2020 (2) TMI 593 - AAR - GST

Exclusive PDS Grain Distribution Agreement: Exemption for Supply of Grains

The Authority ruled that if the agreement binds both the Applicant and the State Government to distribute grains through PDS exclusively, the supply of ... Composite supply - principal supply - service predominant over goods - packing material value threshold 25% - supply in relation to a function entrusted to a Panchayat - exemption under SI No. 3 and 3A of Notification No. 12/2017 CT (Rate) - supply to the State Government - admissibility under section 97(2)(b) of the GST Act - unregistered applicant and dispensation of section 98(1) requirementsAdmissibility under section 97(2)(b) of the GST Act - unregistered applicant and dispensation of section 98(1) requirements - Admissibility of the Applicant's advance ruling application. - HELD THAT: - The Authority held the question admissible under section 97(2)(b) because the Applicant seeks a determination on tax treatment of its proposed activity. As the Applicant is unregistered under the GST Act, the requirement under section 98(1) to obtain jurisdictional officer's comment is dispensed with since neither Central nor State tax administrations have ascertained administrative jurisdiction over an unregistered person.Application admitted; requirements under section 98(1) dispensed with for the unregistered Applicant.Composite supply - principal supply - service predominant over goods - packing material value threshold 25% - Whether the Applicant's activity is a pure service or a composite supply and the significance of the value proportion of packing materials. - HELD THAT: - The Authority examined the nature of the Applicant's proposed delivery - crushing of food grains together with provision of packing materials. It concluded that the activities are supplied in conjunction in the ordinary course of business and that crushing (the service) is the predominant element, while packing material supply is ancillary. Therefore the transaction is a composite supply with the service as the principal supply. However, in the absence of any quantitative details, the proportion of packing materials in value terms could not be determined and remains unascertained for the purpose of the exemption which requires goods not to exceed 25% of the value.The supply is a composite supply where crushing is the principal service; applicability of exemption is subject to the packing materials not exceeding 25% of the composite supply's value (to be ascertained).Supply to the State Government - Whether the recipient of the supply is a government entity for eligibility under the Exemption Notification. - HELD THAT: - The Applicant intends to supply the composite service to the State Government and the Authority notes that the recipient, as described in the submissions, is the State Government. That factual position satisfies the recipient criterion in the Exemption Notification, subject to verification of contractual terms and the nature of the supply.The recipient qualifies as the State Government for purposes of examining exemption eligibility.Supply in relation to a function entrusted to a Panchayat - exemption under SI No. 3 and 3A of Notification No. 12/2017 CT (Rate) - Whether the Applicant's composite supply is exempt under Sl. No. 3/3A of Notification No.12/2017 CT (Rate) as an activity in relation to a function entrusted to a Panchayat. - HELD THAT: - Relying on the Central Government's Circular and the Exemption Notification, the Authority explained that supplies made to governments are exempt when they are in relation to functions entrusted to Panchayats or Municipalities as per the Constitution. The Authority further clarified that such exemption applies to pure services or composite supplies where the value of goods does not exceed 25%. The Authority found that if the terms of the agreement bind both parties so that the grains cannot be diverted from distribution through the Public Distribution System (PDS) - an activity covered under Entry No. 28 of the Eleventh Schedule and entrusted to Panchayats under Article 243G - then the Applicant's composite supply would be in relation to a Panchayat function. Given that condition, and provided the packing materials do not exceed 25% in value, the supply falls within Sl. No. 3A and is exempt.The composite supply will be exempt under Sl. No. 3A if the agreement binds both parties to restrict the grains to PDS distribution (thus relating the supply to a Panchayat function) and the packing material component in value does not exceed 25%.Final Conclusion: The Authority admitted the application and held that the Applicant's proposed activity constitutes a composite supply with crushing as the principal service; the recipient is the State Government; and the supply will be exempt under Sl. No. 3A of Notification No. 12/2017 CT (Rate) only if the contract binds both parties to restrict use to distribution through the PDS (thus relating it to a Panchayat function) and the packing materials in the composite supply do not exceed 25% of the value; the conditions as to contractual restriction and value proportion remain to be ascertained. Issues involved:1. Admissibility of the Application2. Submission of the Applicant3. Observations & Findings of the AuthorityAdmissibility of the Application:The Applicant sought a ruling on whether supplying the service of crushing food grains to the State Government for distribution through the Public Distribution System (PDS) is exempt under specific notifications. The question was deemed admissible under the GST Act as the Applicant was unregistered, and the requirements under the Act were dispensed with.Submission of the Applicant:The Applicant clarified that they would only provide the service of crushing food grains, with the State Government retaining ownership of the grains. The Applicant argued that this service falls under a function entrusted to a Panchayat under the Constitution and should be exempt under relevant notifications. They highlighted that the crushing of grains is related to PDS distribution, covered under the Constitution.Observations & Findings of the Authority:The Authority referred to a Circular clarifying the exemption for services provided to the government under previous notifications, which continued under the GST regime. They emphasized that the supply should be a pure service or a composite supply not exceeding 25% of goods' value. The Authority analyzed the Applicant's case as a composite supply of crushing grains and providing packing materials, with the former being the principal supply. They concluded that if the agreement binds both parties to distribute grains through PDS, the supply would be exempt under specific notifications.Ruling:The Authority ruled that if the agreement binds both the Applicant and the State Government to distribute grains through PDS exclusively, the supply of crushing and delivering grains will be exempt under relevant notifications, provided the value of packing materials in the composite supply does not exceed 25%.This ruling remains valid unless declared void under the GST Act provisions.