Treaty exemption for interest to China Development Bank confirmed, leaving no withholding liability or default exposure.

Interest paid to China Development Bank was treated as exempt under Article 11(3) of the India-China DTAA because the institution was regarded as a financial institution wholly owned by the Government of China. The later protocol amendment was understood as a clarification confirming the existing treaty position, not as creating a new benefit. On that basis, no withholding obligation survived in respect of the interest payment, and the assessee could not be treated as an assessee in default under Sections 201 and 195 of the Income-tax Act, 1961.

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Issues: Whether interest paid to China Development Bank was exempt under Article 11(3) of the India-China DTAA, and whether the assessee could be treated as an assessee in default for failure to deduct tax at source.

Analysis: The financial position and ownership structure of China Development Bank were examined along with the status of its shareholders and the relevant protocol and amendment to Article 11(3). The amended protocol specifically named China Development Bank as a financial institution wholly owned by the Government of China. The reasoning proceeded on the basis that the earlier treaty text was already broad enough to cover such an institution and that the later clarification did not create a new benefit but confirmed the existing position. On that footing, the interest payment fell within the treaty exemption and no withholding obligation survived under the cited provisions.

Conclusion: The interest paid to China Development Bank was exempt from tax under Article 11(3) of the India-China DTAA, and the assessee could not be treated as an assessee in default under Sections 201 and 195 of the Income-tax Act, 1961.

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