This circular provides clarification on the determination of place of supply for software development and design services related to the Electronics Semiconductor and Design Manufacturing (ESDM) industry, where the supplier is located in India and the service recipient is located outside India.

It addresses situations where Indian companies develop software and design integrated circuits electronically for overseas clients, based on design inputs and intellectual property blocks provided digitally by the clients. In some cases, prototype hardware or sample test kits are temporarily provided by the foreign clients to the Indian service providers solely for testing and validation of the developed software or design.

The circular clarifies that in such contracts, the principal supply is software development and design, while testing of software on prototype hardware is only an ancillary activity. These services constitute a composite supply, which must be treated as a single supply for tax purposes. Artificial segregation of testing as a separate performance-based service is not permitted under law.

Accordingly, it is clarified that the place of supply in such composite supplies shall be determined under section 13(2) of the IGST Act, i.e. the location of the service recipient. Provisions relating to performance-based services on goods made physically available, under section 13(3)(a), shall not apply in these cases where testing is merely incidental to the main supply of software/design services