Integration, testing and installation of software between centres of a same unit is supply between distinct persons

[CA Bimal Jain]

The AAR, Tamil Nadu in the matter of IN RE: M/S. OLA ELECTRIC TECHNOLOGIES PRIVATE LIMITED  2022 (8) TMI 919 - AUTHORITY FOR ADVANCE RULING, TAMILNADU  has held that the transfer of rights to perform integration testing, installation, and marketing of software from an e-vehicle manufacturing unit to a software development centre on behalf of end-users is subject to Goods and Services Tax (“GST”) being a supply between two distinct persons. Further held that, where the supply only involves the transfer of rights, it is considered as a supply of service and not that of goods.

Facts:

Ola Electric Technologies Pvt. Ltd. (“the Applicant”) was setting up an electric two-wheelers manufacturing unit in Tamil Nadu which is to be sold through various distribution centres across the country, whereas the head office and additional software development centre was set-up in Bengaluru, Karnataka (“the Head Office”). Tamil Nadu Centre will give the right to the Head Office to integrate, test, market, and install software for performance upgrades on vehicles manufactured by Tamil Nadu Centre. The software was developed by the Head Office, and is owned by them. However, the software will not have any value in the market until Tamil Nadu Centre agrees to integrate it into their manufactured vehicles and allows the Head Office to sell, upload, and maintain the software on these vehicles. The Tamil Nadu Centre was to charge a recurring consideration from the Head Office for the said transfer of right and the Head Office was to sell the software directly to the end user as per their requirement.

The Applicant has contended that the Tamil Nadu and the Head Office  are both registrations of the same legal entity, where Tamil Nadu Centre is transferring the right to integrate, test, and market a software to the Head Office so they can sell it to the end user. The Tamil Nadu Centre is charging the Head Office  for this service in order to properly allocate profits in their financial records, as each Centre maintains its own profitability. It has further contended that the transfer of rights for integration testing, installation, and marketing of the software will not be considered a 'service' because there cannot be a service between different centres of the same legal entity. Therefore, this transaction does not qualify as a supply and should not be subject to GST.

Issues:

1. Whether the transaction of transfer of right from Tamil Nadu Centre to the Head Office shall be leviable to GST?
2. Whether such activity is to be considered as supply of goods or supply of services?

Held:

The AAR, Karnataka in IN RE: M/S. OLA ELECTRIC TECHNOLOGIES PRIVATE LIMITED  2022 (8) TMI 919 - AUTHORITY FOR ADVANCE RULING, TAMILNADU  has held as under:

• Noted that, both the centres are distinct persons and the transfer of right to install the software is done for a consideration and in furtherance of business.
• Further noted that, the supply is that of transfer of right to do integration testing, install and market software from the applicant to the Head Office and the consideration involved is agreed upon by both Centers, wherein it has been stated that the applicant is charging a recurring consideration from the Head Office for the transfer of right. The criterion for the transaction being a supply is satisfied in as much as the transfer of right is made for a consideration.
• Observed that, the Goods move from the Tamil Nadu Centre to distribution centres situated throughout the country whereas the software is sold by the Head Office directly to the end user.
• Further noted that, the Tamil Nadu Centre is only allowing the integration testing, installation, and marketing of the software on their manufactured vehicles by the Head Office, on the request of end-users. Therefore, the transaction between the Tamil Nadu Centre and the Head Office is the supply of a service, which is the agreement to allow the Head Office to install and market the software.
• Opined that, the supply of goods or services between both related and distinct person when made in the course of furtherance of business is an activity to be treated as supply. Further, the Centers are located at two different states and applicant have two separate registrations. Hence, they are distinct persons and the supply is also found to be in furtherance of business only for a pre-determined consideration and therefore such transfer of right is clearly a supply which is leviable to GST.
• Held that, the transfer of rights for integration testing, installation, and marketing software from one centre to another within the same entity is subject to GST as it is a transaction between two distinct persons. Further held that, since the supply only involves the transfer of rights, it is considered a supply of service and not that of goods.

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