Tax dept fails to prove transactions between two entities as ‘sales’

LAHORE: The income tax department has failed to prove that transactions conducted between two associated entities qualify as ‘sales’.

According to details, the department had selected tax return of a yarn manufacturer for audit. The taxation officer identified several discrepancies in the taxpayer’s records including one significant issue related to the transfer of raw materials to a sister organization.

The taxation officer interpreted the transaction concerning the transfer of raw materials as a sale, which he believed should be assessed to determine taxpayer’s final tax liability.

The taxpayer opposed the conclusion and argued that its buying and sales operations were centralized within their structure. It explained that cotton was procured in large quantities collectively, and once one of the group members made the payment, the cotton would then be allocated to other mills within the group based on their individual needs. The taxpayer maintained that these transfers occurred within the group without any exchange of monetary consideration, it should not be classified as sales.

The taxation officer did not accept this reasoning. He concluded that the transactions should indeed be regarded as sales which were netted off for tax purposes.

He explained the rationale of his conclusion that if there had been no sales activities, the taxpayer would not have recorded the resulting net amounts as sales of raw materials in its profit and loss settlements. This finding culminated in an amended assessment order to create a tax demand.

The Commissioner (Appeals) upheld the amended assessment order. However, the tribunal decided in favour of the taxpayer, concluding that the transaction recorded in the ledger account could not be deemed a sale as it lacked the essential element of cash consideration.

The higher appellate forum maintained that these transactions should be considered as arrangements between associated concerns that lacked monetary consideration.

The department pointed out that the taxpayer had included the net amount in its sales, effectively demonstrating inter-company sales of raw materials. The higher appellate forum found this justification in substantial and upheld the tribunal decision.

Copyright Business Recorder, 2025