Licensing US Software in India: Withholding Tax, Royalties and the Engineering Analysis Ruling

A US software company signs its first Indian customer, and the first question from the customer’s finance team is whether it has to withhold tax from the payment. The answer matters, because if the Indian customer withholds when it didn’t need to, you receive less than the invoice and have to claim the money back. If it doesn’t withhold when it should have, the customer, and eventually you, face a dispute.

India’s Supreme Court settled a large part of this question in 2021 in the Engineering Analysis ruling, but the decision doesn’t cover everything a software company sells. This guide explains how India thinks about software payments, what the ruling decided, where it stops, what the India-US tax treaty adds, and the paperwork Indian customers will ask you for. It’s written from the Indian-law perspective, and US tax points should be confirmed with your US advisers.

The question every Indian customer will ask: is it royalty?

When an Indian business pays a non-resident, it has to deduct tax at source if the payment is chargeable to tax in India. Under the Income-tax Act, 2025, which applies from 1 April 2026, payments to non-residents are dealt with in Section 393(2), which replaced Section 195 of the 1961 Act (TaxGuru; Tdsman). The key characterisation question for software is whether the payment is “royalty”, because royalty is taxable in India, and a software payment that is royalty carries withholding tax.

Indian domestic law defines royalty widely. After retrospective amendments in 2012, it can reach payments for the use of, or the right to use, computer software, including rights in copyright. Tax treaties define royalty more narrowly, and a non-resident can choose whichever is more beneficial. Under the India-US tax treaty, Article 12 covers royalties and “fees for included services”. One guide puts the treaty rate on royalties at 15%, with 10% for payments for equipment, against a domestic rate that is commonly cited at 20% before surcharge and cess (SortingTax; TaxesForExpats). Treat those figures as a starting point and confirm them against the treaty and the Act.

The most important rule is that withholding applies only where the amount is chargeable to tax under both domestic law and the treaty. That is why the treaty definition of royalty, not the broader domestic one, usually decides whether an Indian customer needs to withhold on payments to a US vendor (EY).

What the Engineering Analysis ruling decided

In March 2021, the Supreme Court decided a large batch of appeals in Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax. The cases involved Indian end users and Indian distributors buying software from foreign suppliers. The Court held that payments for the sale and resale of standard software, where the customer or distributor gets only a non-exclusive, non-transferable licence to use the software or resell copies, are not payments for the use of a copyright and so are not royalty (tpcases; Khaitan & Co).

The Court’s reasoning is easy to state. The right to use a copyrighted article, which is what an end user of off-the-shelf software gets, is different from a right to use the copyright itself, which is the right to reproduce, adapt or commercially exploit it. The Court also held that the 2012 domestic amendments could not stretch the treaty definition and could not oblige payers to withhold retrospectively (EY; Alvarez & Marsal). Commentary reports that review petitions against the judgment were dismissed in 2026 and that the ruling stands (TaxGuru), although it is worth confirming that against the order.

Tribunals have since applied the same thinking to related payments. A Delhi Tribunal decision reported by PwC in July 2026 held that software subscription receipts from Indian customers were not taxable as royalty, fees for technical services or fees for included services under the India-US treaty, while a separate stream of professional-services income in the same case was taxed as fees for included services (PwC India). A single tribunal ruling doesn’t settle the law, but it shows the direction of travel for standard subscription products.

Where the ruling doesn’t help: source code, customisation and services

The Engineering Analysis reasoning protects standard, off-the-shelf licences. It doesn’t automatically protect everything a software company sells. If your agreement lets the Indian customer reproduce the software beyond making backup copies, modify it, sublicense it, embed it in its own product or white-label it, the customer may be acquiring a right in the copyright itself, and the payment can look like royalty. Source code licences, OEM and white-label arrangements and rights to host and resell fall on that side of the line.

Services need separate thought. Maintenance, support, implementation and consulting fees can fall under “fees for included services” in the India-US treaty if the service makes technical knowledge, skill or know-how available to the customer. Indian tribunals have gone both ways: some have treated support and maintenance fees as taxable included services, and others have found cloud hosting and similar services outside the definition (ITAT decisions, including Rackspace US Inc.; Beacon Filing). The result turns on the facts, so the contract and invoices should describe what is actually delivered.

Draft with that in mind. Keep licence fees and service fees as separate line items. Limit the licence to the customer’s internal use, and say expressly that no right to copy, adapt, sublicense or distribute is granted. Avoid language that describes the customer as acquiring the “intellectual property” or “rights in” the software. And where you do grant wider rights, such as a source code licence, assume royalty treatment and price for the withholding.

Practical compliance: residency certificates, forms and GST

An Indian customer that wants to apply the treaty rate, or no withholding at all, will ask for a tax residency certificate. For a US licensor, that is the IRS Form 6166, and the customer will typically also want a self-declaration in the form the Indian tax authorities prescribe. Under the old law that was Form 10F; one guide reports that Form 41 replaces it under the Income-tax Act, 2025 with effect from 1 April 2026 (SortingTax). Confirm the current form with your Indian counterparty. If you don’t have a Permanent Account Number in India, the customer may be required to deduct at a higher rate, so consider obtaining one if you have recurring Indian income.

The Indian customer will also need to remit your payment through its bank, which usually requires a chartered accountant’s certificate and a remittance declaration in Forms 15CB and 15CA. Give your customer’s finance team the contract, invoice, residency certificate and treaty declaration up front, because delays at this stage are the commonest reason for late payment. If tax is withheld, ask for the withholding certificate so that you can claim a foreign tax credit in the US.

Two further points deserve a line in your contract. First, who bears the Indian tax: a “net of taxes” clause makes the customer gross up the payment, and many Indian customers will resist it, so decide your fallback in advance. Second, indirect tax: an Indian business receiving software or services from abroad generally accounts for Goods and Services Tax itself under the reverse charge mechanism, so check that your invoice and contract don’t suggest you are charging Indian GST. India’s equalisation levies on digital services have been withdrawn, but confirm the current position before pricing.

Structuring, disputes and quick answers

Structure follows the product. Selling standard licences through an Indian distributor or reseller is the pattern the Engineering Analysis ruling was about, and it is the cleanest. Direct SaaS subscriptions have a good reported tribunal position but less settled law. Granting source code, white-label or customisation rights is the highest-risk model. A permanent presence in India, such as a subsidiary or a team that concludes contracts locally, brings a separate set of tax issues. If your customer withholds too much, you can claim the excess back by filing an Indian tax return, and the treaty’s mutual agreement procedure is available for double taxation disputes. The better approach is to get the contract and the paperwork right before the first invoice.

Related reading: selling SaaS to Indian customers from the UK, licensing UK technology to Indian companies: royalties, FEMA and tax, setting up an Indian subsidiary for a US company, India’s DPDP Act for US SaaS companies, hiring contractors in India from the US, who owns code written by Indian developers and crypto tax in India vs the US; also an intercompany IP licence from Dubai to an Indian subsidiary.

Quick answers

Do Indian customers have to withhold tax on payments for US software?

Not automatically. After the Engineering Analysis ruling, payments for standard software licences and resale are not royalty under the treaty, so no withholding applies, but source code, customisation and service fees may be taxable, so each contract needs checking.

Is SaaS taxed as royalty in India?

Tribunals have reached differing results. A Delhi Tribunal ruling reported in July 2026 treated subscription receipts as not taxable under the India-US treaty, but the law is not fully settled.

What documents does an Indian customer need from a US licensor?

Usually a US tax residency certificate (IRS Form 6166), the prescribed tax declaration (Form 10F, or Form 41 under the new Act), a PAN or no-PAN declaration, the invoice and the agreement.

What is the treaty rate for royalties under the India-US treaty?

Secondary guides put it at 15% for royalties generally and 10% for payments for equipment, against a domestic rate commonly cited at 20% before surcharge and cess. Confirm both against the treaty text and the Income-tax Act, 2025.

Does an Indian customer have to deduct tax if I only sell through an Indian distributor?

Not automatically. The Engineering Analysis ruling concerned distributors and end users who receive a non-exclusive, non-transferable licence to resell or use standard software, and held that payments for it are not royalty. Check the agreement for any wider rights.

Final word

Halverton & Co. is an Indian law firm advising US companies, founders, investors and law firms on Indian law, including cross-border software licensing, withholding tax and FEMA documentation, and technology contracts with Indian customers. We practise in Jharkhand, Maharashtra and before the Supreme Court of India, and work alongside US counsel, who advise on US law. Halverton & Co.: Where tech needs law! If you have a question about Indian law, write to us at office@halvertonandco.com, or get in touch.

This article reflects developments reported up to late October 2026. It is for general information only, is not legal advice, and does not create an attorney-client relationship. Halverton & Co. is an Indian law firm and does not advise on US law; US-law points should be confirmed with US counsel.