Software integration testing and marketing rights transfer between cost centers constitutes taxable supply under GST

The AAR held that transfer of right to do integration testing, install and market software between two cost centers of the same entity located in different states constitutes a taxable supply under GST. The transaction involved consideration of Rs.1,05,00,00,000 with invoice raised for Rs.1,02,75,11,617. Since cost centers had separate registrations in different states, they qualified as distinct persons. The supply was classified as service rather than goods, being transfer of right to perform integration testing, installation and marketing activities. The transaction satisfied supply criteria under GST law.

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Issues Involved:
1. Whether the transaction of transfer of right to do integration testing, install, and market software between two cost centers of the same entity is leviable to GST.
2. If yes, whether such supply is considered as goods or services.

Issue-wise Detailed Analysis:

1. GST Levy on Transaction Between Cost Centers:
The applicant sought clarity on whether the transaction of transferring the right to do integration testing, install, and market software from the Tamil Nadu cost center to the Karnataka cost center is subject to GST. The applicant argued that since both cost centers are part of the same legal entity, the transaction should not qualify as a supply under GST. However, the ruling clarified that for GST purposes, different cost centers with separate GST registrations are considered distinct persons. The transaction involves a recurring consideration, which qualifies as a supply under Section 7 of the CGST Act, 2017. The transfer of rights for integration testing, installation, and marketing of software is a supply made for consideration and in the course of business, thus falling within the ambit of GST.

2. Classification of Supply as Goods or Services:
The ruling further examined whether the supply should be classified as goods or services. The applicant's vehicles are manufactured by the Tamil Nadu cost center and distributed across India, while the performance upgrade software is developed and marketed by the Karnataka cost center. The software is sold separately as an optional upgrade to enhance the vehicle's performance. The transaction between the cost centers involves the Tamil Nadu cost center agreeing to allow the Karnataka cost center to install and market the software. This activity is classified as a supply of services, not goods, as it involves the right to perform certain actions rather than the transfer of tangible items.

Conclusion:
The ruling concluded that the transaction of transferring the right to do integration testing, install, and market software between the Tamil Nadu and Karnataka cost centers is leviable to GST. Furthermore, the supply involved is classified as a supply of services. Thus, the applicant must comply with GST regulations for such transactions between distinct persons within the same legal entity.

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