For two decades, Indian tax authorities treated payments by Indian customers to foreign software vendors as royalty — triggering 10-15% withholding under DTAA (or 20% under domestic law without DTAA). The Supreme Court's 2021 Engineering Analysis judgment substantially clarified the position. The cleanup is still working through the system in 2026.
The pre-2021 position
Indian tax authorities relied on Section 9(1)(vi) of the Income Tax Act, which deems royalty to include payment for the 'use of or right to use' copyright or computer software. They argued that any software licensing payment was for the 'use of copyright', making it royalty taxable in India.
This position created decade-long litigation, conflicting tribunal decisions and uncertainty for every foreign software vendor selling into India.
The 2021 Engineering Analysis Supreme Court ruling
In Engineering Analysis Centre of Excellence Pvt Ltd v. CIT (2021), the Supreme Court held that payments for purchase of 'shrink-wrapped' or off-the-shelf software, where the buyer doesn't acquire any copyright (only a licence to use the software for its intended purpose), are NOT royalty under India-US DTAA or other DTAAs with similar wording. The payments are business profits — taxable in India only if the foreign vendor has a PE in India.
Key principles from the ruling:
- Distinguishes between 'use of copyright' (royalty) and 'use of copyrighted article' (not royalty).
- Software licensing for end-use is the latter — purchase of a copyrighted article.
- DTAA definition of royalty is narrower than domestic Section 9 definition; DTAA prevails for treaty residents.
- Applies to most major DTAAs (US, UK, EU countries, Singapore).
Current state — what's taxable, what's not
| Type of payment | Royalty? | Indian tax |
|---|---|---|
| Shrink-wrap / off-the-shelf software licence | No | Not taxable (unless PE) — business profits |
| SaaS subscription (standard, no customisation) | Generally no | Generally not taxable |
| SaaS with right to modify source code | Likely yes | Royalty taxable |
| Custom software developed under contract | No | Business profits (PE-dependent) |
| Software with right to sub-license | Yes | Royalty taxable |
| Cloud infrastructure (IaaS) | Generally no | Business profits |
| Right to use the underlying copyright / IP | Yes | Royalty taxable |
SaaS / software tax opinion per arrangement
FastLegal's tax specialist provides a written opinion on the royalty / business-profits classification for your specific software / SaaS arrangement. Useful both for your subsidiary's withholding compliance and for your foreign vendor's defensibility. Engagement-based.
GST on software / SaaS
GST treatment is independent of income tax classification:
- Foreign software vendor selling to Indian B2B (GST-registered customer) — buyer pays IGST under RCM at 18%, claims input credit.
- Foreign software vendor selling to Indian B2C (individual / unregistered) — vendor registers under OIDAR, charges and remits 18% IGST.
- Indian software / SaaS sold to foreign customers — zero-rated export (no GST on outward supply); claim input credit refund.
- Software sold by Indian subsidiary to Indian customers — standard 18% GST.
Structuring tips for foreign software vendors
- Contracts that grant a 'right to use' (end-use licence) — not 'right to copy', 'right to sub-license' or 'right to modify' — fall outside royalty.
- Avoid language about transferring copyright, IP rights or development rights.
- Sell on a per-user / per-month basis rather than transferring copies.
- Document the end-use nature in invoices and MSA.
- For SaaS, the use of the platform (not the underlying code) is what's being paid for. Make this explicit.
- Obtain TRC + file Form 10F so DTAA position is documented.
Ongoing situations
Despite the Engineering Analysis ruling, some Indian tax assessments still treat software / SaaS as royalty. Refunds for prior-year withholding are working through appeals. Foreign vendors should:
- Document the end-use nature of every Indian sale from the contract stage forward.
- For ongoing arrangements with Indian buyers withholding tax at royalty rates, request the buyer to apply business-profit treatment going forward based on the Supreme Court ruling.
- For prior-year withholding, file refund claims; foreign vendor receives the refund directly.
Frequently asked questions
Does the Supreme Court ruling cover our specific SaaS arrangement?+
Probably, if the SaaS is standard subscription-based with no source-code access and no right to modify. Get an opinion per arrangement to confirm.
What if the Indian buyer has been withholding 10% under royalty treatment — should they stop?+
Likely yes, based on the Engineering Analysis ruling and subsequent assessing-officer guidance. Coordinate with the buyer; document the position change.
Do we need an Indian PAN if we're a foreign software vendor not registering for GST?+
Only if you want to file Form 10F for treaty benefit on any related-party payments. For pure customer-vendor B2B sales with RCM by the buyer, PAN not needed.
What about API access / data feed services?+
Generally business profits (not royalty) if the customer is just consuming the API output. Royalty risk if the customer can build derivative products from the API. Get a specific opinion.
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