Wheat crushing services for government distribution system qualify for tax exemption under composite supply rules

The AAR, West Bengal ruled on a composite supply case involving wheat crushing services for the State Government's Public Distribution System. The applicant mills wheat into fortified atta, receiving Rs. 179.48 per 100kg including fortification and packing charges, plus non-cash consideration of Rs. 124 from by-products and gunny bags. The AAR determined this constitutes a composite supply with milling as the principal service. Since the goods component (Rs. 60) represents only 23.03% of total supply value (Rs. 260.48), falling below the 25% threshold, and the supply relates to Panchayat functions under Article 243G, it qualifies for exemption under Notification No. 12/2017-Central Tax (Rate) entry 3A rather than 5% tax.

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Issues Involved:
1. Determination of the value of supply of services provided by the applicant to the State Government.
2. Applicable rate of tax on the value of supply and the components to be included in the calculation of the percentage of the value of goods in the total value of composite supply for the purpose of Notification No. 2/2018-Central Tax (Rate).

Issue 1: Determination of the Value of Supply

The applicant, a flour miller, is engaged in converting wheat provided by the State Government into fortified atta, without transferring ownership of the wheat or atta. The application was made under Section 97(1) of the GST Act, seeking to determine the value of supply of services provided to the State Government. The applicant argued that the value of supply should include both monetary and non-monetary considerations, such as the retention of gunny bags, bran, and refraction generated during the milling process.

The applicant provided detailed calculations, stating that the cash consideration paid by the State Government is Rs 136.48 per quintal after deducting Rs 43 for the gunny bags. The non-monetary considerations include the value of bran and refraction, valued at Rs 20 per kg and Re 1 per kg, respectively. The total value of supply was determined to be Rs 260.48, which includes Rs 136.48 in cash and Rs 124 in non-cash consideration.

Issue 2: Applicable Rate of Tax and Components for Calculation

The applicant contended 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. The applicant argued that the value of goods, including packing material and fortification charges, amounts to Rs 60, which is 23.03% of the total value of supply (Rs 260.48). Therefore, the supply should be exempt from GST.

The Authority analyzed whether the supply qualifies as a composite supply and if it is related to any function entrusted to a Panchayat under Article 243G of the Constitution. It was determined that the activities undertaken by the applicant qualify as a composite supply, where the principal supply is the service of milling. The agreement between the applicant and the State Government was found to be in relation to a function entrusted to a Panchayat under Article 243G.

The Authority also examined whether the value of goods in the composite supply exceeds 25% of the total value. It was concluded that the value of goods (Rs 60) does not exceed 25% of the total value of supply (Rs 260.48), making the supply eligible for exemption under Notification No. 12/2017-Central Tax (Rate).

Ruling:

The value of supply shall include both monetary and non-cash considerations. The composite supply of services by way of milling food grains into flour (atta) to the Food & Supplies Department, Government of West Bengal, for distribution under the Public Distribution System is eligible for exemption under entry serial no. 3A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, since the value of goods involved does not exceed 25% of the value of supply.

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