Most Favoured Nation clause extended treaty interest exemption, leaving no Indian withholding obligation on the Swedish lender payment.

Interest paid to the Swedish lender was treated as exempt in India under Article 11(3) of the India-Sweden tax treaty because the Protocol's Most Favoured Nation clause allowed the benefit of the later India-Ireland treaty provision to be imported. Mere loan guarantee by EKN did not by itself satisfy the original exemption wording, but the treaty override through the Protocol extended the relief. As the interest was not chargeable to tax in India and the lender had no permanent establishment there, it was not assessable as business profits and no withholding obligation arose under section 195.

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Issues: (i) Whether interest payable to the Swedish lender through the facility agent was taxable in India under Article 11(3) of the India-Sweden tax treaty in view of the Most Favoured Nation clause in the Protocol. (ii) Whether, in the absence of a permanent establishment in India, the interest was chargeable as business profits and whether tax was required to be withheld under section 195.

Issue (i): Whether interest payable to the Swedish lender through the facility agent was taxable in India under Article 11(3) of the India-Sweden tax treaty in view of the Most Favoured Nation clause in the Protocol.

Analysis: The exemption under Article 11(3) was not available merely because the loan was guaranteed by EKN, since guaranteeing a loan is not the same as extending or endorsing it. However, the Protocol to the India-Sweden treaty contained a Most Favoured Nation clause. By applying that clause, and by reference to the treaty benefit available under the later India-Ireland convention, the guaranteed loan was brought within the scope of the exemption for interest.

Conclusion: The interest payment was not taxable in India under Article 11(3) of the India-Sweden treaty by reason of the Most Favoured Nation clause in the Protocol.

Issue (ii): Whether, in the absence of a permanent establishment in India, the interest was chargeable as business profits and whether tax was required to be withheld under section 195.

Analysis: Since the interest was held to be not taxable in India under the treaty, the question of treating it as business profits did not survive for adjudication. On the accepted position that the lender had no permanent establishment in India, no withholding obligation could arise on a payment not chargeable to tax in India.

Conclusion: The interest was not chargeable as business profits in India and no tax was required to be withheld under section 195.

Final Conclusion: The advance ruling held that the treaty exemption applied to the interest payment and the payer had no withholding obligation in India.

Ratio Decidendi: Where a treaty protocol contains a Most Favoured Nation clause, the benefit of a later treaty provision may be imported to extend the interest exemption, and no withholding is required on income that is not chargeable to tax in India.

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