Central Board of Indirect Taxes & Customs (CBIC) has issued Circular No.118/37/2019-GST dated 11th October, 2019 to clarify that 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 as the service provider is not involved in software testing alone as a separate service and 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.
Further, it has also been 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 IGST Act, 2017. Provisions of Section 13(3)(a) of IGST Act, 2017 do not apply separately for determining the place of supply for ancillary supply in such cases.
For more information please refer the attached Circular.
Section 13(2) of IGST Act, 2017–
Place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services. Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.
Section 13(3)(a) of IGST Act, 2017-
Place of supply of the following services shall be the location where the services are actually performed, namely services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services………….