PDS Flour Milling Stays GST-Exempt Only Within a 25% Goods-Value Line: West Bengal AAR’s Arithmetic in Darjeeling Flour Mills

Flour mills that process wheat into fortified atta for the Public Distribution System occupy an odd GST position: they’re supplying a service (milling) bundled with goods (the fortificant and packing material) to a government department, for a welfare scheme — and whether that bundle is GST-exempt or taxable at 5% turns on a single number that has to be recalculated, supply by supply, every time. The West Bengal Authority for Advance Ruling’s ruling in the case of Darjeeling Flour Mills Private Limited (reported 8 October 2026) is a clean worked example of exactly that arithmetic.

Sourcing note: this article is based on TaxGuru’s reporting of this ruling. The AAR’s order number and exact order date were paywalled in the source reviewed and could not be independently verified within this editorial cycle.

The applicant mills wheat into fortified flour for distribution through the Public Distribution System, supplied to the State Food & Supplies Department. The Authority held that this composite supply qualifies for exemption under Serial No. 3A of Notification No. 12/2017-Central Tax (Rate) — which exempts composite supplies to government bodies, where the goods component doesn’t exceed 25% of the total value, relating to a function entrusted to a Panchayat (under Article 243G) or Municipality (under Article 243W) — provided that 25% threshold actually holds. If the goods component exceeds that line, the exemption falls away entirely and the full consideration is taxed at 5% (2.5% CGST + 2.5% SGST) under Serial 26(i)(f) of Notification No. 11/2017-Central Tax (Rate).

The Authority’s own worked numbers are the real lesson here. On the facts before it, the AAR accepted a total composite-supply value of ₹260.48, including ₹124 of non-cash consideration, and treated ₹60 of that (₹10 fortification cost plus ₹50 packing cost) as the “goods” component — working out to 23.03% of the total, just inside the 25% line. The ruling also notes, citing Circular No. 153/09/2021-GST, that whether the goods value stays within 25% is a question of fact, decided case by case — meaning no mill can treat its exemption as a fixed, set-and-forget position; it has to be recalculated and defended on every costing cycle.

Why It Matters

This matters well beyond flour mills: it’s a template for how the 25%-goods-value test under Notification 12/2017’s composite-supply exemption entries gets applied in practice, including the AAR’s willingness to count non-cash consideration toward total value. Any business supplying a mixed goods-and-service composite bundle to government bodies for Panchayat/Municipality functions — not just milling — should read this ruling as a worked precedent on how the arithmetic, and the burden of proving it, actually plays out before an Authority.

Key Takeaways

• Composite supply of milling + PDS distribution to a State Food & Supplies Department qualifies for exemption under Sl. No. 3A, Notification No. 12/2017-CT (Rate), conditional on the goods component staying within 25% of total composite-supply value.
• Exceeding 25% means the entire consideration is taxed at 5% under Sl. 26(i)(f), Notification No. 11/2017-CT (Rate) — there is no partial or blended outcome.
• The AAR counted non-cash consideration (₹124 of a ₹260.48 total value) toward the composite-supply value in this case.
• Per Circular No. 153/09/2021-GST, the 25% test is a question of fact, assessed case by case — not a one-time determination.

Practical Implications

Businesses relying on this exemption category — government-contracted composite supplies of goods bundled with a service, tied to Panchayat/Municipality functions — should recompute the goods-value percentage whenever input costs change, rather than assuming a prior favourable ratio continues to hold. Given the binary consequence (full exemption or full 5% taxation on the entire consideration, with nothing in between), a costing error close to the 25% line carries outsized tax exposure relative to the margin typically earned on these government-rate contracts.

Action Checklist

• Recompute the goods-to-total-value ratio for every costing cycle, not just at contract inception, for any composite supply relying on this exemption.
• Document how non-cash consideration is valued if any forms part of the composite supply.
• Confirm the underlying function genuinely traces to Article 243G (Panchayat) or 243W (Municipality) before relying on this exemption category at all.
• Treat an advance ruling as persuasive, not universally binding — it binds only the applicant and the jurisdictional officer for that specific transaction.

Relevant Sections

Section 97/98, CGST Act, 2017 (Advance Ruling provisions).

Relevant Notifications

Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017, Serial No. 3A (exemption entry).
Notification No. 11/2017-Central Tax (Rate), Serial 26(i)(f) (5% rate, if exemption is lost).
Circular No. 153/09/2021-GST (clarifying the 25%-value test as a question of fact).

FAQs

Is this ruling binding on other flour mills? No — an advance ruling binds only the applicant and the jurisdictional tax officer for that specific transaction.

What happens if the goods value is exactly 25%? Businesses at or very near the threshold should seek a specific ruling or professional opinion rather than relying on proximity to the line.

Does non-cash consideration always count toward the 25% calculation? This AAR included it on its specific facts; the general valuation rules under Section 15 and the Valuation Rules govern how non-cash consideration is valued, and that treatment should be independently confirmed for different fact patterns.

This article is based on secondary reporting (TaxGuru) of a West Bengal AAR ruling in the matter of Darjeeling Flour Mills Private Limited, published 8 October 2026. The AAR’s order number and exact order date were not available in the source reviewed and could not be independently verified within this editorial cycle. This is not legal or professional advice; readers should verify the full ruling and its applicability to their own facts before relying on it.