2023 (2) TMI 928 - AAR - GST

Milling services for Public Distribution System qualify for GST exemption under Notification 12/2017 as composite supply

In Re: M/s. Somnath Flour Mills Private Limited

The AAR, West Bengal ruled on milling services provided to the State Government for the Public Distribution System. The applicant mills wheat into ... Exempt supply or not - composite supply or not - activities undertaken for milling of wheat into Wheat flour, along with fortification and supplied upon packing of the same - Valuation of supply of services provided by the applicant Company to the State Government - rate of tax applicable on the value of supply - components to be included in calculation of the % of value of goods in the total value of composite supply for the purpose of Notification No. 2/2018- Central Tax (Rate). HELD THAT:- The applicant has been selected for empanelment for crushing of wheat into wholemeal atta and fortify it by premixing of micro-nutrients containing Iron, Folic acid, Citrate, EDTA and Vitamins to a specific percentage. The agreement further requires the applicant to pack the crushed stock of wholemeal atta after fortification into properly labelled poly-packs having thickness of 50 microns or above. It, therefore, appears that the activities undertaken by them for milling of wheat into wheat flour, along with fortification and supplied upon packing of the same qualify the definition of ‘composite supply’ under clause (30) of section 2 of the GST Act where the supply of services by way of milling is the principal supply. Whether this composite supply is made in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution? - HELD THAT:- The agreement between the applicant and the State Government for supply of fortified Wholemeal Atta/Atta is found to be executed in terms of G.O. No. 2834-F.S. dated 6th September, 2017 - reference made to to Para 3.1 of the Circular No. 153/09/2021-GST dated 17.06.2021 where it is stated that ‘Public Distribution specifically figures at entry 28 of the 11th Schedule to the constitution, which lists the activities that may be entrusted to a Panchayat under Article 243G of the Constitution.’ Hence, the instant composite supply made by the applicant is found to be in relation to any function entrusted to a Panchayat under article 243G of the Constitution. Whether the value of supply of goods in this case exceeds 25 percent of the total value of the supply or not? - HELD THAT:- The cash consideration paid by the State Government is Rs 179.48/- reduced by Rs 43/-, which comes at Rs 136.48/- per quintal. Further, the contract entered into with the State Government stipulates that the applicant will retain 1kg refraction and 4kgs bran for conversion of 100 kgs of wheat. As per the contract these bran and refraction are retained by the applicant and it is sold in the open market at the prevailing market rates which is generally around Rs 20/- per kg for bran and Re 1/- per kg for refraction. This rate was also confirmed in the memo issued by State Government of West Bengal, Department of Food and Supplies vide memo no. 569(3) - FS/Sectt/Food/4P02/2016/2021 dated 18.02.2022. It is found from the agreement made between the applicant and the State Government that the applicant has been selected for empanelment for crushing of wheat into whole meal atta and fortify it by pre-mixing micro-nutrients and to pack it in 1Kg poly pouch/packet and to deliver the same to the nominated M.R. Distributors - in the instant case, the applicant receives Rs.10/- and Rs. 50/- i.e. Rs. 60/- in total against fortification cost and packing charges respectively for crushing of 100 kgs of wheat which involves supply of goods. It needs to be determined whether such value exceeds 25% of the total value of supply or not. According to the applicant, total value of supply would be Rs 260.48/- which includes both cash and non-cash consideration. In this context, in a similar kind of activity, the Appellate Authority for Advance Ruling (AAAR,), Andhra Pradesh in the matter of Sri Kanakadurga Rice and Flour Mill reported [2020 (11) TMI 72 - THE APPELLATE AUTHORITY UNDER GST, ANDHRA PRADESH] held that ‘it is clear that the value of by-products so retained by the appellant yielded during CMR milling, which were allowed to be retained by the appellant to meet the CMR activity cost shall obviously be included as part of value of supply and also to be termed as a bona fide form of consideration’. In the present case, the total value of supply to be Rs.260.48 out of which Rs.136.48 is the cash consideration and Rs.124 is the non-cash consideration, as it has been explained in the aforesaid memo. The value of goods involved in the instant supply stands at Rs.60/- against total value of supply of Rs. 260.48, thereby the value of goods involved in the instant composite supply stands at 23.03% of the total value of supply i.e., it does not exceed 25% of the value of the composite supply. Thus, the instant supply of services by way of milling of food grains into flour (atta) to Food & Supplies Department, Govt. of West Bengal for distribution of such flour under Public Distribution System is eligible for exemption under serial no. 3A of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, since the supply satisfies all the conditions specified in the said entry. Issues Involved:1. Value of supply of services provided by the applicant to the State Government.2. Rate of tax applicable on the value of supply.3. Inclusion of components in the calculation of the percentage of value of goods in the total value of composite supply for the purpose of Notification No. 2/2018-Central Tax (Rate).Issue-wise Detailed Analysis:1. Value of Supply of Services:The applicant, a flour miller, entered into a contract with the State Government of West Bengal to convert wheat into atta/fortified atta for distribution through the Public Distribution System (PDS). The ownership of the wheat remains with the State Government throughout the process. The applicant charges Rs. 179.48 per quintal for the conversion, which includes crushing charges, fortification charges, packing charges, and transportation & handling charges. Additionally, the applicant retains the gunny bags and by-products (bran and refraction) as non-monetary consideration. The value of these non-monetary considerations is Rs. 124 per quintal. The total value of supply is calculated as Rs. 260.48 per quintal, combining both monetary (Rs. 136.48) and non-monetary considerations (Rs. 124).2. Rate of Tax Applicable:The applicant argued that the supply of services should be exempt from GST under Notification No. 2/2018-Central Tax (Rate) if the value of goods in the composite supply does not exceed 25% of the total value. Alternatively, if the exemption is not applicable, the rate of tax would be 5% as per Circular No. 153/09/2021-GST. The value of goods in the composite supply includes packing material and fortification charges, which amount to Rs. 60 per quintal. The ratio of the value of goods to the total value of supply is 23.03%, which is less than the 25% threshold, making the supply eligible for exemption under Notification No. 2/2018-Central Tax (Rate).3. Inclusion of Components in Calculation:The applicant contended that the value of supply should include both monetary and non-monetary considerations as per Rule 27 of the GST Rules. The non-monetary considerations include gunny bags, bran, and refraction, which are valued at Rs. 124 per quintal. The total value of supply is Rs. 260.48, with the value of goods being Rs. 60. Since the value of goods does not exceed 25% of the total value, the supply qualifies for exemption under Notification No. 2/2018-Central Tax (Rate).Observations & Findings:The Authority found that the supply qualifies as a composite supply of goods and services, with the principal supply being the milling of wheat into atta. The supply is made in relation to a function entrusted to a Panchayat under Article 243G of the Constitution, specifically public distribution. The value of goods involved in the composite supply does not exceed 25% of the total value, making the supply eligible for exemption under Notification No. 12/2017-Central Tax (Rate), as amended.Ruling:The composite supply of services by way of milling of wheat into flour (atta) to the Food & Supplies Department, Govt. of West Bengal, for distribution under the Public Distribution System is eligible for exemption under serial no. 3A of Notification No. 12/2017-Central Tax (Rate), as amended. The value of supply shall include both monetary and non-monetary considerations, and the value of goods involved does not exceed 25% of the total value of supply.