income and profits derived from Petroleum Operations to its parent company. The OFFICE OF ENERGY AFFAIRS shall promptly furnish to Contractor, without fee or other consideration, the official receipts issued in the name of CONTRACTOR by any duly empowered Government authority, acknowledging the payment of said taxes.12 (Emphasis supplied)

Quite palpably, the 60% Philippine government share in the net proceeds includes the corporate income taxes of the Contractors from the start of commercial operations of the Service Contract in 2002 up to 2009.13

During the conduct of a post-audit in 2004, DOE Supervising Auditor Dolores T. Barraza (Auditor Barraza) noted that the corporate income taxes of the Contractors were deducted from the government's share. Consequently, Audit Observation Memorandum No. 2004-006 was issued where Auditor Barraza highlighted that the inclusion of the corporate income taxes in the government's share from January 2002 to November 2003 resulted in the understatement of the government revenue worth PHP 2.63 billion.14

Auditor Barraza computed that the total under collection of the 60% government share from service income up to December 2009 totaled PHP 53,140,304,739.86.15 As a result, she issued Notice of Charge No. 2010-01-151(09)16 identifying the persons liable for the transaction, namely: 1) Thelma M. Cerdeña (Cerdeña), Chief of the DOE Compliance Division; 2) Nora A. Tuazon (Tuazon), Officer-in-Charge of the DOE Financial Services; and 3) the Contractors.

DOE, SPEX, PNOC-EC, and Chevron sought recourse before the COA, which denied their appeal.17

Unflustered, the Contractors, DOE, Cerdeña, and Tuazon, filed their Petitions for Review before COA Proper.18

In the assailed Decision, COA denied the Petitions for Review and declared that the income taxes of the Contractors should not have been part of the 60% government share. COA disputed the argument of the Contractors that the government assumed their income taxes due and demanded that they settle their back taxes under the Service Contract.19

DOE and the Contractors' bid for a reconsideration of the assailed Decision was denied in the challenged Resolution. Taking issue with the disposition, the Contractors, as well as Cerdeña and Tuazon are now before this Court via their respective Petitions for Certiorari. Essentially, they impute grave abuse of discretion amounting to lack or excess of jurisdiction on the part of COA in issuing the repugned Decision and Resolution.

However, during the pendency of the instant Petitions, the Office of the Solicitor General (OSG) informed the Court of two existing international arbitration cases related to the case at bar: Shell Philippines Exploration B.V. v. The Republic of the Philippines, docketed as ICSID Case No. ARB/16/22 pending before the International Centre for Settlement of Investment Disputes (ICSID), and Shell Philippines Exploration B.V. (the Netherlands) and Chevron Malampaya LLC (USA) v. Government of the Republic of the Philippines, docketed as ICC Case No. 21096/CYK/PTA pending before the International Chamber of Commerce (ICC).20

Moreover, OSG furnished the Court with the ICSID Decision on Provisional Measures21 in ICSID Case No. ARB/16/22, which states, among others, that:

(4) The [Republic of the Philippines] shall refrain from taking any steps to enforce any of the three Notices of Charge against [Shell Philippines Exploration B.V.] or to collect any sums due thereunder from [Shell Philippines Exploration B.V.] until this Tribunal shall have decided the [Republic of the Philippines]'s jurisdictional objections identified in the Tribunals Procedural Order No[.] 3 of August 28, 2017 or further order[.]22

On April 16, 2019, the ICC issued its Partial Final Award23 in ICC Case No. 21096/CYK/PTA, which was followed by the release on December 16, 2019 of the Final Award24 upholding the validity of the tax assumption mechanism in the Service Contract.

Commenting on all the Petitions, COA stood pat on its ruling, insisting that there was no provision in the law specifically providing that the income taxes of the Contractors would be part of the share of the Government.25

Stripped of unnecessary verbiage, the main queries brought to this Court for resolution are the following:

On January 30, 2020, the OSG, acting on behalf of DOE, filed a Petition-in-Intervention26 further fortifying its stance in the instant dispute between the Contractors and COA. The OSG stressed that Presidential Decree No. 87, Presidential Decree No. 120627 and Presidential Decree No. 145928 clearly provide that the Contractors' income taxes are included in the Government's 60% share in the net proceeds as stipulated in the Service Contract, and that tax assumption by the Government is permissible and not tantamount to a tax exemption.29

Courts consistently accord considerable deference to the factual findings of administrative bodies vested with expertise in their respective fields. Absent a showing of substantial evidence that such findings were premised on a misapprehension or misapplication of the evidence on record, they are deemed final, conclusive, and binding upon this Court.30

However, when there is a showing that COA has acted without, or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, its findings may be set aside.31 The Court has already discussed the scope of a certiorari proceeding when what is involved is a COA ruling—

A Rule 65 petition is a unique and special rule because it commands limited review of the question raised. As an extraordinary remedy, its purpose is simply to keep the public respondent within the bounds of its jurisdiction or to relieve the petitioner from the public respondent's arbitrary acts. In this review, the Court is confined solely to questions of jurisdiction whenever a tribunal, board or officer exercising judicial or quasi-judicial function acts without jurisdiction or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction.

The limitation of the Court's power of review over COA rulings merely complements its nature as an independent constitutional body that is tasked to safeguard the proper use of the government and, ultimately, the people's property by vesting it with power to (i) determine whether the government entities comply with the law and the rules in disbursing public funds; and (ii) disallow legal disbursements of these funds.32 (Emphasis in the original)

The case at bench exemplifies the rare exception where the Court would overturn the factual and legal findings of COA.

The governing laws and Service Contract No. 38 expressly state that the Contractors' income taxes are included in the Governments share from the Malampaya Project's net proceeds

In the assailed Decision, COA found that there was no provision in the law which specifically provides that the income taxes of the Contractors should be part of the share of the Government.

So, too, Section 12(a)(i)(2) of Presidential Decree No. 1206 embodies the phrase "including all taxes paid by or on behalf of the contractor" in referring to the Government's annual net revenue or share:

Section 1(a) of Presidential Decree No. 1459 invariably echoes the above provision, viz.:

All the above quoted laws governing oil exploration and development industry in the Philippines clearly and unambiguously state that the Government's share includes all taxes. As the word include means "to take in or comprise as a part of a whole or group" or "to contain between or within"33 and leaves no room for any other interpretation, it becomes the duty of the Court to apply the law as it is worded.

"Under the [plainmeaning] rule or verba legis, wherever possible, the words used in the Constitution must be given their ordinary meaning except where technical terms are employed."34 Here, the unequivocal language of Presidential Decree Nos. 87, 1206, and 1459 underscores two key principles: first, the income taxes paid by or on behalf of the Contractors are explicitly included in the government's guaranteed 60% share of the net proceeds from petroleum operations, and second, the government assumes and pays the Contractors' income taxes.

The intent of Presidential Decree No. 87 is a predominant factor in its interpretation

Even assuming that an interpretation should be had, the intent of the law is the most dominant influence in its interpretation.35 Along this vein, former Prime Minister Cesar Virata, former DOE Secretary Raphael Perpetuo Lotilla, and former DOE Undersecretary Rufino Bomasang all confirmed through their respective Judicial Affidavits and Witness Statements that the petroleum fiscal system established under Presidential Decree No. 87 provides for tax assumption:

Evidently, the intended scope and purpose of the law was to provide greater incentives to encourage private participation in the exploration and development of petroleum resources in the Philippines and attract foreign investors to take risks in the Philippine petroleum industry. Its key policy objective is to "hasten the discovery and production of indigenous petroleum through the utilization of government and/or private resources, local and foreign."37 To achieve this, Presidential Decree No. 87 offered "more meaningful incentives to prospective service contractors,"38 one of which is the adoption of the tax assumption system. Correspondingly, from both the letter of the law and the intent of its framers, a rejection of the tax assumption system has no leg to stand on.

The correct interpretation, therefore, taking into consideration all the provisions of Presidential Decree No. 87, as well as its intent, is that: (a) the Contractor is liable to pay income tax, but b) the Contractors' income tax forms part of or is counted in the Government's 60% share.

COA postulates that Section 6.3 of the Service Contract infringes upon the sovereign prerogative of the Government to impose tax or exempt a class from taxation and therefore the said provision is not valid and enforceable.39

Prefatorily, the word exemption is defined as "freedom from a duty, liability, or other requirement; an exception.40 Exemption, being obnoxious to taxation, is not favored and never presumed; if at all, it must be categorically and unmistakably expressed in terms that admit of no doubt, yet such exempting provision must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.41 Even more crucially, the Constitution dictates that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress."42

On the other hand, assumption is the "act of taking (esp. someone else's debt or other obligation) for or on oneself."43 This means that the obligation or liability remains, although the same is merely passed on to a different person.44

From the foregoing perspective, it becomes quite clear that contrary to the standpoint of COA, the concept of an assumption is distinct and not synonymous to an exemption. Considering that Section 6.3 of the Service Contract is not in the nature of a tax exemption, it therefore does not infringe upon the sovereign prerogative of the Government, and the constitutional provisions on tax exemptions do not find application.

Upon this point, the case of Republic v. City of Kidapawan45 is illuminating. The jugular issue of the controversy revolves around the purported exemption of Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) from payment of real property taxes over the Mt. Apo Geothermal Reservation Area. Relatedly, the service contract entered into by the government and PNOC-EDC contained the similar provision in Section 6.3 of the subject Service Contract anent the payment of income taxes, viz.:

8.1 The GOVERNMENT shall assume and pay on behalf of CONTRACTOR all income taxes payable to the Republic of the Philippines based on income or profit derived from geothermal operations. It is understood, however, that such income tax payment shall come from the Government Share of sixty percent (60%) of the Net Value.46

Likewise, although it is the government which actually pays the income taxes, the contract nonetheless specifically provided that the payment is for and in behalf of PNOC-EDC and is chargeable against the 60% share of the government in the net profits derived by the PNOC-EDC arising from the geothermal operation. In reality, the PNOC-EDC is the actual payee while the government is only its agent in the payment of the income taxes. In fact, the official receipt is being issued in the name of PNOC-EDC.47

Evidently, it was decreed that "the exemption [from real property taxes] provided in the service contract cannot be given effect because the DOE, representing the government in the execution of the contract, has no authority to grant the same."48 However, no such pronouncement was made with respect to the government's assumption of PNOC-EDC's income taxes.

It is likewise worthy to note that while the industry involved in the case at bench and in Kidapawan are distinct, it does not necessarily follow that the benefits which the respective contractors enjoy, such as tax assumption, must be construed differently. Ubi lex non distinguit nec nos distinguere debemus. When the law does not distinguish, we must not distinguish.

To illustrate further, in the case of Mitsubishi Corp.-Manila Branch v. Commissioner of Internal Revenue,49 the Court ruled in favor of the private contractor's claim for tax refund by virtue of a "tax assumption" clause in an Exchange of Notes between Japan and the Philippines, which provides:

The Court then distinguished tax exemption and tax assumption, ruling that the restrictions on tax exemption do not apply to tax assumption:

To "assume" means "[t]o take on, become bound as another is bound, or put oneself in place of another as to an obligation or liability." This means that the obligation or liability remains, although the same is merely passed on to a different person. In this light, the concept of an assumption is therefore different from an exemption, the latter being the "[f]reedom from a duty, liability or other requirement" or "[a] privilege given to a judgment debtor by law, allowing the debtor to retain [a] certain property without liability." Thus, contrary to the CTA En Banc's opinion, the constitutional provisions on tax exemptions would not apply.51 (Emphasis supplied)

Consequently, the Court ruled in Mitsubishi that, pursuant to the tax assumption provision in the Exchange of Notes, the Philippine Government, through its executing agency, is responsible for paying any form of taxes directly imposable under the Contract:

As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this case) particularly assumed "all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the [OECF] Loan." The Philippine Governments assumption of "all fiscal levies and taxes," which includes the subject taxes, is clearly a form of concession given to Japanese suppliers, contractors or consultants in consideration of the OECF Loan, which proceeds were used for the implementation of the Project. As part of this, NPC entered into the June 21, 1991 Contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for the engineering, supply, construction, installation, testing, and commissioning of a steam generator, auxiliaries, and associated civil works for the Project, which foreign currency portion was funded by the OECF loans. Thus, in line with the tax assumption provision under the Exchange of Notes, Article VIII (B) (1) of the Contract states that NPC shall pay any and all forms of taxes that are directly imposable under the Contract[.]52 (Emphasis supplied)

Ultimately, the Court concluded in Mitsubishi that the collection of taxes from entities otherwise enjoying the benefits of a tax assumption arrangement is erroneous and, thus, refundable.53

Similarly, under Service Contract No. 38, the Contractors remain liable for income taxes, but the Philippine government assumes and pays these taxes as part of its share of net proceeds. The language of Section 6.3 of Service Contract No. 38 closely mirrors the tax assumption provision upheld in the Exchange of Notes in Mitsubishi.

The Arbitral Awards upheld the validity of the tax assumption mechanism in the Service Contract

"Arbitration agreements are liberally construed in favor of proceeding to arbitration."54 Along this grain, Section XII of the Service Contract is clear and categorical—

As it happened, the Contractors lodged two separate cases for arbitration. The case before the ICSID is still pending. Meanwhile, on April 16, 2019, the ICC, in ICC Case No. 21096/CYK/PTA, issued its Partial Final Award, ruling in this wise:

Invariably, in the December 16, 2019 Final Award, the ICC Arbitral Tribunal reaffirmed the Partial Final Award and upheld the validity of the tax assumption mechanism in the Service Contract. Given that the policy of the state favors arbitration, the exhaustive contribution of foreign arbitral tribunals, such as the ICC, is invaluable in resolving the case at bench. Considering that the ICC made a categorical finding in favor of the Contractors, the Court must perforce respect to such finding.

Be that as it may, even in the absence of the arbitral award, the Court's independent analysis of the COA's disposition inevitably leads to the same conclusion—the tax assumption mechanism under Service Contract No. 38 is lawful and consistent with the legislative framework established by Presidential Decree Nos. 87, 1206, and 1459.

Considering that the Notice of Charge was issued by COA with grave abuse of discretion amounting to lack or excess of jurisdiction, a discussion on the liability of Cerdeña and Tuazon becomes superfluous. Similar to the Contractors, this Court absolves them from any liability under the Notice of Charge.

A final cadence. The Court is on all fours with COA to zealously ensure that the Government is never placed at a disadvantage and that it rightfully receives what is due it in all its transactions. Nevertheless, remaining bound by the Constitution and the laws of the land, the Government cannot be allowed to renege on its obligation, especially when such has been distinctly outlined in the contract it freely entered into and agreed to.

ACCORDINGLY, the consolidated Petitions for Certiorari are GRANTED. The April 6, 2015 Decision No. 2015-115 and the January 24, 2018 Decision No. 2018-075 of the Commission on Audit are REVERSED and SET ASIDE. The October 5, 2010 Notice of Charge No. 2010-01-151(09) is LIFTED.

Gesmundo, C.J., Inting, Zalameda, M. Lopez, Gaerlan, Rosario, Marquez, Kho, Jr., and Singh, JJ., concur.
Leonen, SAJ., see dissenting opinion.
Caguioa, J., see concurring opinion.
Hernando,* J., on official leave. See concurring opinion.
Lazaro-Javier,** J., no part.
J. Lopez, J., with separate concurring opinion.