TDS on Import of Software

Following the Supreme Court's Engineering Analysis (2021) ruling, TDS on standard software licence payments is often NIL — but classification matters, and many deductors still over-deduct.

FY 2026-27 · Section 393(2)

Quick answer

Indicative rate

Often NIL (standard licences) or 20% (if genuinely royalty)

Section & code

Section 393(2), Sl. No. 17, Code 1057

Forms typically needed:

Form 15CA Form 15CB if payment is treated as taxable

Cross-Border TDS Decision Helper

Nature of payment

Payee has valid PAN?

TRC + Form 41 furnished?

Indicative Act rate

20%

Domestic Act rate under Section 393(2) for royalty/FTS to a non-resident non-company — doubled from 10% by Finance Act 2023 (effective 1 April 2023), unchanged since. Classify carefully: royalty and FTS have different treaty definitions.

Without a TRC and Form 41, the treaty rate can't be applied — the Act rate above governs until documentation is furnished.

This is a decision aid, not a filing determination — always confirm classification and the exact treaty article with a professional before remitting.

The ruling that changed software TDS in India

In March 2021, the Supreme Court decided Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT — a landmark judgment on how payments for computer software should be characterised for TDS purposes. The Court held that amounts paid by Indian end-users or distributors to non-resident software suppliers, under end-user licence agreements (EULAs) or distribution agreements, for the resale or use of shrink-wrapped/off-the-shelf software, do not constitute royalty for the use of copyright under most of India's DTAAs — and therefore no income arises in India, and no TDS obligation exists under Section 195 (now 393(2)).

This is settled law, not a disputed or evolving position — it has stood since 2021 and has been applied consistently in subsequent cases. It represents a genuinely large, high-value correction to a widespread practice of over-deducting TDS on routine software purchases.

Why the distinction matters: licence vs. transfer of copyright

The Court's reasoning turns on what rights the payment actually transfers. A standard software licence — install this application, use it, don't redistribute or modify it — grants a right to USE a copy of the software, not a right to exploit the underlying COPYRIGHT (reproduce, adapt, sublicense, commercially distribute). Royalty, under most DTAAs, specifically covers payment for the use of or right to use a copyright — not merely a copy of a copyrighted product.

This is the same distinction as buying a book versus buying the right to publish and sell copies of that book. Buying the book (or, here, the software licence) for your own use is not a royalty payment; acquiring rights over the underlying intellectual property is.

When software payments ARE still royalty

The NIL position doesn't apply universally. If the agreement grants the Indian party a right to reproduce and commercially distribute the software (not just install and use it), a right to modify the source code, or a right to sublicense it to others, the payment can still be royalty under the applicable treaty, and TDS would apply. Custom-developed software with IP assignment, source-code licences, and reseller agreements with reproduction rights are the categories most likely to fall outside the Engineering Analysis protection.

The specific DTAA's royalty definition also matters — not every treaty defines royalty identically, and a small number of older treaties may still capture standard licensing differently. Read the actual licence agreement and the specific treaty article before defaulting to NIL.

SaaS is a related but distinct question

Software-as-a-Service (cloud subscriptions like AWS, Azure, or SaaS tools) raises a related but not identical question, since there's no traditional 'licence' being granted at all — the customer is accessing a hosted service, not installing software. This is covered separately (see our SaaS-specific guide), but the same underlying principle applies: look at what rights are actually being transferred, not just the commercial label attached to the payment.

Worked example

A ₹15 lakh payment for enterprise design software licences

An Indian manufacturing company pays a US software vendor ₹15,00,000 for annual licences to design software installed on its engineers' workstations. The licence agreement is a standard EULA — install, use internally, no redistribution or modification rights. Under Engineering Analysis, this is not royalty and doesn't attract TDS under Section 393(2), since no right to the underlying copyright is transferred. The company should still retain the licence agreement and a documented classification rationale in its file, in case of a scrutiny query, even though no tax is withheld.

Common mistakes & litigation traps

Deducting TDS reflexively on every software payment

Many finance teams still deduct 10-20% TDS on all software payments out of caution, without checking the licence terms — this over-deduction is unnecessary for standard licences and creates avoidable cash-flow drag for the vendor.

Assuming custom or source-code software gets the same NIL treatment

Engineering Analysis specifically concerned standard, shrink-wrapped licences. Custom development, source-code transfers, and reproduction/sublicensing rights are a different fact pattern and may still be royalty.

Not documenting the classification decision

Even a correct NIL determination should be backed by a filed rationale — the licence agreement terms and why they don't meet the royalty definition — in case of a later assessment query.