‘Transfer of raw material within sister concerns is not sales’

LAHORE: A taxpayer has compelled the tax department to withdraw additional tax on transfer of raw material within sister concerns as no consideration was involved in the transaction.

The taxpayer had challenged an amended tax assessment on the ground that sale of goods occurs when ownership of goods is transferred to buyer and a payment is made in the form of money. If such ownership is exchanged for anything other than money, such transaction cannot be classified as a sale and would be considered as exchange or barter.

The taxpayer, a public limited company, was involved in manufacturing and selling of yarn. The department had selected its tax return for audit under Section 177 of the Income Tax Ordinance. The taxation officer had identified several discrepancies in the record during the audit.

One significant issue related to the transfer of raw materials to the sister concerns, which he took as a sale and assessed under Section 169 to determine the taxpayer’s final tax liability. The taxpayer preferred to oppose the conclusion before the commissioner appeals with an argument that buying and sales operations were centralized within their structure and raw material was procured in large quantities collectively and once one of the group members made the payment, the raw material then be allocated to other sister concerns within the group based on their individual needs. Since these transfer occurred within the group without any exchange of monetary consideration, it should not be classified as sales.

But the audit officer had not accepted this reasoning and 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 statements. This finding culminated in an amended order under Section 122 (1) of the Ordinance, by which tax demand was created.

However, the departmental tribunal did not agree with the department and 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 transaction.

Copyright Business Recorder, 2025