Treaty taxation of interest requires actual payment; notional transfer pricing interest could not be taxed under the DTAA.

Under the India-Germany DTAA, interest is taxable only when it is actually "paid" to a resident of the other Contracting State, meaning funds must be placed at the creditor's disposal. A notional transfer pricing adjustment for interest that was neither paid nor contractually receivable did not satisfy that treaty condition, and domestic accrual principles could not be imported through Article 3(2) to expand taxation. Section 90(2) preserved the more beneficial treaty position, while Chapter X and Section 92C could not create a charge where the treaty did not permit it. The notional interest addition was therefore deleted.

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Issues: Whether a transfer pricing adjustment bringing to tax notional interest, which was neither actually paid nor contractually receivable, could be taxed under Article 11 of the India-Germany DTAA.

Analysis: Article 11 taxes interest arising in a Contracting State only when it is paid to a resident of the other Contracting State. The expression "paid" was read in its ordinary treaty sense as actual placement of funds at the disposal of the creditor, and not as deemed accrual. The domestic law principle of accrual could not be imported through Article 3(2) because the treaty context required a different meaning. Section 90(2) of the Income-tax Act, 1961 gives overriding effect to the more beneficial treaty provisions. Chapter X and Section 92C of the Income-tax Act, 1961 may determine arm's length price, but they do not create a charge where the treaty does not permit taxation.

Conclusion: The notional interest adjustment did not satisfy the treaty condition of interest being "paid" and was not taxable under Article 11; the addition was deleted and the ground was allowed.

Ratio Decidendi: Where a tax treaty permits taxation of interest only on payment basis, a notional transfer pricing adjustment cannot be brought to tax unless the income has actually been paid within the meaning of the treaty.

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