CBIC issues Clarification on Determination of Place of Supply in case of supply of Software or Design Services

The Central Board of Indirect Taxes and Customs (CBIC) vide a circular dated 11th October 2019 has issued a clarification regarding the determination of place of supply in case of software or design services related to Electronics Semi-conductor and Design Manufacturing (ESDM) industry. These clarifications are made to address the representations made by supplier of software or design services located in the taxable territory to a service recipient located in non-taxable territory by using the sample hardware kits provided by the service recipient.

The provisions relating to determination of place of supply as contained in the Integrated Goods & Services Tax Act, 2017 have been examined by CBIC and in order to ensure uniformity in the implementation of the provisions of the law CBIC has clarified the following:

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.

So, the place of supply is the location of the service recipient as per Section 13(2) of the IGST Act in cases 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. 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.

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