AI & Technology Tax Advisory

TDS under Section 195 ITA 1961 (Section 393 ITA 2025 for payments from TY 2026-27 onwards) applies only if the payment constitutes royalty or fees for technical services as defined in Sections 9(1)(vi) and 9(1)(vii). The Supreme Court in Engineering Analysis Centre of Excellence v CIT (2021) held that end-user software licence payments are not royalties because no copyright is transferred. AI API subscriptions — where you access a service without acquiring any model rights — fall squarely in that category. Obtain a Tax Residency Certificate and Form 10F from the vendor, document that no copyright or exclusive right is granted, and TDS is then not applicable on those subscription charges.

The character of the expenditure is determined by the enduring-benefit test under Section 37(1) ITA 1961 (Section 58 ITA 2025). A one-time model build that creates a proprietary, reusable asset with a lasting competitive advantage is capital expenditure — eligible for depreciation at 25% WDV under Block 11 (intangible assets) in Appendix I of the Income Tax Rules 1962. Recurring costs — API charges, cloud compute for inference, retraining runs, fine-tuning on new data — are revenue in nature and fully deductible in the year incurred. Your CA must document the characterisation contemporaneously; a mixed build-and-run contract should be split.

Cross-border transactions between associated enterprises are governed by Section 92 ITA 1961 (Section 130 ITA 2025). Licensing of an AI model is an international transaction requiring arm's length pricing under Section 92C. Comparable uncontrolled price (CUP) is rarely available for proprietary AI; TNMM on the R&D entity's cost-plus margin is a commonly accepted method. Rule 10D requires contemporaneous documentation filed in Form 3CEB (CA-certified, due October 31 each year) and a master file in Form 3CEAA if aggregate group transactions exceed Rs 50 crore.

AI-powered SaaS is classified under SAC 998314 (other IT-enabled services) at 18% CGST+SGST or IGST. A GST-registered recipient engaged in taxable output supplies can claim input tax credit under Section 16 CGST Act 2017, subject to the vendor reflecting the invoice in GSTR-1 and it appearing in the recipient's GSTR-2B. ITC is blocked under Section 17(5) only for specific categories — IT services used in the course of business do not fall under any blocked category. Ensure your tax invoices comply with Rule 46 CGST Rules 2017 (IRN mandatory if your turnover exceeds Rs 5 crore).

Export of services qualifies as zero-rated supply under Section 16(1) IGST Act 2017. File a Letter of Undertaking annually in Form RFD-11 on the GST portal before your first export invoice so you can export without paying IGST. Claim the accumulated input tax credit refund in Form RFD-01 under Rule 89 CGST Rules 2017 within two years of the relevant date (invoice date for services). Each invoice must reference the LUT ARN, and you need a Foreign Inward Remittance Certificate (FIRC) or Bank Realisation Certificate confirming USD receipt to support the refund claim.