Are you deducting TDS under Section 195 on foreign remittances? Here’s a twist that could either save you money—or land you in a compliance trap.

Many businesses and finance heads grapple with one key question:

Should TDS under Section 195 be deducted on the gross amount or just on the income portion of the payment?

Let’s decode this complex area with the help of court rulings and recent tribunal decisions.

The Confusion: Gross or Net?

Section 195 of the Income-tax Act, 1961 deals with tax deduction at source on payments made to non-residents. But when the payment includes a mix of taxable and non-taxable components (like reimbursements, costs, or services), how much TDS should be deducted?

Two different interpretations have created a tax dilemma.

Karnataka High Court (Samsung Electronics Case) – Gross is the Way

In this ruling, the Karnataka High Court held that:

• TDS must be deducted on the gross amount payable to the non-resident.
• It incorrectly interpreted the Supreme Court’s ruling in the Transmission Corporation of A.P. Ltd. case, which required obtaining a certificate under Section 195(2) to determine taxable income in a composite payment.

Supreme Court’s Verdict (GE India Technology Case) – Net is the Law

Thankfully, clarity came from the highest court.

In GE India Technology Cen. (P.) Ltd., the Supreme Court ruled:

• TDS should only be on the income portion that is chargeable to tax in India.
• There is no need to deduct TDS on the entire gross payment, especially if part of it is non-taxable.

This corrected the previous misinterpretation and laid the foundation for a more logical approach.

Bengaluru Tribunal Rulings: Back to Confusion?

Syed Aslam Hashmi Case

• The tribunal followed the outdated Karnataka HC view.
• It held that TDS should be deducted on the entire amount (gross).

R. Prakash Case

• Similarly, this case upheld that interest under Section 201(1A) should be computed on the whole consideration paid—not just the taxable portion.

What’s Wrong?

Both decisions failed to consider the Supreme Court’s landmark ruling in GE India, which explicitly limits TDS to the income component only.

Why This Matters for Your Business?

Deducting TDS on the gross amount unnecessarily increases:

• Cash flow pressure
• Working capital blockage
• Disputes with vendors and non-resident partners

On the flip side, under-deducting can trigger:

• Interest under Section 201(1A)
• Disallowance of expenses
• Litigation risk

Key Takeaway: Always Follow the Supreme Court

As of today, the correct position in law—as laid down in GE India Technology—is that:

“TDS should be deducted only on the income portion of the payment to a non-resident, not the full gross amount.”

If in doubt, apply for a certificate under Section 195(2) to determine the portion of income chargeable in India.

Final Thoughts

Don’t let outdated tribunal decisions misguide your compliance. When it comes to cross-border payments and TDS under Section 195, knowing whether to deduct on gross or net can make a huge financial difference.

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