Case: 79. LVM Construction Corp. v. F.T.

Sanchez/Socor/Kimwa joint venture (2011)

Topic: Nature/Concept/Characteristics of VAT

DOCTRINE:

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.

ACTION SEQUENCE:

Complaint for recovery of a sum of money and damages with CIAC-> CIAC granted -> CA
affirmed in toto-> SC affirmed

FACTS

In 1996, the Department of Public Works and Highways (DPWH) awarded petitioner LVM
Construction a project to construct an Arterial Road Link in Southern Leyte. LVM Construction
subcontracted respondents F.T. Sanchez/Socor/Kimwa to build a portion of the link for 30% of
the contract amount or 86.3 Million pesos. Particularly, the parties agreed to a Sub-Contract
agreement where LVM would retain 10% for every billing. Problem ensued when the respondent
joint venture completed all the sub-contracted works and demanded LVM to pay the 2.5 Million
it retained for Billing No. 27 by reason of non-payment of DPWH and the 10% LVM had retained
for every billing. For its part, LVM averred that its auditors discovered that E-VAT of 8.5% had
not been deducted for the first 26 billings and that it would deduct said VAT from the amount still
due the joint venture. The joint venture replied that it issued receipts for the transaction where it
already paid for 10% VAT.

After the lapse of 4 years with its claims totaling 22.9 Million (including interest) unpaid, the
Managing Director of the joint venture filed a complaint for a sum of money and damages with
the Construction Industry Arbitration Commission (CIAC). In its Answer, LVM insisted that it did
not release the 10% retention for the first 26 billings to make the corresponding 8.5%
deductions for E-VAT due the BIR.LVM also stated that the respondent joint venture owed it
21.7 Million in liquidated damages for delays in the completion of the project. The CIAC granted
the joint venture’s complaint but only as to the sum of 11.3 Million on the ground that VAT
deductions of the DPWH payment to LVM already included all its subcontractors and that delays
of the joint venture were justified. The CA affirmed the CIAC decision in toto.

ISSUE/S

W/N the CA erred in awarding respondent joint venture its claim for the retained 10% of the first
26 billings allegedly for payment of E-VAT, as the joint venture already paid VAT?

RULING

NO. Under Sec. 1114 (C) of the NIRC, the government or any of its political subdivisions shall
deduct and withhold the VAT due at 3% of the gross payment for purchase of goods and 6% of
the gross receipts for services and in the case of public work contractors the withholding rate
shall be 8.5%. In the instant case, the DPWH already withheld and deducted the VAT due the
BIR in its contract with LVM and the Sub-Contract Agreement between the latter and the joint
venture not providing the power to make the same deductions to LVM. 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.

DISPOSITIVE PORTION

Petition is DENIED.

NOTES

- 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.
- 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.
- 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.

Digest by Murao

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