The West Bengal Authority of Advance Ruling (AAR) in the case of Himalayan Flour Mill Pvt. Ltd. In Order No. 08/WBAAR/2022-23 dated 18.08.2022, has ruled that the composite supply of services by way of milling of food grains into flour to the Government of West Bengal for distribution of such flour under the Public Distribution System is eligible for GST exemption under Entry No. 3A of the Exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

In this case, the applicant entered into an agreement with the District Controller of Food and Supplies, Government of West Bengal, for the supply of fortified wholemeal atta. According to the agreement, the State Government (Food & Supplies Department) sends the whole, unpolished food grain to the applicant for crushing and processing it into flour. The applicant returns the flour packed in the manner as the State Government requires by fortifying the crushed grain with the vitamin, which is then distributed through the Public Distribution System (PDS) by the State Government on behalf of the Food and Supplies Department, Government of West Bengal.

The applicant sought an advance ruling on the issue of whether the composite supply of services by way of milling of food grains into flour to the West Bengal government for distribution of flour under PDS is eligible for GST exemption.

The applicant submitted that, as per the agreement, the output generated from the process of milling is 95% per quintal of wheat. The balance of 4% is for de-branning and 1% in the form of refraction for cleaning. The bran and refractors generated are retained by the applicant for sale in the open market. The applicant retains the gunny bags into which food grains are supplied to him by the government. These gunny bags are also available for sale on the market.

The applicant contended that the supply is covered under serial no. 3A of Notification no. 12/2017-Central Tax (Rate) dated June 28, 2017 and is exempted from payment of tax.

For being eligible for the exemption under serial no. 3A of Notification no. 12/2017-Central Tax (Rate) dated June 28, 2017, the supply being made can be regarded as a composite supply of goods and services. The supply qualifies as a function entrusted to a panchayat under Article 243G of the Constitution or a function of a municipality under Article 243W of the Constitution. The value of the supply of goods constitutes not more than 25 per cent of the value of the said composite supply.

The AAR observed that the value of by-products retained by the appellant and yielded during CMR milling, which were allowed to be retained by the appellant to meet the CMR activity cost, must obviously be included as part of the value of supply and also be considered a bona fide form of consideration. The value of supply shall be the consideration in money and shall also include all the components for non-cash consideration.

Further, the AAR noted that public distribution is specifically mentioned in Entry 28 of the Constitution's 11th Schedule, which lists the activities that can be delegated to a Panchayat under Article 243G of the Constitution. Hence, the 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.