SC ruled that payments made by Indian end users to foreign software suppliers are not "royalty" and therefore they are not taxable in India, if there is no transfer of copyright in the software.
Nidhi | Jun 10, 2025 |
Software Payments Cannot be Considered as Royalty Without Transferring Copyright
Assume you buy software from a US company with just a basic license for internal use, no extras. Now, the question is, do you need to deduct tax at source (TDS)? Is this payment considered a “royalty” under Indian tax laws? Will the tax department later ask for tax?
A similar situation led to a long litigation, which the Hon’ble Supreme Court finally settled in 2021. The ruling was in favour of taxpayers. However, the applicability of that decision is not automatic. It depends on whether you have followed the rules under the DTAA (Double Taxation Avoidance Agreement) carefully for it to apply.
In the judgement of Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC), the Supreme Court ruled that payments made by Indian end users or distributors to foreign software suppliers are not treated as “royalty” and therefore they are not taxable in India, as long as there is no transfer of copyright in the software.
The Supreme Court’s ruling does not cancel out Indian tax law. According to Section 9(1)(vi) of the Income-tax Act, 1961, payments for software can still be treated as “royalty” and taxable in India, even if the software is used only for internal business purposes.
| Aspect | Under the Income-tax Act | Under DTAA (e.g., India-US) |
| Meaning of “Royalty” | Wide: includes payments for software use/licenses | Narrow: only applies if there is a transfer of copyright |
| Tax Implications of Software Payments | Taxable in India | Not taxable if it’s just a right to use (no copyright) |
| TDS Obligation (Section 195) | Yes, TDS must be deducted | It can be avoided if the DTAA benefit is claimed correctly |
Therefore, the favourable tax treatment given by the Supreme Court comes from DTAA provisions and taxpayers must claim this benefit to get it.
Section 90(4) of the Income-tax Act clearly states that a non-resident must provide a Tax Residency Certificate (TRC) from their country they live to claim DTAA relief. Also, Rule 21AB and CBDT Circulars mention specific compliance requirements for DTAA claims.
If you do not submit the mentioned documents, you may not be able to avail yourself of the benefits.
The TDS is applicable in the following conditions:
TDS is not applicable in any of the following conditions:
The Supreme Court’s ruling in the Engineering Analysis case gave helpful relief to Indian companies that pay for software from abroad. But this relief comes from the tax treaty (DTAA) and not from changes in domestic tax rules.
So, if you only depend on the court decision without following the rules under Section 90(4) and Rule 21AB, you might still face unwarranted tax, interest, or penalties.
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