Central Tax Circulars

CGST Circular 118/2019

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal
Commissioners/ Commissioner of Central Tax (All) /

The Principal Director Generals/ Director Generals (All)

Madam/Sir,

Subject: Clarification regarding determination of place of supply in case of
software/design services related to Electronics Semi-conductor and Design
Manufacturing (ESDM) industry – reg.

1) Various representations have been received from trade and industry seeking
clarification on determination of place of supply in case of supply of
software/design services by a supplier located in taxable territory to a
service recipient located in nontaxable territory by using the sample hardware
kits provided by the service recipient.

2) It is stated that a number of companies that are part of the growing
Electronics Semiconductor and Design Manufacturing (ESDM) industry in India
are engaged in the process of developing software and designing integrated
circuits electronically for customers located overseas. The client/customer
electronically provides Indian development and design companies with design
requirements and Intellectual Property blocks (“IP blocks”, reusable units of
software logic and design layouts that can be combined to form newer designs).
Based on these, the Indian company digitally integrates the various IP blocks
to develop the software and the silicon or hardware design. These designs are
communicated abroad (in industry standard electronic formats) either to the
customer or (on behest of the customer) a manufacturing facility for the
manufacture of hardware based on such designs.

2.1 In addition, the software developed is also integrated upon or customized
to this hardware. On some occasions, samples of such prototype hardware are
then provided back to the Indian development and design companies to test and
validate the software and design that has been developed to ensure that it is
error free.

2.2 The trade has requested clarification on whether provision of hardware
prototypes and samples and testing thereon lends these services the character
of performance-based services in respect of “goods required to be made
physically available by the recipient to the provider”.

3) The provisions relating to determination of place of supply as contained in
the Integrated Goods & Services Tax Act, 2017 (hereinafter referred to as
“the IGST Act”) have been examined. In order to ensure uniformity in the
implementation of the provisions of the law, the Board, in exercise of its
powers conferred by sub-section (1) of section 168 of the Central Goods &
Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”) clarifies
the same as below.

4) In contracts where service provider is involved in a composite supply of
software development and design for integrated circuits electronically,
testing of software on sample prototype hardware is often an ancillary supply,
whereas, chip design/software development is the principal supply of the
service provider. The service provider is not involved in software testing
alone as a separate service. The testing of software/design is aimed at
improving the quality of software/design and is an ancillary activity. The
entire activity needs to be viewed as one supply and accordingly treated for
the purposes of taxation. Artificial vivisection of the contract of a
composite supply is not provided in law. These cases are fact based and each
case should be examined for the nature of supply contracted.

4.1 Therefore, it is clarified that the place of supply of software/design by
supplier located in taxable territory to service recipient located in
non-taxable territory by using sample prototype hardware / test kits in a
composite supply, where such testing is an ancillary supply, is the location of
the service recipient as per Section 13(2) of the IGST Act. Provisions of
Section 13(3)(a) of IGST Act do not apply separately for determining the place
of supply for ancillary supply in such cases.

5) Difficulty if any, in the implementation of this circular may be brought to
the notice of the Board.