Hello Johnson Daniel,
Thank you for posting your query on Microsoft Q&A.
Defender for SQL Servers on machines helps protect SQL server instances running on VMs or Physical Machines which includes on-prem environment and Azure VMs. If you have SQL server instances at on-prem servers or Azure VMs, "Defender for SQL Servers on Machines" is the right choice.
Defender for Azure SQL is specifically for protecting Azure SQL Databases and Azure SQL Managed Instances. If you have SQL database in Azure SQL Database or Azure SQL Managed Instance, "Defender for Azure SQL" is the correct choice to work with.
Please refer the below documents.
https://learn.microsoft.com/en-us/azure/defender-for-cloud/defender-for-sql-usage
https://learn.microsoft.com/en-us/azure/azure-sql/database/azure-defender-for-sql?view=azuresql
I hope this information is helpful. Please feel free to reach out if you have any further questions.
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Venkata Jagadeep