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Indian buyers of foreign software licences — AWS, Microsoft, Adobe and similar — must classify each contract as royalty (TDS at treaty rate under Section 413, payment code 1062) or business income (no TDS without PE) post the Engineering Analysis ruling, while also screening for equalisation levy on digital services.
Apply a contract-by-contract test on copyright transfer, customisation, and source-code rights; collect TRC, Form 10F and PE declaration before deducting at the DTAA rate; file Form 15CA/15CB before each remittance; reconcile the TDS challans, return, and books monthly.
Section 413 + payment code 1062 for royalty and FTS, Engineering Analysis SC ruling 2021, Equalisation Levy Act 2016, Section 10(50) exemption when EL applies, Forms 15CA/15CB pre-remittance, DTAA rate v domestic rate test.
Foreign vendor master with royalty / EL / business-income classification, TDS deduction register tied to challans, Form 26Q reconciliation, and a Form 15CA/15CB log keyed to each outward remittance.
Indian buyers of foreign software licences — AWS Mumbai infrastructure, Microsoft 365 and Azure subscriptions, Adobe Creative Cloud, Atlassian, Salesforce, and the long tail of specialist tools — sit between two distinct tax regimes. Section 413 of the Income Tax Act, 1961, in the restructured payment-code architecture, captures TDS on royalty and fees for technical services payable to non-residents under payment code 1062. The Equalisation Levy Act 2016 captures a 2 per cent charge on specified digital services from non-residents without a permanent establishment in India. The Supreme Court’s 2021 ruling in Engineering Analysis Centre of Excellence v. CIT redrew the royalty line for standard end-user software licences, but the contract-by-contract test still has to be applied, and the monthly TDS reconciliation still has to be filed.
How does Section 413 with payment code 1062 work for foreign software payments?
Section 413 sits in the new payment-code era of the Income Tax Act and captures TDS on payments to non-residents, including royalty and fees for technical services. The applicable payment code is 1062. The buyer must hold a TAN, deduct tax at source at the rate specified under the Act read with the applicable DTAA, deposit the tax to the credit of the Central Government within the prescribed window, file the quarterly TDS return that includes the non-resident payment line, and issue Form 16A to the non-resident.
The domestic rate for royalty and fees for technical services to a non-resident under the Income Tax Act is significantly higher than the treaty rate available under most Indian DTAAs. The US DTAA, the UK DTAA, and the Singapore DTAA prescribe royalty rates in the range of 10 to 15 per cent depending on the article and the nature of the right granted. To access the treaty rate, the buyer must hold a current Tax Residency Certificate, an electronically filed Form 10F, and a no-PE declaration from the non-resident.
Quick reference: Section 413, equalisation levy, and software-licence facts
| Compliance lever | Legal anchor | Threshold or rule | Documentation |
|---|---|---|---|
| TDS on royalty / FTS to non-resident | Section 413 + payment code 1062 | Per payment | TAN + TRC + Form 10F + No-PE declaration |
| Treaty rate access | Section 90 + applicable DTAA | TRC valid for the relevant period | Tax Residency Certificate + electronic Form 10F |
| Royalty test for software | Engineering Analysis (SC, 2021) + DTAA Article on Royalty | EULA without copyright transfer | Contract review per vendor |
| Equalisation levy on digital services | Equalisation Levy Act 2016 | 2% on e-commerce supply / services by non-resident without PE | Self-assessment by payer; Form 1 annual return |
| Income tax exemption when EL applies | Section 10(50) | Same payment | Vendor classification at onboarding |
| Pre-remittance form | Section 195(6) read with Rule 37BB | Above ₹5 lakh per year and chargeable | Form 15CA Part C + Form 15CB |
| GST on imported services (RCM) | Section 5(3) IGST Act | All imported services | Reverse charge IGST + ITC claim |
| AD bank documentation | FEMA Master Direction | Each outward remittance | Form A2 + supporting invoice + 15CA |
What changes after the Engineering Analysis ruling?
The Supreme Court’s 2021 ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT clarified that consideration paid by Indian end-users or distributors to non-resident software manufacturers for the resale or use of computer software through end-user licence agreements does not amount to royalty under the relevant DTAA where the agreement does not transfer copyright. The Court drew the distinction between the copyrighted article (the software product) and the copyright (the underlying right). A standard EULA grants the right to use a copy of the software but does not transfer copyright. Therefore the consideration is business income of the non-resident, not chargeable to tax in India in the absence of a PE, and Section 413 TDS does not apply.
The ruling reshaped the operational reality for many Indian buyers but did not eliminate the contract review. Customised software developed for the Indian buyer, source-code licences that allow modification and redistribution, software bundled with hardware that grants copyright rights, and licences that allow commercial exploitation of the software (such as embedding it in a product the Indian buyer sells onward) continue to attract royalty treatment. The classification test must be applied per contract — and the contract file must be retained as the evidence basis for the no-TDS position taken on the remittance.
What changes when the equalisation levy applies?
The Equalisation Levy 2.0 — introduced in 2020 and applicable to e-commerce supply or services by non-resident e-commerce operators — operates as a separate charge from income tax. The levy is at 2 per cent of the consideration received or receivable by the non-resident from supply or services to specified persons in India, where the non-resident does not have a PE in India. The liability sits on the non-resident, but the collection is made by the Indian payer where applicable.
The key consequence is Section 10(50). Where a payment attracts equalisation levy, the corresponding income is exempt from income tax in India. The two regimes are therefore mutually exclusive — a payment is either inside the equalisation levy net or potentially inside the Section 413 TDS net, but not both. The buyer must classify each foreign vendor at onboarding into one of three baskets: royalty (Section 413 TDS at treaty rate), e-commerce service (equalisation levy at 2 per cent with no income tax), or business income (no TDS, no equalisation levy, provided no PE).
Worked example: ₹4.8 crore AWS spend and ₹2.2 crore Microsoft licence
Consider an Indian IT services company with annual foreign software spend of ₹4.8 crore on AWS Mumbai infrastructure and ₹2.2 crore on Microsoft 365 and Azure subscriptions. The AWS contract is with AWS India and is therefore a domestic supply — no foreign remittance, no Section 413 TDS, but full GST under SAC 998313 with input tax credit. The treatment is straightforward and need not be examined here.
The Microsoft 365 subscription is invoiced by Microsoft Ireland Operations Limited. The contract is a standard EULA granting the right to use the software for internal business purposes, with no transfer of copyright and no right of redistribution. Applying the Engineering Analysis test, the payment is not royalty under the India-Ireland DTAA. The buyer takes the position that the payment is business income of Microsoft Ireland, not chargeable to tax in India in the absence of a PE, and Section 413 TDS does not apply.
The buyer must still file Form 15CA Part D (remittance not chargeable to tax) before each outward remittance, supported by a CA opinion certifying the chargeability position. Form 10F and a no-PE declaration from Microsoft are obtained at onboarding and refreshed annually. The AD bank releases the remittance against the Form 15CA acknowledgement number.
The Azure subscription invoiced separately to specified Indian persons by Microsoft Ireland falls inside the equalisation levy net at 2 per cent. The Indian buyer accounts for the levy as an additional cost (the levy is paid by the non-resident operationally but is reflected in pricing). No income tax is payable on the corresponding income under Section 10(50).
The reverse charge GST treatment under Section 5(3) of the IGST Act applies to both Microsoft 365 and Azure as imported services. The buyer pays IGST under reverse charge on the rupee equivalent of the foreign currency invoice and claims input tax credit in the same return, producing a cash-neutral GST outcome but a compliance entry that must reconcile against GSTR-3B Table 3.1(d) and Table 4(A)(3).
Across the year, the buyer’s foreign vendor master classifies 14 vendors: 9 fall under the Engineering Analysis no-TDS treatment for standard EULA software; 3 attract equalisation levy as digital service e-commerce operators; 2 attract Section 413 TDS at the 10 per cent treaty rate because the contracts include source-code rights or commercial exploitation rights. The classification file, the contract evidence, and the CA opinions per vendor sit in a single audit-ready folder.
Plug in your annual foreign vendor spend, classification mix, and treaty rates to size the TDS exposure under Section 413 and the equalisation levy split.
Open the TDS Mismatch Estimator →How does the monthly TDS reconciliation tie back to the books?
The operational backbone of Section 413 compliance is a three-way reconciliation. The first leg is the foreign vendor invoice register in the books — every invoice from a non-resident vendor, with the gross amount, the foreign currency, the INR equivalent at the booking rate, the vendor classification (royalty / EL / business income), and the TDS deducted. The second leg is the TDS challan register — every challan deposited to the Central Government under Section 413 with the payment code 1062, the gross amount, the rate, and the TDS paid. The third leg is the TDS return in Form 27Q, which captures non-resident TDS deductions and is filed quarterly.
The reconciliation surfaces three recurring break categories. Vendor onboarding gaps — a new foreign vendor invoiced without a TRC or Form 10F on file, forcing the buyer to deduct at the higher domestic rate or to delay the remittance. Classification slippage — a vendor previously treated as no-TDS business income reclassified as royalty after a contract amendment that added source-code rights, requiring retrospective TDS deduction. Forex variance — the difference between the booking rate and the AD bank’s applied rate on the day of the remittance, which changes the rupee value of the deduction.
A reconciliation software India workflow can match the foreign vendor invoice register against the challan register and the Form 27Q return, surfacing variances within hours of the return filing rather than at the next assessment.
What recurring controls keep Section 413 compliance audit-ready?
Finance teams that run Section 413 compliance cleanly build four recurring controls. The first is a foreign vendor master with classification fields — every vendor is tagged at onboarding into royalty / EL / business income, with the supporting contract excerpt and CA opinion attached. The second is a TRC and Form 10F calendar — both documents are time-limited and must be refreshed annually; missing a refresh forces a higher domestic rate on the next remittance. The third is a Form 15CA / 15CB pre-remittance checklist — no outward remittance is released by the AD bank without the acknowledgement number, and the buyer’s AP team treats this as a hard gate. The fourth is a monthly three-way reconciliation between the foreign vendor invoice register, the TDS challan register, and Form 27Q. The Income Tax Department publishes the operative notifications and the TDS return schemas on the e-filing portal, which AP and tax teams should monitor.
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