Most Favoured Nation clause extended treaty relief, making interest on insured French credit non-taxable and removing withholding duty.

Interest paid to a French lender and its assignee was held not taxable in India under the India-France tax treaty, as modified by the Most Favoured Nation clause in the protocol. Although mere COFACE insurance was not treated as an endorsement of the credit on the treaty text alone, later OECD-member treaty practice was used to extend the narrower source-taxing rule to insured credit, giving the applicant treaty relief. Because the interest was not chargeable to tax in India, the applicant was also held under no obligation to deduct tax at source on the payments.

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Issues: (i) Whether interest payable to the French lender and its assignee was taxable in India under Article 12(3)(b) of the India-France Double Taxation Avoidance Convention, read with the Most Favoured Nation clause in the protocol, when the underlying credit was insured by COFACE. (ii) Whether the applicant was obliged to deduct tax at source under section 195 of the Income-tax Act, 1961, on such interest payments.

Issue (i): Whether interest payable to the French lender and its assignee was taxable in India under Article 12(3)(b) of the India-France Double Taxation Avoidance Convention, read with the Most Favoured Nation clause in the protocol, when the underlying credit was insured by COFACE.

Analysis: The expression "endorsed" in Article 12(3)(b) was not treated as wide enough to cover mere insurance of export credit. On the treaty text alone, insurance by COFACE did not amount to a loan or credit being extended or endorsed by COFACE. However, the protocol's Most Favoured Nation clause required comparison with later conventions concluded by India with OECD member States. Those conventions showed a more restricted scope of taxation where interest connected with insured credit was excluded. The protocol formed an integral part of the Convention, and the treaty had to be construed in that light. On that basis, the benefit of the wider exemption was held applicable.

Conclusion: The interest was held not taxable in India under Article 12(3)(b) of the Convention as modified by the Most Favoured Nation clause in the protocol.

Issue (ii): Whether the applicant was obliged to deduct tax at source under section 195 of the Income-tax Act, 1961, on such interest payments.

Analysis: Since the interest itself was held not chargeable to tax in India under the applicable treaty framework, no tax was required to be withheld at source on those payments.

Conclusion: The applicant was held to have no obligation to deduct tax at source under section 195 on the interest payable to the French lender or its assignee.

Final Conclusion: The ruling granted treaty relief to the applicant by holding the interest payments exempt from Indian taxation and by negating any corresponding withholding obligation.

Ratio Decidendi: Where a treaty protocol incorporates a Most Favoured Nation clause, later Indian treaties with OECD member States that provide a more restricted source-taxing right on interest may be applied to extend the same restricted scope, even if the original treaty text would not by itself cover mere credit insurance.

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