Separate and distinct liability

This case is about the Value Added Tax (VAT) or the indirect tax imposed on, among others the performance of services, even in the absence of any profit attributable thereto. The question arising here is whether the contractor of services can pass on the payment of VAT to the subcontractor.

This case is between a duly licensed construction firm engaged in construction of roads and bridges (LVM) for the Department of Public Works and Highways (DPWH) which was awarded a P300-million contract for the construction of an arterial road link in Southern Leyte; and a joint venture Filipino and Korean companies represented by Felino (JV).

After signing the main contract with the DPWH, LVM subcontracted approximately 30 percent of the contract amount (P86,318,478.138) with JV for the construction of a portion of the project. The subcontract agreement provides that payment to JV shall be within 7 days after receipt of payment by LVM from DPWH on the item of work accomplished in the subcontracted portion of the project less 9 percent, for which JV shall issue a BIR receipt. The subcontract likewise provides a 10 percent retention for every billing of subcontractor.

In the course of the construction, JV sent LVM a total of 27 billings. For billing No. 1 to 26, LVM paid JV the total sum of P80,414.697.12 less the 10 percent retention in the sum of P8,041,469.79. For billing No. 27 in the sum of P5,903,780.96, LVM paid JV the sum of P2,544,934.99 claiming that it had not yet been fully paid by DPWH. The official receipts issued by JV show that it has already paid the 10 percent output VAT for the credit of LVM. JV also filed the corresponding Monthly VAT Declarations equivalent to 10 percent of its gross receipts from LVM.

After completion of the project, JV demanded from LVM settlement of its unpaid claims as well as the release of the money retained by the latter under the sub-contract agreement. In reply however LVM apprised JV that it was going to deduct from the amount still due to JV, the 8.5 percent E-Vat which was withheld by DPWH from it and which it is required by law to pay pursuant to R.A. 8424 and Section 114 of the National Internal Revenue Code (NIRC). Can LVM do that?

No. There are two contracts under the factual milieu of this case: the main contract between DPWH and LVM where LVM was itself required by law to pay 8.5 percent VAT; and the Subcontract Agreement between LVM and JV over the 30 percent of the project amount where JV also paid the 10% VAT on the gross receipts. There is no stipulation in this Sub-Contract Agreement regarding JV’s sharing of the VAT deducted by the DPWH from its payment on the main contract with LVM.

In the absence of such stipulation in the Sub Contract Agreement, LVM has no basis in offsetting the amounts of said tax from the retained amount still in its possession. Indeed, a contract constitutes the law between the parties who are, therefore, bound by its stipulation which, when couched in clear and plain language, should be applied according to their literal tenor. Courts are obliged to give effect to the parties’ agreement and enforce it to the letter. They have no authority to alter a contract by construction or to make a new one for the parties; their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its wisdom or folly. They cannot supply material stipulations, read into the contract words it does not contain or any other intention that would contradict its plain import.

Thus LVM cannot deduct the VAT amounts withheld by the DPWH from the sums it still owed to JV which, as subcontractor of the 30 percent project, has its own liability for 10 percent VAT in so far as the sums paid for the subcontracted works are concerned. Although the burden to pay an indirect tax like VAT can be passed on to the purchaser of the goods or services, the liability to pay the same remains with the manufacturer or seller like LVM and JV. In the same manner that LVM is liable for the VAT due on the payments made by DPWH pursuant to the main contract on the Project, the JV is, consequently, liable for the VAT due on the payments made by LVM pursuant to the Sub-Contract (LVM Construction etc. vs. FT Sanchez/Socor/ Kimwa Joint Venture etc., G.R. 181961, December 5, 2011)

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