How to Review a Software / IP Licence Agreement in India

A software licence agreement is a permission slip, not a sale. The vendor keeps ownership of the code and grants you, the licensee, a defined right to use it: how many users, which sites, which servers, for how long. Most disputes do not start with a big betrayal. They start with a licence that was silent, or vague, on one of those terms, and both sides read the silence in their own favour until an invoice or an audit forces the question. This guide is published by Adira, which makes contract review and CLM software, so we have a commercial interest in you reading licences carefully. It stands on its own regardless of what you buy from us; if you just want to mark up one licence by hand, Weave, Adira's free browser tool, lets you do that without an account.

What a software licence agreement actually grants

A licence clause answers four questions: what can be used, by whom, where, and for how long. Get one wrong and the licence you think you have is not the one you signed.

Licence scope. Software licences are metered in different units, and the unit matters more than the headline price. A named-user licence ties the right to identified individuals, cheap to audit, expensive when staff turn over. A concurrent-user licence caps how many people are logged in at once, regardless of headcount. A site licence covers one location, so a multi-site business must check whether "site" means one office or the whole company. A core or CPU licence, common in infrastructure and database software, counts processor cores on the server, and virtualisation or a hardware refresh can silently breach it without anyone touching the software.

Perpetual versus subscription. A perpetual licence is paid once, often with separate annual maintenance, and keeps working after that payment stops, though maintenance usually does not. A subscription licence is paid periodically, and the right to use ends when payment stops. This decides what termination costs: losing a subscription means losing access immediately; losing maintenance on a perpetual licence means the software still runs, just unsupported.

On-premise versus SaaS. An on-prem licence installs the software inside the customer's own infrastructure. A SaaS arrangement is not really a "licence" to install anything; it is a right to access a hosted service, and the contract needs uptime, data location, and data-return terms too. A contract drafted for on-prem software, reused unedited for SaaS, leaves most of what actually matters unaddressed.

IP ownership vs licence: the distinction that decides everything else

A licence agreement should say, in plain words, that the vendor owns the software and the customer receives only a licence to use it. Poorly drafted contracts, especially ones built from a services-agreement template, sometimes use "licence" and "assign" loosely enough that a customer cannot tell whether it owns the customisations built on top of the vendor's core product. An assignment transfers ownership; a licence only grants permission to use while ownership stays put. Our IP assignment vs licence guide covers how Indian courts read the two words when a contract uses both loosely. For a standard licence deal, the vendor owns the base product; what needs careful drafting is who owns configurations and integrations built during implementation, since a silent contract usually leaves those with whoever wrote the code, not whoever paid for it.

Source code escrow and audit rights: the two enforcement mechanics

Source code escrow. For SaaS, escrow is close to meaningless, there is no local install to fail over to. For on-premise perpetual licences of business-critical software, especially from a smaller vendor, it is one of the few tools that matters if the vendor goes insolvent or stops supporting the product. It deposits the source code, ideally with build scripts and documentation, with a neutral third party, released on a defined trigger such as insolvency. A deposit made once and never re-verified is close to worthless years later if it no longer compiles. See our source code escrow guide for release triggers and how escrow interacts with the moratorium under the Insolvency and Bankruptcy Code.

Audit and true-up rights. Almost every commercial licence gives the vendor a right to audit usage against the licensed entitlement, typically once a year on notice. This is not a formality; vendor "true-up" audits are a real, recurring revenue line for enterprise software companies, and an over-deployed customer can face a retroactive bill at penalty, list-rate pricing rather than the negotiated discount. Our audit rights guide covers what makes an audit clause fair generally; specific to a licence deal, also check whether the true-up rate is the original discount or full list price.

Warranties, IP indemnity, and limitation of liability

A licence typically bundles three promises that vendors often draft to work against each other. Warranties: a promise the software performs "materially in accordance with the documentation" for a defined period, usually 30 to 90 days, is standard; a blanket "AS IS" disclaimer shifts all performance risk to the customer. IP indemnity: a promise the vendor will defend and cover costs if a third party claims the software infringes their IP, the clause that matters most in a licence deal, since without it a customer bears the entire risk of the vendor having improperly cleared the code. Check the carve-outs: customer modification, use outside scope, unapproved combination. Limitation of liability: the IP indemnity should be a carve-out from the general cap, with its own, higher super-cap. See our limitation of liability guide for how Sections 73 and 74 of the Indian Contract Act, 1872 set the backdrop a cap modifies, and when Section 23 can strike one down as unconscionable.

Support, maintenance, and what termination actually does

A perpetual licence's real ongoing cost is annual maintenance, typically 15 to 22 percent of the fee, buying patches and support. Lapse on it and most vendors charge a reinstatement penalty or refuse to reinstate, forcing a fresh purchase. Check the end-of-life clause: how much notice the vendor gives before dropping support for a version you rely on.

Termination has different consequences by licence type. On subscription or SaaS, it should mean access stops and data is returned or deleted within a stated window, commonly 30 to 90 days. On a perpetual licence, termination of the agreement should not, by itself, kill the right to keep using software already paid for, unless the contract expressly says so, deliberately, as leverage. Read this literally: "termination of this Agreement shall terminate the licence granted herein" is a very different sentence from "termination shall terminate Vendor's support obligations."

The Indian position: GST, cross-border withholding, and stamping

GST. A software licence, one-time or SaaS subscription, is taxed as a supply of the right to use intellectual property. Notification No. 11/2017-Central Tax (Rate), under SAC 9973, covers "temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of Information Technology software", at 18 percent, raised from 12 percent effective 25 January 2018. See the notification. The classification, not the invoice label, decides the rate: "licence fee", "subscription", and "SaaS fee" are all taxed the same.

Withholding tax: the Engineering Analysis ruling. If your licensor is offshore, whether the fee counts as "royalty" decides whether you must withhold under Section 195 of the Income Tax Act, 1961, which requires any person paying a non-resident a "sum chargeable under the provisions of this Act" to deduct tax at payment. (See Section 195.) Tax authorities long argued any payment for using software was royalty for copyright use, triggering TDS. The Supreme Court settled this in Engineering Analysis Centre of Excellence Pvt Ltd v CIT, (2021) 432 ITR 471 (SC), decided 2 March 2021 by a bench of R.F. Nariman, Hemant Gupta and B.R. Gavai JJ, hearing 86 appeals together. The Court held that payments by Indian end-users and distributors to non-resident suppliers, for resale or use under a EULA or distribution agreement, are not royalty for use of copyright, because the licence transfers none of the exclusive rights a copyright owner holds under Section 14(b) of the Copyright Act, 1957, which lists the right "to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme." A customer buying the right to run software, without a right to reproduce, adapt, or commercially exploit the code, has a licence to use a copy, not a transfer of copyright, so no Section 195 obligation followed. Read the judgment. A bespoke licence with source code or resale rights can differ; confirm the classification with a tax advisor.

Stamping. A software licence attracts stamp duty under the applicable state Stamp Act, or the Indian Stamp Act, 1899 where the state has none, at rates set state by state. Section 35 of that Act says an instrument chargeable with duty "shall [not] be admitted in evidence for any purpose... unless such instrument is duly stamped", a defect the Supreme Court confirmed is curable, not fatal, in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 (13 December 2023). Stamp the licence, and any order forms under it, for the state of execution.

Red flags table

Normal	Red flag	Why it matters
Licence metric (named user, concurrent user, core, site) clearly defined with a worked example	Metric used but never defined ("per user")	Ambiguity resolves in the drafting party's favour during an audit
Termination of the agreement kept separate from termination of the licence grant, for perpetual deals	One clause ends both perpetual and subscription rights the same way	A paid-up perpetual right can be read as revoked over an unrelated dispute
IP indemnity with standard carve-outs (customer modification, unapproved combination)	No IP indemnity, or one folded into a low general cap	Customer bears the entire risk of a third-party infringement claim
Audit capped at once a year, true-up priced at the original negotiated rate	Audit unlimited in frequency, true-up at full list price	Turns a compliance check into an uncapped penalty clause
Source code escrow with periodic deposit verification, for critical on-prem software	No escrow, or a one-time deposit never refreshed	A stale, non-compiling deposit is worthless when needed
Maintenance lapse has a defined, capped reinstatement fee	Lapsed maintenance means permanent loss of upgrade rights	A small billing lapse becomes a full repurchase
GST and, for cross-border deals, TDS treatment addressed explicitly	Silent on tax treatment; price stated as a bare number	Who absorbs GST or TDS becomes a dispute at the first invoice
End-of-life notice period stated for any version run in production	No EOL clause; vendor can drop support without notice	Business-critical software goes unsupported with no migration window

Bad clause versus better clause

Bad: "Vendor grants Customer a licence to use the Software. This Agreement may be terminated by either party on 30 days' notice, upon which all rights granted herein shall immediately cease."

What is wrong: no licence metric, no perpetual-vs-subscription distinction, and a termination clause that kills even a fully paid-up perpetual licence over an unrelated 30-day notice.

Better: "Vendor grants Customer a perpetual, non-exclusive, non-transferable licence to install and use the Software for up to 250 Named Users across Customer's sites in India, as identified and updated by Customer from time to time under Clause [X]. This Agreement may be terminated by either party on 30 days' written notice for convenience, or immediately for uncured material breach. Termination shall terminate Vendor's support and maintenance obligations under Clause [Y], but shall not affect the licence granted in this Clause, which shall survive termination for any reason other than termination under Clause [Z] (non-payment of licence fees) or Customer's material breach of the scope restrictions in this Clause."

What changed and why: the licence metric is a checkable number instead of implicit, perpetual versus subscription is explicit, and termination is split cleanly into "support ends" versus "the licence itself ends", so an unrelated dispute cannot claw back software already paid for.

How this interacts with related clauses

The licence grant decides scope; IP assignment vs licence decides who owns what is built on top of it; audit rights decide how scope is enforced later; source code escrow decides what happens if the vendor cannot keep supporting the product; and limitation of liability decides what an indemnity claim is worth if it goes wrong.

US and global contrast

US software licences use the same building blocks, but two things differ. US EULAs lean on decades of "click-wrap" and "shrink-wrap" case law (ProCD v Zeidenberg being the best known); Indian courts generally apply ordinary Contract Act principles, offer, acceptance, consideration under Section 10, to a click-through licence rather than a specialised doctrine. The tax treatment differs too: the US has no equivalent to India's Engineering Analysis distinction between royalty for copyright and payment for a copyrighted article, since US withholding on cross-border software runs off its own treaty and IRC analysis. Do not assume a US tax opinion translates to the Indian position.

FAQ

What is the difference between a software licence and a software assignment? A licence grants permission to use software while the vendor keeps ownership. An assignment transfers ownership itself. Almost all commercial software deals, even "perpetual" ones, are licences.

Does "perpetual licence" really mean the software can be used forever? The licence grant, if properly drafted, should survive termination of the wider agreement, subject to continued compliance with scope and payment. Support and maintenance are not perpetual.

Do we need source code escrow for a SaaS product? Rarely, in the way it protects on-prem software. A SaaS customer never runs the code locally, so escrow does not solve the real risk, service continuity. Ask instead about data portability and transition assistance on termination.

Do we have to deduct TDS when paying a foreign software vendor for a licence? Following Engineering Analysis Centre of Excellence Pvt Ltd v CIT, (2021) 432 ITR 471 (SC), a payment for mere use of software, without acquiring any exclusive right under Section 14(b) of the Copyright Act, generally does not count as royalty and does not attract Section 195 withholding. A bespoke deal with source code or resale rights can differ; confirm with a tax advisor.

What GST rate applies to a software licence bought in India? 18 percent, under SAC 9973, whether billed as a one-time fee or a subscription, regardless of whether the software is delivered as a physical copy or accessed online.

Can a vendor increase our bill after an audit finds we exceeded our licensed seats? Yes, if the clause allows a true-up, and most enterprise licences do. Check whether the true-up rate is your original discount or full list price; that difference is often the entire point of the audit.

This guide explains how software and IP licence agreements are generally structured under Indian law, and the statutory points, GST classification, the Engineering Analysis withholding position, and stamping, that a generic or US-drafted template commonly gets wrong. It is not legal advice, and it does not tell you whether your specific licence, tax position, or audit exposure is safe to sign in your situation. For that, especially on a high-value or long-term deal, have a lawyer and a tax advisor review the actual documents.