SaaS Payments & TDS under Section 195: Correct Classification is Critical

An Analytical Framework for Correct Tax Treatment under the Income Tax Act, 1961 & DTAA Provisions

Why This Matters

With Indian businesses increasingly subscribing to global Software-as-a-Service (SaaS) platforms—ranging from basic tools to enterprise-grade cloud infrastructure—the question of TDS applicability under Section 195 has become both complex and critical.

Incorrect classification of such payments can:

• Trigger TDS defaults under Section 201,

• Invite interest under Section 201(1A),

• Result in penalties, and

• Disrupt vendor relationships due to remittance delays.

Hence, a well-informed analysis using Section 195 + DTAA rules + judicial precedents is essential.

Legal Foundation: When Does TDS Apply on SaaS Payments?

1. Section 195 of the Income Tax Act, 1961

Mandates TDS on any sum paid to a non-resident if such sum is chargeable to tax under the Act.

So, the starting point is: Is the payment taxable in India? This leads to two essential tests:

• Domestic Law Classification (Section 9)

• DTAA Override (Section 90 & Article 12)

Test #1: Domestic Law (Section 9)

Under Section 9(1)(vii):

• Income by way of Fees for Technical Services (FTS) is deemed to accrue in India if services are utilized in India, regardless of the provider’s location.

FTS under Explanation 2 to Section 9(1)(vii):
Includes rendering of managerial, technical, or consultancy services.

Also consider Section 9(1)(vi) (Royalty) in case of:

• Software license fees,

• Cloud storage IP charges,

• Use of proprietary technology platforms.

Test #2: DTAA Override – The “Make Available” Rule

Most Indian DTAAs (e.g., with USA, UK, Canada, Australia) contain a narrower definition of FTS:

FTS is only taxable in India if it “makes available” technical knowledge, skill, or experience that enables the recipient to apply it independently.

✅ Applies: Custom software deployment + training → FTS
❌ Doesn’t apply: Standard SaaS tools with no human involvement → Not FTS

Judicial Support:

• Deutsche Bank AG v. DDIT (ITAT Mumbai) – Subscription-based services without human interface are not taxable.

• Bharati Airtel v. ACIT (ITAT Delhi) – Custom cloud set-up + training = taxable FTS under DTAA.

Analytical Matrix: Classifying SaaS Payments Correctly

Nature of SaaS Service	Human Involvement or Customization?	Knowledge Made Available?	TDS under Section 195?
Microsoft 365, Zoom, Trello (pure SaaS)	❌ No	❌ No	❌ Not taxable
Oracle Cloud ERP with deployment training	✅ Yes	✅ Yes	✅ FTS under DTAA
Server Hosting via AWS, no support	❌ No	❌ No	❌ Not taxable
White-labeled cloud platform + source code transfer	✅ Yes	✅ Yes	✅ Royalty or FTS
AI analytics SaaS with insight reports	✅ Yes	❌ No (no user-level knowledge transfer)	❌ Likely not taxable

Case Study: ABC Pvt. Ltd. – TDS Misclassification

Facts:

• ₹25 lakhs paid to a US-based SaaS vendor for cloud infrastructure.

• Service included onboarding, remote configuration, and Indian staff training.

Incorrect Assumption:

• Company treated it as a standard software service and did not deduct TDS.

Legal Analysis:

• Under India–USA DTAA (Article 12), the training component "made available" technical knowledge enabling independent use.

• Thus, the payment qualified as FTS, taxable in India.

Correct Compliance:

• TDS @ 10% under DTAA (plus surcharge & cess).

• Form 15CB by CA, followed by Form 15CA online, required before remittance.

Outcome:

• Company was deemed an assessee-in-default under Section 201.

• Penal interest under Section 201(1A) imposed.

• Faced delays in further cross-border payments due to regulatory alerts.

Top 5 Mistakes to Avoid in SaaS TDS Classification

❌ Mistake	✅ Resolution
Assuming all SaaS payments are non-taxable	Perform FTS + royalty + PE analysis under both domestic law and DTAA
Ignoring the “make available” test under DTAA	Apply the test factually and consult judicial rulings
Paying before filing Form 15CA/CB	Always obtain CA certificate + e-file Form 15CA prior to remittance
Treating cloud hosting as pure infrastructure	Examine if any customization, IP use, or human-led support is involved
Not documenting classification rationale	Maintain tax memos for all outward remittances for audit safety

Your SaaS TDS Compliance Checklist

Before making any cross-border SaaS remittance:

✅ Has the FTS/Royalty/PE test been conducted?

✅ Does the applicable DTAA contain the “make available” clause?

✅ Has the scope of services (training, IP use, customisation) been factored?

✅ Have you obtained and filed Form 15CB (CA Certificate)?

✅ Have you uploaded the correct Form 15CA (Part B or C)?

✅ Have you deducted TDS under the appropriate DTAA rate?

Key Legal References

• Section 195 – TDS on foreign remittances

• Section 9(1)(vi)/(vii) – Royalty and FTS definitions

• Explanation 2 to Section 9(1)(vii) – Scope of technical services

• Section 90 – DTAA override

• CBDT Circular No. 21/2023 – Classification of online services

• Rule 37BB – 15CA/15CB filing

• Judgments:

  • Bharati Airtel Ltd v. ACIT

  • Deutsche Bank AG v. DDIT

  • KPMG v. ITC

Conclusion: Don’t Let Your Cloud Cost You in Tax

SaaS and cloud services are efficient, scalable, and integral to modern business—but compliance missteps on their tax treatment can invite avoidable pain. With tax authorities tightening remittance controls and expanding scrutiny, the classification of cross-border digital payments must be fact-based, DTAA-aware, and legally supported.

"In taxation, it’s not what you pay—it’s what you misclassify that costs the most."