LVM Construction Corporation vs.

Sanchez (5 December 2011)

FACTS:

Petitioner LVM Construction Corporation (LVM) is a duly licensed construction

firm primarily engaged in the construction of roads and bridges for the
Department of Public Works and Highways (DPWH). Awarded the construction of
the Arterial Road Link Development Project in Southern Leyte (the Project), LVM
sub- contracted approximately 30% of the contract amount with the Joint Venture
composed of respondents F.T. Sanchez Corporation (FTSC), Socor Construction
Corporation (SCC) and Kimwa Construction Development Corporation(KCDC).

The Sub-Contract Agreement executed by the parties pertinently provided as

follows:

“4) Ten percent (10%) retention to be deducted for every billing of sub-contractor
as prescribed under the Tender Documents.”

For work rendered in the premises, the Joint Venture sent LVM a total of
27 Billings.

In a letter dated 16 May 2001, however, LVM apprised the Joint Venture of the
fact that its auditors have belatedly discovered that no deductions for E-VAT had
been made from its payments on Billing Nos. 1 to 26 and that it was, as a
consequence, going to deduct the 8.5% payments for said tax from the amount
still due in the premises.

In its 14 June 2001 Reply, the Joint Venture claimed that, having issued Official
Receipts for every payment it received, it was liable to pay 10% VAT thereon and
that LVM can, in turn, claim therefrom an equivalent input tax of 10%.

On 26 April 2006, the CIAC rendered its decision granting the Joint Venture’s
claims, discounting the contractual and legal bases for LVM’s claim that it had
the right to offset its E- VAT payments from the retention money still in its
possession.

The CIAC’s decision was affirmed in toto by the CA.

ISSUE:
1. Whether or not Respondents’ liability to pay Value Added Tax need not be
stated in the sub contract agreement.
2. Whether or not a set off between the supposed E-Vat Payments of LVM and
the retention money demanded by the Join Venture is valid.
HELD:
It needs to be stated and the set-off is not valid. For lack of any stipulation
regarding the same in the parties’ Sub-Contract Agreement, we find that the CA
correctly brushed aside LVM’s insistence on deducting its supposed E-VAT
payments from the retention money demanded by the Joint Venture.

Indeed, a contract constitutes the law between the parties who are, therefore,
bound by its stipulations which, when couched in clear and plain language,
should be applied according to their literal tenor. That there was no agreement
regarding the offsetting urged by LVM.

Precisely, Sanchez, under the contract was required to issue official receipts
registered with the BIR for every payment LVM makes for the progress billings,
which it did. For these official receipts issued by Sanchez to LVM, Sanchez
already paid 10% VAT to the BIR, thus: ‘The VAT Law is very clear. Everyone
must pay 10% VAT based on their issued official receipts. These receipts must
be official receipts and registered with the BIR. Respondent (LVM) must pay its
output Vat based on its receipts. Complainant (Sanchez) must also pay output
VAT based on its receipts.
 [G.R. No. 181961 : December 05, 2011]

LVM CONSTRUCTION CORPORATION, REPRESENTED BY

ITS MANAGING DIRECTOR, ANDRES CHUA LAO,
PETITIONER, VS. F.T. SANCHEZ/SOCOR/KIMWA (JOINT
VENTURE), F.T. SANCHEZ CONSTRUCTION CORPORATION,
SOCOR CONSTRUCTION CORPORATION AND KIMWA
CONSTRUCTION AND DEVELOPMENT CORPORATION ALL
REPRESENTED BY FORTUNATO O. SANCHEZ, JR.,
RESPONDENTS.

DECISION

PEREZ, J.:

Filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure,

the petition for review on certiorari at bench seeks the reversal of
the 28 September 2007 Decision[1] rendered by the then
Thirteenth Division of the Court of Appeals (CA) in CA-G.R. SP
No. 94849,[2] the decretal portion of which states:
cralaw

WHEREFORE, premises considered, the assailed Decision dated

April 26, 2006 of the Construction Industry Arbitration
Commission in CIAC Case No. 25-2005 is hereby AFFIRMED.

SO ORDERED.[3]

The Facts 

Petitioner LVM Construction Corporation (LVM) is a duly licensed

construction firm primarily engaged in the construction of roads
and bridges for the Department of Public Works and Highways
(DPWH). Awarded the construction of the Arterial Road Link
Development Project in Southern Leyte (the Project), LVM sub-
contracted approximately 30% of the contract amount with
the Joint Venture composed of respondents F.T. Sanchez
Corporation (FTSC), Socor Construction Corporation (SCC) and
Kimwa Construction Development Corporation (KCDC).  For the
contract price of P90,061,917.25 which was later on reduced to
P86,318,478.38,[4] the Joint Venture agreed to undertake
construction of the portion of the Project starting from Sta. 154 +
210.20 to Sta. 160 + 480.00. With LVM as the Contractor and the
Joint Venture as Sub-Contractor, the 27 November 1996 Sub-
Contract Agreement[5] executed by the parties pertinently
provided as follows:

3) That payment to the SUB-CONTRACTOR shall be on item of

work accomplished in the sub-contracted portion of the project at
awarded unit cost of the project less NINE PERCENT (9%).  The
SUB-CONTRACTOR shall issue a BIR registered receipt to the
CONTRACTOR.

4) Ten percent (10%) retention to be deducted for every billing of

sub-contractor as prescribed under the Tender Documents.

xxxx

13) The payment to the SUB-CONTRACTOR shall be made within

seven (7) days after the check issued by DPWH to CONTRACTOR
has already been made good.[6]

For work rendered in the premises, there is no dispute regarding

the fact that the Joint Venture sent LVM a total of 27 Billings.  For
Billing Nos. 1 to 26, LVM paid the Joint Venture the total sum of
P80,414,697.12 and retained the sum of P8,041,469.79 by way
of the 10% retention stipulated in the Sub-Contract Agreement.[7] 
For Billing No. 27 in the sum of P5,903,780.96, on the other
hand, LVM paid the Joint Venture the partial sum of
P2,544,934.99 on 31 May 2001,[8] claiming that it had not yet
been fully paid by the DPWH.[9]  Having completed the sub-
contracted works, the Joint Venture subsequently demanded from
LVM the settlement of its unpaid claims as well as the release of
money retained by the latter in accordance with the Sub-Contract
Agreement.  In a letter dated 16 May 2001, however, LVM
apprised the Joint Venture of the fact that its auditors have
belatedly discovered that no deductions for E-VAT had been made
from its payments on Billing Nos. 1 to 26 and that it was, as a
consequence, going to deduct the 8.5% payments for said tax
from the amount still due in the premises. [10]  In its 14 June 2001
Reply, the Joint Venture claimed that, having issued Official
Receipts for every payment it received, it was liable to pay 10%
VAT thereon and that LVM can, in turn, claim therefrom an
equivalent input tax of 10%.[11]

With its claims still unpaid despite the lapse of more than four (4)
years from the completion of the sub-contracted works, the Joint
Venture, thru its Managing Director, Fortunato O. Sanchez, Jr.,
filed against LVM the 30 June 2005 complaint for sum of money
and damages which was docketed before the Construction
Industry Arbitration Commission (CIAC) as CIAC Case No. 25-
2005.[12]  Having submitted a Bill of Particulars in response to
LVM's motion therefor,[13] the Joint Venture went on to file an
Amended Complaint dated 23 December 2005 specifying its
claims as follows: (a) P8,041,469.73 as retention monies for
Billing Nos. 1 to 26; (b) P3,358,845.97 as unpaid balance on
Billing No. 27; (c) P6,186,570.71 as interest on unpaid retention
money computed at 12% per annum reckoned from 6 August
1999 up to 1 January 2006; and (d) P5,365,677.70 as interest at
12% per annum on delayed payment of monies collected from
DPWH on Billing Nos. 1 to 26.  In addition, the Joint Venture
sought indemnity for attorney's fees equivalent to 10% of the
amount collected and/or in a sum not less than P1,000,000.00. [14]

In its 21 October 2005 Answer with Compulsory Counterclaim,

LVM maintained that it did not release the 10% retention for
Billing Nos. 1 to 26 on the ground that it had yet to make the
corresponding 8.5% deductions for E-VAT which the Joint Venture
should have paid to the Bureau of Internal Revenue (BIR) and
that there is, as a consequence, a need to offset the sums
corresponding thereto from the retention money still in its
possession. Moreover, LVM alleged that the Joint Venture's claims
failed to take into consideration its own outstanding obligation in
the total amount of P21,737,094.05, representing the liquidated
damages it incurred as a consequence of its delays in the
completion of the project.  In addition to said liquidated damages,
LVM prayed for the grant of its counterclaims for exemplary
damages and attorney's fees.[15]  In its 2 January 2006
supplemental answer, LVM likewise argued that the Joint
Venture's prayer for imposition of 12% interest on the retention
money and the balance of Billing No. 27 is bereft of factual and
legal bases since no interest was stipulated in the parties'
agreement and it was justified in refusing the release of said
sums claimed.[16]

With the parties' assent to the 19 December 2005 Terms of

Reference which identified, among other matters, the issues to be
resolved in the case,[17]  the CIAC proceeded to receive the
parties' evidence in support of their respective causes. On 26
April 2006, the CIAC rendered its decision granting the Joint
Venture's claims for the payment of the retention money for
Billing Nos. 1 to 26 as well as the interest thereon and the unpaid
balance billing from 6 August 1999 to 1 January 2006 in the
aggregate sum of P11,307,646.68.  Discounting the contractual
and legal bases for LVM's claim that it had the right to offset its
E-VAT payments from the retention money still in its possession,
the CIAC ruled that the VAT deductions the DPWH made from its
payments to LVM were for the whole project and already included
all its supplies and subcontractors. Instead of withholding said
retention money, LVM was determined to have - to its credit and
for its use - the input VAT corresponding to the 10% equivalent
VAT paid by the Joint Venture based on the BIR-registered official
receipts it issued.  Finding that the delays incurred by the Joint
Venture were justified, the CIAC likewise denied LVM's
counterclaim for liquidated damages for lack of contractual basis.
[18]

Elevated by LVM to the CA through a petition for review filed

pursuant to Rule 43 of the 1997 Rules of Civil Procedure,[19] the
CIAC's decision was affirmed in toto in the herein assailed
Decision dated 28 September 2007 rendered by said court's
Thirteenth Division in CA-G.R. SP No. 94849. [20]  In upholding the
CIAC's rejection of LVM's insistence on the offsetting of E-VAT
payments from the retention money, the CA ruled as follows:

Clearly, there was no provision in the Sub-Contract Agreement

that would hold Sanchez liable for EVAT on the amounts paid to it
by LVM.  As pointed out by the CIAC in its Award, `the contract
documents provide only for the payment of the awarded cost of
the project  less 9%.  Any other deduction must be clearly
stated in the provisions of the contract or upon agreement of the
parties. xxx The tribunal finds no provision that EVAT will be
deducted from the sub-contractor. xxx If [the Joint Venture]
should pay or share in the payment of the EVAT, it must be
clearly defined in the sub-contract agreement.'

Elucidating further, CIAC pointed out that Sanchez, under the

contract was required to issue official receipts registered with the
BIR for every payment LVM makes for the progress billings, which
it did.  For these official receipts issued by Sanchez to LVM,
Sanchez already paid 10% VAT to the BIR, thus: `The VAT Law is
very clear.  Everyone must pay 10% VAT based on their issued
official receipts.  These receipts must be official receipts and
registered with the BIR.  Respondent (LVM) must pay its output
Vat based on its receipts.  Complainant (Sanchez) must also pay
output VAT based on its receipts. The law however allow each
entity to deduct the input VAT based on the official receipts
issued to it.  Clearly, therefore, respondent [LVM], has to its
credit the 10% output VAT paid by claimant [Joint
Venture] based on the official receipts issued to it. 
Respondent [LVM] can use this input VAT to offset any output
VAT respondent [LVM] must pay for any of its other projects."[21]

LVM's motion for reconsideration of the foregoing decision was

denied for lack of merit in the CA's 26 February 2008 Resolution,
[22]
 hence, this Rule 45 petition for review on certiorari.

The Issues
LVM urges the grant of its petition for review upon the following
errors imputed against the CA, to wit:

CONTRARY TO THE FINDING OF THE COURT OF APPEALS,

RESPONDENTS' LIABILITY TO PAY VALUE ADDED TAX
NEED NOT BE STATED IN THE SUB-CONTRACT AGREEMENT
DATED 27 NOVEMBER 1996 AS THE PROVISIONS OF
REPUBLIC ACT 8424, OTHERWISE KNOWN AS THE
NATIONAL INTERNAL REVENUE CODE OF THE
PHILIPPINES, FORM PART OF, AND ARE DEEMED
INCORPORATED AND READ INTO SAID AGREEMENT.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT

RESPONDENTS ARE DEEMED TO HAVE ALREADY PAID
VALUE ADDED TAX MERELY BECAUSE RESPONDENTS HAD
ALLEGEDLY ISSUED RECEIPTS FOR SERVICES RENDERED.
[23]

The Court's Ruling

The petition is bereft of merit.

For lack of any stipulation regarding the same in the parties' Sub-

Contract Agreement, we find that the CA correctly brushed aside
LVM's insistence on deducting its supposed E-VAT payments from
the retention money demanded by the Joint Venture.  Indeed, a
contract constitutes the law between the parties who are,
therefore, bound by its stipulations[24] which, when couched in
clear and plain language, should be applied according to their
literal tenor.[25]  That there was no agreement regarding the
offsetting urged by LVM may likewise be readily gleaned from the
parties' contemporaneous and subsequent acts which are given
primordial consideration in determining their intention. [26]  The
record shows that, except for deducting sums corresponding to
the 10% retention agreed upon, 9% as contingency on sub-
contract, 1% withholding tax and such other itemized
miscellaneous expenses, LVM settled the Joint Venture's Billing
Nos. 1 to 26 without any mention of deductions for the E-VAT
payments it claims to have advanced.[27]  It was, in fact, only on
16 May 2001 that LVM's Managing Director, Andres C. Lao,
apprised the Joint Venture in writing of its intention to deduct
said payments,[28] to wit:

If you would recall, during our last meeting with Deputy Project
Manager of the DPWH-PJHL, Eng. Jimmy T. Chan, last March
2001 at the PJHL Office in Palo, Leyte, our company made a
commitment to pay up to 99% accomplishment and release the
retention money up to the 23 rd partial billing after receipt by our
company of the 27th partial billing from JBIC and GOP relative to
the above mentioned project.

Much as our company wants to comply with said commitment,

our auditors recently discovered that all payments made by us to
your Joint Venture, relative to the above mentioned project were
made without the corresponding deduction of the E-VAT of
8.50% x 10/11, which your Joint Venture should have paid
to the BIR.  Records would show that from billing number 1 up
to 26, no deductions for E-VAT were made.  As a matter of
fact, our company was the one who shouldered all
payments due for the E-VAT which should have been
deducted from the payments made by us to your Joint
Venture.  Copy of the payments made by our company to the
BIR relative to the E-VAT is hereto attached as Annex "1" for
your perusal and ready reference.

This being the case and to offset the advances made by our
company, we would like to inform you that our company would
deduct the payments made for E-VAT to the amount due to your
Joint Venture.   Only by doing so, would our advances be settled
and liquidated.  We hope that our auditor and your auditor can
discuss this matter to avoid any possible conflict regarding this
matter.
From the foregoing letter, it is evident that LVM unilaterally
broached its intention of deducting the subject E-VAT payments
only on 15 May 2001 or long after the project's completion on 9
July 1999.[29]  In the absence of any stipulation thereon, however,
the CA correctly disallowed the offsetting of said sums from the
retention money undoubtedly due the Joint Venture.  Courts are
obliged to give effect to the parties' agreement and enforce the
contract to the letter.[30]  The rule is settled that they have no
authority to alter a contract by construction or to make a new
contract 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.  Courts cannot
supply material stipulations, read into the contract words it does
not contain[31] or, for that matter, read into it any other intention
that would contradict its plain import. [32]  This is particularly true
in this case where, in addition to the dearth of a meeting of
minds between the parties, their contemporaneous and
subsequent acts fail to yield any intention to offset the said E-VAT
payments from the retention money still in LVM's possession.

In taking exception to the CA's affirmance of the CIAC's rejection

of its position for lack of contractual basis, LVM argues that the
Joint Venture's liability for E-VAT as an entity that renders
services in the course of trade or business need not be stated in
the Sub-Contract Agreement considering that it is an obligation
imposed by law which forms part of, and is read into, every
contract.[33]  As correctly argued by the Joint Venture, however,
there are two (2) contracts under the factual milieu of the case:
the main contract DPWH entered into with LVM for the
construction of the Arterial Road Link Development Project in
Southern Leyte and the Sub-Contract Agreement the latter in
turn concluded with the Joint Venture over 30% of said project's
contract amount.  As the entity which directly dealt with the
government insofar as the main contract was concerned, LVM
was itself required by law to pay the 8.5% VAT which was
withheld by the DPWH in accordance with Republic Act No.
8424[34] or the Tax Reform Act of 1997 as well as the National
Internal Revenue Code of 1997  (NIRC).  Section 114 (C) of said
law provides as follows:

"Section 114. Return and Payment of Value-Added Tax. -

xxxx

(C) Withholding of Creditable Value-added Tax. - The

Government or any of its political subdivisions, instrumentalities
or agencies, including government-owned or -controlled
corporations (GOCCs) shall, before making payment on account
of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the
value-added tax due at the rate of three percent (3%) of the
gross payment for the purchase of goods and six percent (6%) on
gross receipts for services rendered by contractors on every sale
or installment payment which shall be creditable against the
value-added tax liability of the seller or
contractor: Provided, however, That in the case of government
public works contractors, the withholding rate shall be eight and
one-half percent (8.5%): Provided, further, That the payment
for lease or use of properties or property rights to nonresident
owners shall be subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor or person in
control of the payment shall be considered as the withholding
agent."

For the Sub-Contract Agreement, on the other hand, respondent

F. Sanchez Construction, acting on behalf of the Joint Venture,
issued BIR-registered receipts for the sums paid by LVM for
Billing Nos. 1 to 26, indicating the total amount paid by the latter,
the retention fee deducted therefrom and the tax due thereon.
[35]
 These were in consonance with paragraph 3 of the Sub-
Contract Agreement which, after stating that LVM's payment shall
"be on item of work accomplished in the sub-contracted portion
of the project awarded unit cost of the project less NINE PERCENT
(9%)," simply provided, that "(t)he SUB-CONTRACTOR shall issue
a BIR registered receipt to the CONTRACTOR." [36] As the VAT-
registered person, on the other hand, Fortunato T. Sanchez, Sr.
[37]
 also filed the corresponding Monthly VAT Declarations [38] with
the BIR which, by themselves, are evidence of the Joint Venture's
VAT liability for LVM's payments on its billings. In fixing the base
of the tax, the first paragraph A Section 108 of the NIRC provides
that "(t)here shall be levied assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services, including the use
or lease of properties."

In the absence of any stipulation regarding the Joint Venture's

sharing in the VAT deducted and withheld by the DPWH from its
payment on the main contract, the CIAC and the CA correctly
ruled that LVM has no basis in offsetting the amounts of said tax
from the retention still in its possession.  VAT is a uniform tax
levied on every importation of goods, whether or not in the
course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of
services in the course of trade or business. [39]  It is a tax on
transactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable
thereto.[40]  As an indirect tax that may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or
services, VAT should be understood not in the context of the
person or entity that is primarily, directly and legally liable for its
payment, but in terms of its nature as a tax on consumption.[41]

Neither do we find merit in LVM's harping over the lack of

showing in the record that the Joint Venture has actually paid its
liability for VAT.  For this purpose, LVM insists that the Official
Receipts for its payments on the Joint Venture's billing were
issued by respondent F. Sanchez Construction and that the
Monthly VAT Declarations were, in fact, filed by Fortunato
Sanchez, Sr.  However, the evidence on record is to the effect
that, failing to register with the Securities and Exchange
Commission (SEC) and to obtain a Mayor's Permit and
authorization from the BIR to print its official receipts, the Joint
Venture apprised LVM of its intention to use respondent F.
Sanchez Construction's BIR-registered receipts. [42]  Aside from
being indicative of its knowledge of the foregoing circumstances,
LVM's previous unqualified acceptance of said official receipts
should, clearly, bar the belated exceptions it now takes with
respect thereto. A party, having performed affirmative acts upon
which another person based his subsequent actions, cannot
thereafter refute his acts or renege on the effects of the same, to
the prejudice of the latter.[43]

To recapitulate, LVM, as Contractor for the Project, was liable for

the 8.5% VAT which was withheld by the DPWH from its
payments, pursuant to Section 114 (C) of the NIRC.  Absent any
agreement to that effect, LVM cannot deduct the amounts thus
withheld from the sums it still owed the Joint Venture which, as
Sub-Contractor of 30% of the Project, had its own liability for
10% VAT insofar as the sums paid for the sub-contracted works
were concerned. Although the burden to pay an indirect tax like
VAT can, admittedly, be passed on to the purchaser of the goods
or services, it bears emphasizing that the liability to pay the same
remains with the manufacturer or seller like LVM and the Joint
Venture.  In the same manner that LVM is liable for the VAT due
on the payments made by the DPWH pursuant to the contract on
the Project, the Joint Venture is, consequently, liable for the VAT
due on the payments made by LVM pursuant to the parties' Sub-
Contract.cralaw

WHEREFORE, premises considered, the petition is DENIED for

lack of merit and the CA's 28 September 2007 Decision is,
accordingly, AFFIRMED in toto.

SO ORDERED.

Carpio, (Chairperson), Brion, Perez, Sereno, and Reyes, JJ.