(1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest.
(3) Notwithstanding the provisions of paragraph (2), interest arising in a Contracting State shall be exempt from tax in that State, provided that it is derived and beneficially owned by:
- (a) the Government, a political subdivision or a local authority or Central Bank of the other Contracting State; or
- (i) in the case of India, the Reserve Bank of India, the Export-import Bank of India, the National Housing Bank; and
- (ii) in the case of Mexico, Banco de México, Banco Nacional de Comercio Exterior, S.N.C., Nacional Financiera S.N.C., or Banco Nacional de Obras y Servicios Públicos, S.N.C.; or
- (c) the interest is paid by any of the entities mentioned in sub-paragraph (a); or
- (d) any other institution as may be agreed upon from time to time between the competent authorities of the Contracting States through exchange of letters.
(4) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
(5) The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.
(6) Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
(7) Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds, for whatever reason, the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.