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

The AAR, West Bengal ruled on milling services provided to the State Government for the Public Distribution System. The applicant mills wheat into fortified flour and packs it for distribution. The Authority determined this constitutes a composite supply with milling as the principal service. Since the activity falls under functions entrusted to Panchayats under Article 243G of the Constitution and the value of goods (Rs. 60/-) represents only 23.03% of the total supply value (Rs. 260.48/-), which is below the 25% threshold, the supply qualifies for exemption under Notification No. 12/2017-Central Tax (Rate).

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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.

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