Clarification regarding determination of place of supply in case of software/design services related to Electronics Semi-conductor and Design Manufacturing (ESDM) industry.
Circular No. 118/37/2019-GST
F. No. 354/136/2019-TRU
Government of India
Ministry of Finance
Department of Revenue
Tax research Unit
Room No. 156, North Block,
New Delhi, the 11th October 2019
The Principal Chief Commissioners/ Chief Commissioners/ Principal
Commissioners/ Commissioner of Central Tax (All) /
The Principal Director Generals/ Director Generals (All)
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.
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
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.
(Harish Y N)
Tel: 011 2309 5547
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