2023 (9) TMI 120 - AAR - GST

Company providing wheat crushing services for Public Distribution System qualifies for GST exemption under Notification 12/2017

The AAR, West Bengal ruled that a company providing wheat crushing services to convert wheat into fortified atta for the State Government's Public ... Composite supply - value of supply where consideration is not wholly in money - Rule 27(b) of the GST Rules - non monetary consideration (net realizable value) - function entrusted to a Panchayat/municipality under the Eleventh Schedule - exemption under Entry 3A of Notification No. 12/2017 CT(Rate) - 25% goods component threshold in composite supplyComposite supply - The activity of milling of wheat into fortified atta with packing constitutes a composite supply with milling (service) as the principal supply. - HELD THAT: - The agreement required crushing of wheat, premixing of micro nutrients (fortification) and packing into labelled poly packs for delivery to nominated distributors. Those integrated activities satisfy the definition of composite supply where the supply of services by way of milling is the principal supply. The Authority so found after examining the contract terms and the nature of the activities undertaken by the applicant. [Paras 4]The supply is a composite supply with milling as the principal supply.Function entrusted to a Panchayat/municipality under the Eleventh Schedule - exemption under Entry 3A of Notification No. 12/2017 CT(Rate) - The composite supply is made in relation to a function entrusted to a Panchayat under Article 243G (public distribution) and thus falls within the scope of Entry 3A for potential exemption. - HELD THAT: - The empanelment and supply to the State Government were executed pursuant to government orders and the Public Distribution System. Circular No. 153/09/2021 GST recognises PDS as an activity listed in the Eleventh Schedule. On that basis the Authority concluded the composite supply was in relation to a function entrusted to a Panchayat and therefore eligible to be considered under Entry 3A of Notification No. 12/2017 CT(Rate). [Paras 4]The composite supply relates to a function entrusted to a Panchayat and falls within Entry 3A's ambit.Value of supply where consideration is not wholly in money - Rule 27(b) of the GST Rules - non monetary consideration (net realizable value) - Value of the composite supply includes both cash consideration and the known non monetary consideration (gunny bags and by products) in terms of Rule 27(b). - HELD THAT: - Price was not the sole consideration. Rule 27(b) prescribes that where consideration is not wholly in money the value shall be the sum of cash consideration and the monetary equivalent of non cash consideration if known at the time of supply. The Department's memo quantified the non cash elements (gunny bags and by products) as ascertainable net realizable values. Applying Rule 27(b) to those agreed notional values, the Authority treated Rs.136.48 as cash consideration and Rs.124 as non cash consideration, yielding the total value of supply relied upon in the ruling. [Paras 2, 4]Value of supply comprises cash consideration plus the known monetary equivalent of non cash consideration under Rule 27(b).25% goods component threshold in composite supply - exemption under Entry 3A of Notification No. 12/2017 CT(Rate) - The value of goods (fortification inputs and packing) is 23.03% of the total value of the composite supply and therefore does not exceed 25%; the supply is exempt under Entry 3A. - HELD THAT: - The applicant accepted, and the Authority accepted based on the contractual price breakup and the Department memo, that the value of goods involved (packing and fortification) amounted to Rs.60 and the aggregate supply value amounted to Rs.260.48 (cash plus non cash consideration). Calculating the ratio (60/260.48 x 100) produced 23.03%, which is below the 25% threshold specified in Entry 3A and Circular guidance. The Authority therefore concluded that the composite supply qualifies for exemption under Entry 3A of Notification No.12/2017 CT(Rate). [Paras 2, 4]The goods component does not exceed 25% and the composite supply is exempt under Entry 3A.Final Conclusion: The Authority ruled that the milling plus fortification and packing activity is a composite supply (milling being the principal supply), relates to a function entrusted under the Eleventh Schedule, and - treating cash and known non cash consideration under Rule 27(b) - the goods component is 23.03% of the total value; accordingly the supply is exempt under Entry 3A of Notification No. 12/2017 CT(Rate). 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 and components to be included 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).Summary:Issue 1: Value of Supply of Services Provided by the Applicant to the State GovernmentThe applicant, a flour miller, provides services to the State Government for converting wheat into fortified atta, which is then distributed through the Public Distribution System (PDS). The ownership of the wheat and atta remains with the State Government throughout the process. The applicant charges Rs 179.48 per quintal for crushing, which includes various components like crushing charges, fortification charges, packing charges, and transportation & handling charges. Additionally, the applicant retains the gunny bags and by-products (bran and refraction) generated during the milling process, which are considered non-monetary considerations. The total value of supply is calculated as Rs 260.48, which includes both cash consideration (Rs 136.48) and non-cash consideration (Rs 124).Issue 2: Rate of Tax Applicable and Components for CalculationThe applicant contends that the supply of services should be exempt from GST under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended by Notification No. 2/2018-Central Tax (Rate) dated 25.01.2018. This exemption applies if the value of goods in the composite supply does not exceed 25% of the total value. The applicant argues that the value of goods (packing material and vitamins) is Rs 60, which is 23.03% of the total value of supply (Rs 260.48). Therefore, the supply qualifies for exemption.Observations and Findings:1. The supply qualifies as a composite supply of goods and services, with the principal supply being the milling service.2. The composite supply is made in relation to a function entrusted to a Panchayat under Article 243G of the Constitution, specifically public distribution.3. The value of goods involved in the composite supply does not exceed 25% of the total value of supply, making the supply eligible for exemption under Notification No. 12/2017-Central Tax (Rate).Ruling:The composite supply of services by way of milling of 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.