Lahore: The income tax department has failed to substantiate that transactions between two associated entities qualify as “sales,” after an audit of a yarn manufacturer’s tax return revealed discrepancies.
The taxation officer, in charge of auditing the manufacturer’s tax records, flagged several issues, including one significant transaction regarding the transfer of raw materials to a sister company. The officer interpreted this transfer as a sale, which he believed should be assessed for the taxpayer’s final tax liability.
The taxpayer opposed this conclusion, arguing that its buying and selling operations were centralized. It explained that cotton, purchased in bulk, was allocated to various mills within the group after one member made the payment. The company maintained that these internal transfers within the group did not involve any exchange of money and, therefore, should not be treated as sales.
Despite the taxpayer’s explanation, the taxation officer concluded that the transfers were indeed sales and should be taxed accordingly, citing the recording of net amounts as sales in the company’s profit and loss statements. This interpretation led to an amended tax assessment, creating a demand for additional taxes.
The Commissioner (Appeals) upheld the amended assessment order, but the matter was taken to the tribunal, which sided with the taxpayer. The tribunal ruled that the transaction lacked the essential element of cash consideration and could not be classified as a sale. It emphasized that the transaction was merely an internal arrangement within associated entities.
The higher appellate forum supported the tribunal's decision, maintaining that the transactions should be seen as non-monetary arrangements between associated concerns, and not as sales subject to taxation.
This ruling highlights the complexity of inter-company transactions and the importance of clear definitions in tax assessments.
