ISLAMABAD: The Supreme Court of Pakistan, while dismissing an appeal of the Federal Board of Revenue (FBR), ruled that the transfer of raw materials by a company to its sister concern (associated entity) does not qualify as sale for the purpose of taxation.
In this regard, the SC has issued a judgement against the FBR.
According to the SC’s judgement, we determine that the tax obligations outlined in Section 153 of the Income Tax Ordinance do not pertain to the transfer of raw materials to the sister concern.
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This petition presented a solitary question for a grant of leave to appeal against the order issued on the 16th of March, 2022, by the Division Bench of the High Court. This order arose from an application lodged by the Revenue under Section 133(1) of the Income Tax Ordinance,2001 (the ordinance).
The question is whether the transactions conducted by the respondent company, taxpayer, with its associated entity, M/s Saritow Spinning Mills Limited (the company), qualify as “sales.” This question is pivotal, as it may have significant implications for determining tax obligations and classifying transactions under the ordinance.
For the tax year 2003, the taxpayer’s tax return was selected for an audit in accordance with Section 177 of the Ordinance. The taxation officer identified several discrepancies in the taxpayer’s records during the audit. One significant issue related to the transfer of raw materials to the company.
The taxation officer interpreted the transaction concerning the transfer of raw materials as a sale, which he believed should be assessed under Section 169 of the ordinance to determine the taxpayer’s final tax liability.
However, the taxpayer opposed this conclusion. The taxpayer argued that its buying and sales operations were centralised 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 since these transfers occurred within the group without any exchange of monetary consideration, it should not be classified as sales.
The taxpayer subsequently challenged the amended assessment order before the Commissioner (Appeals). After thoroughly reviewing the case and the arguments presented, the Commissioner (Appeals) upheld the amended assessment order.
The taxpayer then took the matter to the Appellate Tribunal Inland Revenue (the Tribunal). In this forum, the taxpayer effectively articulated its position and persuaded the Tribunal to accept its arguments. Ultimately, 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 FBR challenged the order of the ATIR before the High Court. The High Court concluded that there was no justifiable reason to categorise the alleged transactions as sales, especially since such classifications were based on mere assumptions and conjectural assertions without any concrete evidence to support them.
The SC ruled that it is essential to emphasise that, in common parlance, a sale is recognised as occurring when the ownership of goods is transferred to the buyer and payment for these goods has been made.
Notably, this payment must take the form of money, commonly referred to as the price of the goods. It is essential to clarify that if the ownership of goods is exchanged for anything other than money, the transaction cannot be classified as a sale; instead, it would be considered an exchange or barter.
The SC referred to Section 4 of the Sale of Goods Act of 1930. One of the fundamental requirements for a transaction to qualify as a sale is the presence of monetary consideration.
Moreover, sub-section 7(iii) of Section 153 of the Ordinance further elucidates the concept of a sale of goods by providing its definition. This definition encompasses any transaction in which goods are sold, irrespective of whether the payment is made in cash or on credit, and is applicable regardless of the existence of a formal written contract.
According to this definition, it is mandated that a sale must involve the receipt of consideration, which can be either cash or credit. In the present case, however, we observe a significant absence of this critical element of consideration.
Consequently, the SC concluded that the transactions documented in the ledgers merely represent a straightforward transfer of raw materials from one entity to another, devoid of any characteristics of a sale. “As such, we determine that the tax obligations outlined in Section 153 of the Ordinance do not pertain to the transfer of raw materials to the sister concern”, the SC added.
Copyright Business Recorder, 2025
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