Software & SaaS Payments to Foreign Companies in India 2026: Royalty, DTAA & TDS Guide

Quick answer: Not every payment by an Indian business for foreign software or a SaaS subscription is automatically royalty. The correct Indian tax treatment depends on the legal rights granted under the contract, the domestic royalty definition, the applicable tax treaty, whether services are bundled with the software, and whether the foreign supplier has a permanent establishment in India. For treaty-eligible suppliers, the Supreme Court’s Engineering Analysis ruling remains a central authority on payments for copyrighted software where the customer receives only the right to use the product and not rights in the copyright itself.

For payments made on or after 1 April 2026, withholding must be tested under the Income-tax Act, 2025. Section 9(6) contains the royalty source rule and expressly refers to rights to use computer software. The treaty analysis, however, remains separate: Section 159 preserves treaty relief, and a beneficial DTAA can restrict India’s taxing right when its royalty article is narrower than domestic law.

1. Why software and SaaS payments need a separate tax analysis

A single technology invoice can contain very different elements: a standard software licence, cloud access, data storage, hosting, implementation, customisation, maintenance, technical support, API access, database access or consulting. Calling the invoice “software” or “subscription” does not determine the tax result. The substance of the rights and services matters.

The practical risk is material. If the payment is chargeable to tax in India and withholding is missed, the Indian payer can face tax, interest and compliance consequences. Conversely, deducting tax mechanically when the treaty does not permit India to tax the payment can create unnecessary cash-flow friction for the overseas vendor and commercial disputes over gross-up clauses.

2. Domestic law: Section 9(6) of the Income-tax Act, 2025

Section 9(6) of the Income-tax Act, 2025 deems specified royalty payable by the Government, a resident, or in certain cases a non-resident to accrue or arise in India. The definition is broad. It covers consideration for transfer or grant of rights in intellectual property and expressly states that rights in computer software can be included irrespective of the medium through which the right is transferred.

This is the domestic-law starting point, not the end of the analysis. For a resident of a treaty country, the applicable DTAA must then be tested because the treaty may use a narrower copyright-based definition of royalty and may allocate ordinary business profits to the residence country unless the foreign enterprise has a permanent establishment in India.

3. What the Supreme Court held in Engineering Analysis

In Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, decided on 2 March 2021, the Supreme Court examined multiple categories of payments for off-the-shelf/shrink-wrapped software. The Court focused on the distinction between a licence to use a copyrighted article and a transfer of rights in the copyright.

On the facts and treaty provisions before it, the Court held that payments that did not convey copyright rights such as reproduction, adaptation or commercial exploitation were not royalty under the relevant DTAAs. Consequently, the Indian payer was not required to withhold tax merely because it had paid a foreign supplier for the use or resale of such software.

The judgment should not be reduced to the slogan “software is never royalty”. It does not immunise every SaaS, source-code, database, customised-software, embedded-IP or bundled-service arrangement. Contract terms and the specific treaty remain critical.

4. SaaS subscriptions: royalty, FTS/FIS or business profits?

A typical SaaS customer logs into a hosted platform and receives access to functionality. The customer usually does not receive source code, ownership of the software, a right to reproduce the software, or a right to commercially exploit the copyright. That fact pattern may support a business-profits analysis under a treaty rather than royalty, but the answer is not automatic.

Three questions should be asked separately. First, does the arrangement grant a right in copyright or merely access to a service? Second, does any implementation, consulting or technical support fall within the treaty definition of fees for technical or included services? Third, does the foreign supplier have a permanent establishment or other taxable nexus in India under the treaty and current domestic rules?

5. DTAA analysis can change the domestic-law result

India’s tax treaties are not identical. Some royalty articles focus on the use of, or right to use, copyright and specified intellectual property. Some treaties also contain a separate FTS or Fees for Included Services article; certain treaties apply additional tests such as “make available”.

A treaty claim should therefore be documented rather than assumed. The foreign supplier should generally provide a valid Tax Residency Certificate and the prescribed treaty information. Under the Income-tax Act, 2025, Form 41 is the current form for furnishing the information required for treaty relief where applicable.

6. Withholding tax from 1 April 2026

For payments made from 1 April 2026, the Income-tax Act, 2025 withholding framework applies. Section 393 governs deduction from payments to non-residents and foreign companies. The payer must determine whether the sum is chargeable in India after applying the Act together with any beneficial DTAA.

The key principle is chargeability: the remittance amount, invoice label or foreign currency does not by itself create a withholding obligation. The character of the income, treaty entitlement, source rule and permanent-establishment position have to be analysed first.

7. Form 145 and Form 146 for foreign remittances

The 2026 compliance framework uses Form 145 for information relating to payments to a non-resident or foreign company and Form 146 for the accountant’s certificate in the cases prescribed by Rule 220. Businesses paying for foreign software or SaaS should align the remittance form position with the tax memo or CA certificate rather than treating the bank documentation as a separate exercise.

The documentation file should ordinarily contain the agreement or order form, invoice, description of user rights, TRC, Form 41 where relevant, permanent-establishment representation when appropriate, withholding computation and the applicable Form 145/146 record.

8. Practical examples

Example 1 — standard enterprise software licence

An Indian company buys 200 user licences for standard accounting software from a US vendor. Employees may install and use the software, but the agreement prohibits copying, modification, source-code access and commercial exploitation. The Engineering Analysis reasoning may be highly relevant under the applicable treaty. The payer should still review the exact licence wording and treaty royalty article before concluding that no Indian royalty withholding applies.

Example 2 — cloud SaaS subscription

An Indian company subscribes to a Singapore-hosted CRM. Users log in through a browser; no software is transferred and no copyright rights are granted. The payment should be separately tested as royalty, FTS/FIS and business profits under the India–Singapore treaty. Hosting, configuration and support components should be reviewed instead of assuming the entire invoice has one character.

Example 3 — customised platform plus implementation

A foreign vendor grants broad rights to modify software, supplies proprietary modules and separately sends engineers to India for implementation. This is materially different from a simple SaaS subscription. Royalty, services income and permanent-establishment exposure may all require separate analysis, and withholding may apply to one component even if another component receives treaty protection.

9. Contract review checklist before paying a foreign software vendor

1. Identify the exact product and every service component in the invoice. 2. Check whether the customer receives source code, reproduction, adaptation, sublicensing or commercial exploitation rights. 3. Determine whether the software is standard, customised, embedded or bundled with services. 4. Identify the vendor’s country of tax residence and applicable DTAA. 5. Obtain TRC and Form 41 information where required. 6. Test royalty, FTS/FIS and business-profits articles separately. 7. Assess Indian PE or on-site presence. 8. Document the Section 393 withholding conclusion. 9. Complete Form 145/146 and bank remittance documentation where applicable. 10. Reconcile the tax conclusion with the contract’s gross-up clause.

10. Common mistakes

A common mistake is treating every recurring cloud payment as a licence fee. Another is applying Engineering Analysis without reading the contract or treaty. Businesses also frequently ignore bundled implementation/support charges, accept a vendor’s “no PE” statement without examining Indian personnel or infrastructure, or deduct at a domestic rate despite having valid treaty documentation.

The reverse mistake is equally important: assuming that every technology payment is exempt because the supplier is outside India. A broad grant of copyright or technology rights, a taxable service component or an Indian PE can change the result.

11. Frequently asked questions

Is every SaaS subscription royalty in India?

No. The classification depends on the rights granted, domestic law and the applicable treaty. Mere access to functionality without copyright rights can be materially different from a licence transferring rights in copyright.

Does Engineering Analysis still matter in 2026?

Yes. It remains the Supreme Court authority on the treaty/copyright distinction for the software-payment categories before it. But it must be applied to comparable facts and treaty wording; it is not a blanket exemption for all digital or SaaS payments.

If the payment is not royalty, is it automatically tax-free in India?

Not necessarily. It may need to be tested as FTS/FIS or business profits, and the foreign enterprise’s PE position must be considered. Current domestic digital-nexus rules may also be relevant in appropriate cases, subject to treaty protection.

Do I still need remittance documentation if no tax is deductible?

Yes. The payer should retain the legal/tax analysis and comply with the applicable Form 145/146 and authorised-dealer bank process. A defensible no-withholding conclusion should be evidenced, not merely asserted.

12. Related PGT & Associates resources

For connected issues, see our guides on Foreign Service Payments from India, Form 41 for DTAA claims, and Foreign Company Tax Audit in India. Wix will also display these related articles with this post.

13. Primary sources

Income-tax Act, 2025, Section 9 (official Income Tax Department): https://www.incometaxindia.gov.in/w/section-9-1

Supreme Court of India, Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, judgment dated 2 March 2021: https://api.sci.gov.in/supremecourt/2011/38137/38137_2011_33_1501_26629_Judgement_02-Mar-2021.pdf

Income Tax Department, Form 41 user manual / DTAA information: https://www.incometax.gov.in/iec/foportal/newformpage/forms/form41-UM

Income Tax Department, Form 145: https://www.incometax.gov.in/iec/foportal/newformpage/forms/form145

How PGT & Associates can help

Cross-border software and cloud contracts often combine tax, treaty, withholding and remittance issues. PGT & Associates can assist businesses with transaction-specific characterisation, DTAA documentation, withholding positions and Form 145/146 compliance. The appropriate treatment depends on the contract and facts; this article is general information and is not a substitute for professional advice on a specific transaction.