USA
54. Agreement for avoidance of
double taxation of income with USA
Whereas the
annexed Convention between the Government of the United States of America and the
Government of the Republic of India for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes on income has entered
into force on the 18th December, 1990 after the
notification by both the
Contracting States to each other of the completion of the procedures required
under their laws for bringing into force of the said Convention in accordance
with paragraph 1 of Article 30 of the said Convention ;
Now,
therefore, in exercise of the powers conferred by section 90 of the Income-tax
Act, 1961 (43 of 1961) and section 24A of the Companies (Profits) Surtax Act,
1964 (7 of 1964), the Central Government hereby directs that all the provisions
of the said Convention shall be given effect to in the Union of India.
Further in
exercise of the powers conferred by section 44A(b) of the Wealth-tax Act, 1957
(27 of 1957) and section 44(b) of the Gift-tax Act, 1958 (18 of 1958), the
Central Government also directs that the provisions of Article 28 of the said
Convention shall be given effect to in the Union of India.
Notification: No. GSR 990(E), dated 20-12-1990.
Annexure
Convention Between The Government Of The United
States Of America And The Government Of The Republic Of India For The Avoidance
Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes
On Income
The Government
of the United States of America and the Government of the Republic of India,
desiring to conclude a Convention for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income, have agreed as
follows :
Article 1 - General
Scope - 1. This Convention shall apply to persons who are residents of one
or both of the Contracting States, except as otherwise provided in the
Convention.
2. The Convention shall not restrict in any
manner any exclusion, exemption, deduction, credit, or other allowance now or
hereafter accorded:
(a) by the laws of either Contracting State ; or
(b) by any other agreement between the Contracting States.
3. Notwithstanding any provision of the
Convention except paragraph 4, a Contracting State may tax its residents [as
determined under Article 4 (Residence)], and by reason of citizenship may tax
its citizens, as if the Convention had not come into effect. For this purpose,
the term “citizen” shall include a former citizen whose loss of citizenship had
as one of its principal purposes the avoidance of tax, but only for a period of
10 years following such loss.
4. The provisions of paragraph 3 shall not
affect—
(a) the benefits conferred by a Contracting State under paragraph 2 of
Article 9 (Associated Enterprises), under paragraphs 2 and 6 of Article 20
(Private Pensions, Annuities, Alimony, and Child Support), and under Articles
25 (Relief from Double Taxation), 26 (Non-Discrimination), and 27 (Mutual
Agreement Procedure) ; and
(b) the benefits conferred by a Contracting State under Articles 19
(Remuneration and Pensions in respect of Government Service), 21 (Payment
received by Students and Apprentices), 22 (Payments received by Professors,
Teachers and Research Scholars) and 29 (Diplomatic Agents and Consular
Officers), upon individuals who are neither citizens of, nor have immigrant
status in, that State.
Article 2 - Taxes
covered - 1. The existing taxes to which this Convention shall apply are :
(a) in the United States, the Federal income taxes imposed by the
Internal Revenue Code (but excluding the accumulated earnings tax, the personal
holding company tax, and social security taxes), and the exercise taxes imposed
on insurance premiums paid to foreign insurers and with respect to private
foundations (hereinafter referred to as “United States Tax”); provided,
however, the Convention shall apply to the exercise taxes imposed on insurance
premiums paid to foreign insurers only to the extent that the risks covered by
such premiums are not reinsured with a person not entitled to exemption from
such taxes under this or any other Convention which applies to these taxes ;
and
(b) in India :
(i) the income-tax including any surcharge thereon, but excluding
income-tax on undistributed income of companies, imposed under the Income-tax
Act ; and
(ii) the surtax
(hereinafter referred to as
“Indian tax”).
Taxes referred
to in (a) and (b) above shall not include any amount payable in
respect of any default or omission in relation to the above taxes or which
represent a penalty imposed relating to those taxes.
2. The Convention shall apply also to any
identical or substantially similar taxes which are imposed after the date of
signature of the Convention in addition to, or in place of, the existing taxes.
The competent authorities of the Contracting States shall notify each other of
any significant changes which have been made in their respective taxation laws
and of any official published material concerning the application of the
Convention.
Article 3 - General
definitions - 1. In this Convention, unless the context otherwise requires:
(a) the
term “India” means the territory of India and includes the territorial sea and
air space above it, as well as any other maritime zone in which India has
sovereign rights, other rights and jurisdictions, according to the Indian law
and in accordance with inter-national law ;
(b) the
term “United States”, when used in a geographical sense means all the territory
of the United States of America, including its territorial sea, in which the
laws relating to United States tax are in force, and all the area beyond its
territorial sea, including the sea bed and subsoil thereof, over which the United
States has jurisdiction in accordance with international law and in which the
laws relating to United States tax are in force ;
(c) the
terms “a Contracting State” and “the other Contracting State” mean India or the
United States as the context requires ;
(d) the
term “tax” means Indian tax or United States tax, as the context requires ;
(e) the
term “person” includes an individual, an estate, a trust, a partnership, a
company, any other body of persons, or other taxable entity ;
(f) the
term “company” means any body corporate or any entity which is treated as a
company or body corporate for tax purposes ;
(g) the
terms “enterprise of a Contracting State” and “enterprise of the other Contracting
State” mean respectively an enterprise carried on by a resident of a
Contracting State and an enterprise carried on by a resident of the other
Contracting State ;
(h) the
term “competent authority” means, in the case of India, the Central Government
in the Ministry of Finance (Department of Revenue) or their authorised
representative, and in the case of the United States, the Secretary of the
Treasury or his delegate ;
(i) the
term “national” means any individual possessing the nationality or citizenship
of a Contracting State ;
(j) the
term “international traffic” means any transport by a ship or aircraft operated
by an enterprise of a Contracting State, except when the ship or aircraft is
operated solely between places within the other Contracting State ;
(k) the
term “taxable year” in relation to Indian tax means “previous year” as defined
in the Income-tax Act, 1961.
2. As regards the application of the Convention
by a Contracting State any term not defined therein shall, unless the context
otherwise requires or the competent authorities agree to a common meaning
pursuant to the provisions of Article 27 (Mutual Agreement Procedure), have the
meaning which it has under the laws of that State concerning the taxes to which
the Convention applies.
Article 4 - Residence
- 1. For the purposes of this Convention, the term “resident of a
Contracting State” means any person who, under the laws of that State, is
liable to tax therein by reason of his domicile, residence, citizenship, place
of management, place of incorporation, or any other criterion of a similar
nature, provided, however, that
(a) this term does not include any person who is liable to tax in that
State in respect only of income from sources in that State; and
(b) in the case of income derived or paid by a partnership, estate, or
trust, this term applies only to the extent that the income derived by such
partnership, estate, or trust is subject to tax in that State as the income of
a resident, either in its hands or in the hands of its partners or
beneficiaries.
(2)
Where by reason of the provisions of paragraph 1, an individual is a resident
of both Contracting States, then his status shall be determined as follows :
(a) he shall be deemed to be a resident of the State in which he has a permanent
home available to him; if he has a permanent home available to him in both
States, he shall be deemed to be a resident of the State with which his
personal and economic relations are closer (centre of vital interests) ;
(b) if the State in which he has his centre of vital interests cannot
be determined, or if he does not have a permanent home available to him in
either State, he shall be deemed to be a resident of the State in which he has
an habitual abode ;
(c) if he has an habitual abode in both States or in neither of them,
he shall be deemed to be a resident of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the
competent authorities of the Contracting States shall settle the question by mutual
agreement.
3. Where, by reason of paragraph 1, a company is
a resident of both Contracting States, such company shall be considered to be
outside the scope of this Convention except for purposes of paragraph 2 of
Article 10 (Dividends), Article 26 (Non-Discrimination), Article 27 (Mutual
Agreement Procedure), Article 28 (Exchange of Information and Administrative
Assistance) and Article 30 (Entry into Force).
4. Where, by reason of the provisions of
paragraph 1, a person other than an individual or a company is a resident of
both Contracting States, the competent authorities of the Contracting States
shall settle the question by mutual agreement and determine the mode of
application of the Convention to such person.
Article 5 - Permanent
establishment - 1. For the purposes of this Convention, the term “permanent
establishment” means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes
especially :
(a) a place of management ;
(b) a branch ;
(c) an office ;
(d) a factory ;
(e) a workshop ;
(f) a mine, an oil or gas well, a quarry, or any other place of
extraction of natural resources ;
(g) a warehouse, in relation to a person providing storage facilities for
others ;
(h) a farm, plantation or other place where agriculture, forestry,
plantation or related activities are carried on ;
(i) a store or premises used as a sales outlet ;
(j) an installation or structure used for the exploration or
exploitation of natural resources, but only if so used for a period of more
than 120 days in any twelve-month period ;
(k) a building site or construction, installation or assembly project
or supervisory activities in connection therewith, where such site, project or activities
(together with other such sites, projects or activities, if any) continue for a
period of more than 120 days in any twelve-month period ;
(l) the furnishing of services, other than
included services as defined in Article 12 (Royalties and Fees for Included
Services), within a Contracting State by an enterprise through employees or
other personnel, but only if:
(i) activities of that nature continue within that
State for a period or periods aggregating more than 90 days within any
twelve-month period ; or
(ii) the services are performed within that State
for a related enterprise [within the meaning of paragraph 1 of Article 9
(Associated Enterprises)].
3. Notwithstanding the preceding provisions of
this Article, the term “permanent establishment” shall be deemed not to include
any one or more of the following :
(a) the use of facilities solely for the purpose of storage, display,
or occasional delivery of goods or merchandise belonging to the enterprise ;
(b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display, or occasional delivery ;
(c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise ;
(d) the maintenance of a fixed place of business solely for the purpose
of purchasing goods or merchandise, or of collecting information, for the
enterprise ;
(e) the maintenance of a fixed place of business solely for the purpose
of advertising, for the supply of information, for scientific research or for
other activities which have a preparatory or auxiliary character, for the
enterprise.
4. Notwithstanding the provisions of paragraphs
1 and 2, where a person—other than an agent of an independent status to whom
paragraph 5 applies - is acting in a Contracting State on behalf of an
enterprise of the other Contracting State, that enterprise shall be deemed to
have a permanent establishment in the first-mentioned State, if :
(a) he has and habitually exercises in the first-mentioned State an
authority to conclude on behalf of the enterprise, unless his activities are
limited to those mentioned in paragraph 3 which, if exercised through a fixed
place of business, would not make that fixed place of business a permanent
establishment under the provisions of that paragraph ;
(b) he has no such authority but habitually maintains in the
first-mentioned State a stock of goods or merchandise from which he regularly
delivers goods or merchandise on behalf of the enterprise, and some additional
activities conducted in the State on behalf of the enterprise have contributed
to the sale of the goods or merchandise ; or
(c) he habitually secures orders in the first-mentioned State, wholly
or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall
not be deemed to have a permanent establishment in the other Contracting State
merely because it carries on business in that other State through a broker,
general commission agent, or any other agent of an independent status, provided
that such persons are acting in the ordinary course of their business. However,
when the activities of such an agent are devoted wholly or almost wholly on
behalf of that enterprise and the transactions between the agent and the
enterprise are not made under arm’s length conditions, he shall not be
considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident
of a Contracting State controls or is controlled by a company which is a
resident of the other Contracting State, or which carries on business in that
other State (whether through a permanent establishment or otherwise), shall not
of itself constitute either company a permanent establishment of the other.
Article 6 - Income
from immovable property (real property) - 1. Income derived by a resident
of a Contracting State from immovable property (real property), including
income from agriculture or forestry, situated in the other Contracting State
may be taxed in that other State.
2. The term “immovable property” shall have the
meaning which it has under the law of the Contracting State in which the
property in question is situated.
3. The provisions of paragraph 1 shall also apply
to income derived from the direct use, letting, or use in any other form of
immovable property.
4. The provisions of paragraphs 1 and 3 shall
also apply to the income from immovable property of an enterprise and to income
from immovable property used for the performance of independent personal
services.
Article 7 - Business
profits - 1. The profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries on business in the
other Contracting State through a permanent establishment situated therein. If
the enterprise carries on business as aforesaid, the profits of the enterprise
may be taxed in the other State but only so much of them as is attributable to
(a) that permanent establishment ; (b) sales in the other State
of goods or merchandise of the same or similar kind as those sold through that
permanent establishment ; or (c) other business activities carried on in
the other State of the same or similar kind as those effected through that
permanent establishment.
2. Subject to the provisions of paragraph 3,
where an enterprise of a Contracting State carries on business in the other
Contracting State through a permanent establishment situated therein, there
shall in each Contracting State be attributed to that permanent establishment
the profits which it might be expected to make if it were a distinct and
independent enterprise engaged in the same or similar activities under the same
or similar conditions and dealing wholly at arm’s length with the enterprise of
which it is a permanent establishment and other enterprises controlling,
controlled by or subject to the same common control as that enterprise. In any
case where the correct amount of profits attributable to a permanent
establishment is incapable of determination or the determination thereof
presents exceptional difficulties, the profits attributable to the permanent
establishment may be estimated on a reasonable basis. The estimate adopted
shall, however, be such that the result shall be in accordance with the
principles contained in this Article.
3. In the determination of the profits of a
permanent establishment, there shall be allowed as deductions expenses which
are incurred for the purposes of the business of the permanent establishment,
including a reasonable allocation of executive and general administrative
expenses, research and development expenses, interest, and other expenses
incurred for the purposes of the enterprise as a whole (or the part thereof
which includes the permanent establishment), whether incurred in the State in
which the permanent establishment is situated or elsewhere, in accordance with
the provisions of and subject to the limitations of the taxation laws of that
State. However, no such deduction shall be allowed in respect of amounts, if
any, paid (otherwise than towards reimbursement of actual expenses) by the
permanent establishment to the head office of the enterprise or any of its
other offices, by way of royalties, fees or other similar payments in return
for the use of patents, know-how or other rights, or by way of commission or
other charges for specific services performed or for management, or, except in
the case of a banking enterprises, by way of interest on moneys lent to the
permanent establishment. Likewise, no account shall be taken, in the
determination of the profits of a permanent establishment, for amounts charged
(otherwise than toward reimbursement of actual expenses), by the permanent
establishment to the head office of the enterprise or any of its other offices,
by way of royalties, fees or other similar payments in return for the use of
patents, know-how or other rights, or by way of commission or other charges for
specific services performed or for management, or, except in the case of a
banking enterprise, by way of interest on moneys lent to the head office of the
enterprise or any of its other offices.
4. No profits shall be attributed to a permanent
establishment by reason of the mere purchase by that permanent establishment of
goods or merchandise for the enterprise.
5. For the purposes of this Convention, the
profits to be attributed to the permanent establishment as provided in
paragraph 1(a) of this Article shall include only the profits derived
from the assets and activities of the permanent establishment and shall be
determined by the same method year by year unless there is good and sufficient
reason to the contrary.
6. Where profits include items of income which
are dealt with separately in other Articles of the Convention, then the
provisions of those Articles shall not be affected by the provisions of this
Article.
7. For the purposes of the Convention, the term
“business profits” means income derived from any trade or business including
income from the furnishing of services other than included services as defined
in Article 12 (Royalties and Fees for Included Services) and including income
from the rental of tangible personal property other than property described in
paragraph 3(b) of Article 12 (Royalties and Fees for Included Services).
Article 8 - Shipping
and air transport - 1. Profits derived by an enterprise of a Contracting
State from the operation by that enterprise of ships or aircraft in
international traffic shall be taxable only in that State.
2. For the purposes of this Article, profits
from the operation of ships or aircraft in international traffic shall mean
profits derived by an enterprise described in paragraph 1 from the
transportation by sea or air respectively of passengers, mail, livestock or
goods carried on by the owners or lessees or charterers of ships or aircraft
including—
(a) the sale of tickets for such transportation on behalf of other
enterprises;
(b) other activity directly connected with such transportation ; and
(c) the rental of ships or aircraft incidental to any activity directly
connected with such transportation.
3. Profits of an enterprise of a Contracting
State described in paragraph 1 from the use, maintenance, or rental of
containers (including trailers, barges, and related equipment for the transport
of containers) used in connection with the operation of ships or aircraft in
international traffic shall be taxable only in that State.
4. The provisions of paragraphs 1 and 3 shall
also apply to profits from participation in a pool, a joint business, or an
international operating agency.
5. For the purposes of this Article, interest on
funds connected with the operation of ships or aircraft in international
traffic shall be regarded as profits derived from the operation of such ships
or aircraft, and the provisions of Article 11 (Interest) shall not apply in
relation to such interest.
6. Gains derived by an enterprise of a
Contracting State described in paragraph 1 from the alienation of ships,
aircraft or containers owned and operated by the enterprise, the income from
which is taxable only in that State, shall be taxed only in that State.
Article 9 - Associated
enterprises - 1. Where :
(a) an enterprise of a Contracting State participates directly or
indirectly in the management, control or capital of an enterprise of the other
Contracting State ; or
(b) the same persons participate directly or indirectly in the
management, control, or capital of an enterprise of a Contracting State and an
enterprise of the other Contracting State,
and in either
case conditions are made or imposed between the two enterprises in their
commercial or financial relations which differ from those which would be made
between independent enterprises, then any profits which, but for those
conditions would have accrued to one of the enterprises, but by reason of those
conditions have not so accrued, may be included in the profits of that
enterprise and taxed accordingly.
2. Where a Contracting State includes in the
profits of an enterprise of that State, and taxes accordingly, profits on which
an enterprise of the other Contracting State has been charged to tax in that
other State, and the profits so included are profits which would have accrued
to the enterprise of the first-mentioned State if the conditions made between
the two enterprises had been those which would have been made between
independent enterprises, then that other State shall make an appropriate
adjustment to the amount of the tax charged therein on those profits. In
determining such adjustment, due regard shall be had to the other provisions of
this Convention and the competent authorities of the Contracting States shall,
if necessary, consult each other.
Article 10 - Dividends
- 1. Dividends paid by a company which is a resident of a Contracting State
to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in
the Contracting State of which the company paying the dividends is a resident, and
according to the laws of that State, but if the beneficial owner of the
dividends is a resident of the other Contracting State, the tax so charged
shall not exceed :
(a) 15 per cent of the gross amount of the dividends if the beneficial
owner is a company which owns at least 10 per cent of the voting stock of the
company paying the dividends.
(b) 25 per cent of the gross amount of the dividends in all other
cases.
Sub-paragraph
(b) and not sub-paragraph (a) shall apply in the case of
dividends paid by a United States person which is a Regulated Investment
Company. Sub-paragraph (a) shall not apply to dividends paid by a United
States person which is a Real Estate Investment Trust, and sub-paragraph (b)
shall only apply if the dividend is beneficially owned by an individual holding
a less than 10 per cent interest in the Real Estate Investment Trust. This
paragraph shall not affect the taxation of the company in respect of the
profits out of which the dividends are paid.
3. The term “dividends” as used in this Article
means income from shares or other rights, not being debt-claims, participating
in profits, income from other corporate rights which are subjected to the same
taxation treatment as income from shares by the taxation laws of the State of
which the company making the distribution is a resident ; and income from
arrangements, including debt obligations, carrying the right to participate in
profits, to the extent so characterised under the laws of the Contracting State
in which the income arises.
4. The provisions of paragraphs 1 and 2 shall
not apply if the beneficial owner of the dividends, being a resident of a
Contracting State, carries on business in the other Contracting State, of which
the company paying the dividends is a resident, through a permanent
establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the dividends are
attributable to such permanent establishment or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15 (Independent Personal
Services), as the case may be, shall apply.
5. Where a company which is a resident of a
Contracting State derives profits or income from the other Contracting State,
that other State may not impose any tax on the dividends paid by the company
except insofar as such dividends are paid to a resident of that other State or
insofar as the holding in respect of which the dividends are paid is
effectively connected with a permanent establishment or a fixed base situated
in that other State, nor subject the company’s undistributed profits to a tax
on the company’s undistributed profits, even if the dividends paid or the
undistributed profits consist wholly or partly of profits or income arising in
such other State.
Article 11 - Interest
- 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 :
(a) 10 per cent of the gross amount of the interest if such interest is
paid on a loan granted by a bank carrying on a bona fide banking
business or by a similar financial institution (including an insurance company)
; and
(b) 15 per cent of the gross amount of the interest in all other cases.
3. Notwithstanding the provisions of paragraph 2
of this Article, interest arising in a Contracting State :
(a) and derived and beneficially owned by the Government of the other
Contracting State, a political sub-division or local authority thereof, the
Reserve Bank of India, or the Federal Reserve Bank of the United States, as the
case may be, and such other institutions of either Contracting State as the
competent authorities may agree pursuant to Article 27 (Mutual Agreement
Procedure) ;
(b) with respect to loans or credits extended or endorsed
(i) by the Export Import Bank of the United
States, when India is the first-mentioned Contracting State ; and
(ii) by the EXIM Bank of India, when the United
States is the first-mentioned Contracting State ; and
(c) to the extent approved by the Government of that State, and derived
and beneficially owned by any person, other than a person referred to in
sub-paragraphs (a) and (b), who is a resident of the other
Contracting State, provided that the transaction giving rise to the debt-claim
has been approved in this behalf by the Government of the first-mentioned
Contracting State ;
shall be
exempt from tax in the first-mentioned Contracting State.
4. The term “interest” as used in this
Convention 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 or prizes attaching to such securities,
bonds, or debentures. Penalty charges for late payment shall not be regarded as
interest for the purposes of the Convention. However, the term “interest” does
not include income dealt with in Article 10 (Dividends).
5. The provisions of paragraphs 2 and 3 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 interest is attributable to such permanent
establishment or fixed base. In such case the provisions of Article 7 (Business
Profits) or Article 15 (Independent Personal Services), as the case may be,
shall apply.
6. Interest shall be deemed to arise in a
Contracting State when the payer is that State itself or a political
sub-division, local authority, or 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 Contracting State in which the
permanent establishment or fixed base is situated.
7. Where, by reason of a special relationship
between the payer and the beneficial owner or between both of them and some
other person, the amount of the interest, having regard to the debt-claim for
which it is paid, exceeds the amount which would have been agreed upon by the
payer and the beneficial owner in the absence of such relationship, the
provisions of this Article shall apply only to the last-mentioned amount. In
such case the excess part of the payments shall remain taxable according to the
laws of each Contracting State, due regard being had to the other provisions of
the Convention.
Article 12 - Royalties
and fees for included services - 1. Royalties and fees for included
services 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 royalties and fees for included
services may also be taxed in the Contracting State in which they arise and
according to the laws of that State; but if the beneficial owner of the
royalties or fees for included services is a resident of the other Contracting
State, the tax so charged shall not exceed :
(a) in the case of royalties referred to in sub-paragraph (a) of
paragraph 3 and fees for included services as defined in this Article [other
than services described in sub-paragraph (b) of this paragraph] :
(i) during the first five taxable years for which
this Convention has effect,
(a) 15 per cent of the gross amount of the royalties or fees for
included services as defined in this Article, where the payer of the royalties
or fees is the Government of that Contracting State, a political sub-division
or a public sector company ; and
(b) 20 per cent of the gross amount of the royalties or fees for
included services in all other cases ; and
(ii) during the subsequent years, 15 per cent of
the gross amount of royalties or fees for included services ; and
(b) in the case of royalties referred to in sub-paragraph (b) of
paragraph 3 and fees for included services as defined in this Article that are
ancillary and subsidiary to the enjoyment of the property for which payment is
received under paragraph 3(b) of this Article, 10 per cent of the gross
amount of the royalties or fees for included services.
3. The term “royalties” as used in this Article
means :
(a) payments of any kind received as a consideration for the use of, or
the right to use, any copyright of a literary, artistic, or scientific work,
including cinematograph films or work on film, tape or other means of
reproduction for use in connection with radio or television broadcasting, any
patent, trade mark, design or model, plan, secret formula or process, or for
information concerning industrial, commercial or scientific experience,
including gains derived from the alienation of any such right or property which
are contingent on the productivity, use, or disposition thereof ; and
(b) payments of any kind received as consideration for the use of, or
the right to use, any industrial, commercial, or scientific equipment, other
than payments derived by an enterprise described in paragraph 1 of Article 8
(Shipping and Air Transport) from activities described in paragraph 2(c)
or 3 of Article 8.
4. For purposes of this Article, “fees for
included services” means payments of any kind to any person in consideration
for the rendering of any technical or consultancy services (including through
the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the
right, property or information for which a payment described in paragraph 3 is
received ; or
(b) make available technical knowledge, experience, skill, know-how, or
processes, or consist of the development and transfer of a technical plan or
technical design.
5. Notwithstanding paragraph 4, “fees for
included services” does not include amounts paid :
(a) for services that are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of property other than a sale
described in paragraph 3(a) ;
(b) for services that are ancillary and subsidiary to the rental of
ships, aircraft, containers or other equipment used in connection with the
operation of ships or aircraft in international traffic ;
(c) for teaching in or by educational institutions ;
(d) for services for the personal use of the individual or individuals
making the payments ; or
(e) to an employee of the person making the payments or to any
individual or firm of individuals (other than a company) for professional
services as defined in Article 15 (Independent Personal Services).
6. The provisions of paragraphs 1 and 2 shall
not apply if the beneficial owner of the royalties or fees for included
services, being a resident of a Contracting State, carries on business in the
other Contracting State, in which the royalties or fees for included services
arise, through a permanent establishment situated therein, or performs in that
other State independent personal services from a fixed base situated therein,
and the royalties or fees for included services are attributable to such
permanent establishment or fixed base. In such case the provisions of Article 7
(Business Profits) or Article 15 (Independent Personal Services), as the case
may be shall apply.
7. (a) Royalties and fees for included
services shall be deemed to arise in a Contracting State when the payer is that
State itself, a political sub-division, a local authority, or a resident of
that State. Where, however, the person paying the royalties or fees for
included services, whether he is a resident of a Contracting State or not, has
in a Contracting State a permanent establishment or a fixed base in connection
with which the liability to pay the royalties or fees for included services was
incurred, and such royalties or fees for included services are borne by such
permanent establishment or fixed base, then such royalties or fees for included
services shall be deemed to arise in the Contracting State in which the
permanent establishment or fixed base is situated.
(b)
Where under sub-paragraph (a) royalties or fees for included services do
not arise in one of the Contracting States, and the royalties relate to the use
of, or the right to use, the right or property, or the fees for included
services relate to services performed, in one of the Contracting States, the
royalties or fees for included services shall be deemed to arise in that Contracting
State.
8. Where, by reason of a special relationship
between the payer and the beneficial owner or between both of them and some
other person, the amount of the royalties or fees for included services paid
exceeds 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 such case, the excess part of the payments shall
remain taxable according to the laws of each Contracting State, due regard
being had to the other provisions of the Convention.
Article 13 - Gains
- Except as provided in Article 8 (Shipping and Air Transport) of this
Convention, each Contracting State may tax capital gains in accordance with the
provisions of its domestic law.
Article 14 - Permanent
establishment tax - 1. A company which is a resident of India may be
subject in the United States to a tax in addition to the tax allowable under
the other provisions of this Convention.
(a) Such tax, however, may be imposed only on :
(i) the portion of the business profits of the
company subject to tax in the United States which represents the dividend
equivalent amount ; and
(ii) the excess, if any, of interest deductible in
the United States in computing the profits of the company that are subject to
tax in the United States and either attributable to a permanent establishment
in the United States or subject to tax in the United States under Article 6
[Income from Immovable Property (Real Property)], Article 12 (Royalties and
Fees for Included Services) as fees for included services, or Article 13
(Gains) of this Convention over the interest paid by or from the permanent
establishment or trade or business in the United States.
(b) For purpose of this Article, business profits means profits that
are effectively connected (or treated as effectively connected) with the
conduct of a trade or a business within the United States and are either
attributable to a permanent establishment in the United States or subject to
tax in the United States under Article 6 [Income from Immovable Property (Real
Property)], Article 12 (Royalties and Fees for Included Services) as fees for
included services or Article 13 (Gains) of this Convention.
(c) The tax referred to in sub-paragraph (a) shall not be imposed
at a rate exceeding :
(i) the rate specified in paragraph 2(a) of
Article 10 (Dividends) for the tax described in sub-paragraph (a)(i)
; and
(ii) the rate specified in paragraph 2(a) or
(b) (whichever is appropriate) or Article 11 (Interest) for the tax
described in sub-paragraph (a)(ii).
2. A company which is a resident of the United
States may be subject to tax in India at a rate higher than that applicable to
the domestic companies. The difference in the tax rate shall not, however,
exceed the existing difference of 15 percentage points.
3. In the case of a banking company which is a
resident of the United States, the interest paid by the permanent establishment
of such a company in India to the head office may be subject in India to a tax
in addition to the tax imposable under the other provisions of this Convention
at a rate which shall not exceed the rate specified in paragraph 2(a) of
Article 11 (Interest).
Article 15 - Independent
personal services - 1. Income derived by a person who is an
individual or firm of individuals (other than a company) who is a resident of a
Contracting State from the performance in the other Contracting State of
professional services or other independent activities of a similar character
shall be taxable only in the first-mentioned State except in the following
circumstances when such income may also be taxed in the other Contracting
State :
(a) if such person has a fixed base regularly available to him in the
other Contracting State for the purpose of performing his activities; in that
case, only so much of the income as is attributable to that fixed base may be
taxed in that other State; or
(b) if the person’s stay in the other Contracting State is for a period
or periods amounting to or exceeding in the aggregate 90 days in the relevant
taxable year.
2. The term “professional services” includes
independent scientific, literary, artistic, educational or teaching activities
as well as the independent activities of physicians, surgeons, lawyers,
engineers, architects, dentists and accountants.
Article 16 - Dependent
personal services - 1. Subject to the provisions of Articles 17
(Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19
(Remuneration and Pensions in respect of Government Service), 20 (Private
Pensions, Annuities, Alimony and Child Support), 21 (Payments received by
Students and Apprentices) and 22 (Payments received by Professors, Teachers and
Research Scholars), salaries, wages and other similar remuneration derived by a
resident of a Contracting State in respect of an employment shall be taxable
only in that State unless the employment is exercised in the other Contracting
State. If the employment is so exercised, such remuneration as is derived
therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph
1, remuneration derived by a resident of a Contracting State in respect of an
employment exercised in the other Contracting State shall be taxable only in
the first-mentioned State, if :
(a) the recipient is present in the other State for a period or periods
not exceeding in the aggregate 183 days in the relevant taxable year ;
(b) the remuneration is paid by, or on behalf of, an employer who is not
a resident of the other State ; and
(c) the remuneration is not borne by a permanent establishment or a
fixed base or a trade or business which the employer has in the other State.
3. Notwithstanding the preceding provisions of
this Article, remuneration derived in respect of an employment exercised aboard
a ship or aircraft operating in international traffic by an enterprise of a
Contracting State may be taxed in that State.
Article 17 - Directors’
fees - Directors’ fees and similar payments derived by a resident of a
Contracting State in his capacity as a member of the board of directors of a
company which is a resident of the other Contracting State may be taxed in that
other State.
Article 18 - Income
earned by entertainers and athletes - 1. Notwithstanding the
provisions of Articles 15 (Independent Personal Services) and 16 (Dependent
Personal Services), income derived by a resident of a Contracting State as an
entertainer, such as a theatre, motion picture, radio or television artiste, or
a musician, or as an athlete, from his personal activities as such exercised in
the other Contracting State, may be taxed in that other State, except where the
amount of the net income derived by such entertainer or athlete from such
activities (after deduction of all expenses incurred by him in connection with
his visit and performance) does not exceed one thousand five hundred United
States dollars ($ 1,500) or its equivalent in Indian rupees for the taxable
year concerned.
2. Where income in respect of activities
exercised by an entertainer or an athlete in his capacity as such accrues not
to the entertainer or athlete but to another person, that income of that other
person may, notwithstanding the provisions of Articles 7 (Business Profits), 15
(Independent Personal Services) and 16 (Dependent Personal Services), be taxed
in the Contracting State in which the activities of the entertainer or athlete
are exercised unless the entertainer, athlete, or other person establishes that
neither the entertainer or athlete nor persons related thereto participate
directly or indirectly in the profits of that other person in any manner,
including the receipt of deferred remuneration, bonuses, fees, dividends,
partnership distributions, or other distributions.
3. Income referred to in the preceding
paragraphs of this Article derived by a resident of a Contracting State in
respect of activities exercised in the other Contracting State shall not be
taxed in that other State if the visit of the entertainers or athletes to that
other State is supported wholly or substantially from the public funds of the
Government of the first-mentioned Contracting State, or of a political
sub-division or local authority thereof.
4. The competent authorities of the Contracting
States may, by mutual agreement, increase the dollar amounts referred to in
paragraph 1 to reflect economic or monetary developments.
Article 19 - Remuneration
and pensions in respect of Government service - 1. (a)
Remuneration, other than a pension, paid by a Contracting State or a political
sub-division or a local authority thereof to an individual in respect of
services rendered to that State or sub-division or authority shall be taxable
only in that State.
(b)
However, such remuneration shall be taxable only in the other Contracting State
if the services are rendered in that other State and the individual is a
resident of that State who :
(i) is a national of that State ; or
(ii) did not become a resident of that State solely
for the purpose of rendering the services.
2. (a) Any pension paid by, or out of
funds created by, a Contracting State or a political sub-division or a local
authority thereof to an individual in respect of services rendered to that
State or sub-division or authority shall be taxable only in that State.
(b)
However, such pension shall be taxable only in the other Contracting State if
the individual is a resident of, and a national of, that State.
3. The provisions of Articles 16 (Dependent
Personal Services), 17 (Directors’ Fees), 18 (Income Earned by Entertainers and
Athletes) and 20 (Private Pensions, Annuities, Alimony and Child Support) shall
apply to remuneration and pensions in respect of services rendered in
connection with a business carried on by a Contracting State or a political
sub-division or a local authority thereof.
Article 20 - Private
pensions, annuities, alimony and child support - 1. Any pension,
other than a pension referred to in Article 19 (Remuneration and Pensions in
respect of Government Service), or any annuity derived by a resident of a
Contracting State from sources within the other Contracting State may be taxed
only in the first-mentioned Contracting State.
2. Notwithstanding paragraph 1, and subject to
the provisions of Article 19 (Remuneration and Pensions in Respect of Government
Service), social security benefits and other public pensions paid by a
Contracting State to a resident of the other Contracting State or a citizen of
the United States shall be taxable only in the first-mentioned State.
3. The term “pension” means a periodic payment
made in consideration of past services or by way of compensation for injuries
received in the course of performance of services.
4. The term “annuity” means stated sums payable
periodically at stated times during life or during a specified or ascertainable
number of years, under an obligation to make the payments in return for
adequate and full consideration in money or money’s worth (but not for services
rendered).
5. Alimony paid to a resident of a Contracting State
shall be taxable only in that State. The term “alimony” as used in this
paragraph means periodic payments made pursuant to a written separation
agreement or a decree of divorce, separate maintenance, or compulsory support,
which payments are taxable to the recipient under the laws of the State of
which he is a resident.
6. Periodic payments for the support of a minor
child made pursuant to a written separation agreement or a decree of divorce,
separate maintenance or compulsory support, paid by a resident of a Contracting
State to a resident of the other Contracting State, shall be taxable only in
the first-mentioned State.
Article 21 - Payments
received by students and apprentices - 1. A student or business
apprentice who is or was a resident of one of the Contracting States
immediately before visiting the other Contracting State and who is present in
that other State principally for the purpose of his education or training shall
be exempt from tax in that other State, on payments which arise outside that
other State for the purposes of his maintenance, education or training.
2. In respect of grants, scholarships and
remuneration from employment not covered by paragraph 1, a student or business
apprentice described in paragraph 1 shall, in addition, be entitled during such
education or training to the same exemptions, reliefs or reductions in respect
of taxes available to residents of the State which he is visiting.
3. The benefits of this Article shall extend only
for such period of time as may be reasonable or customarily required to
complete the education or training undertaken.
4. For the purposes of this Article, an
individual shall be deemed to be a resident of a Contracting State if he is
resident in that Contracting State in the taxable year in which he visits the
other Contracting State or in the immediately preceding taxable year.
Article 22 - Payments
received by professors, teachers and research scholars - 1. An
individual who visits a Contracting State for a period not exceeding two years
for the purpose of teaching or engaging in research at a university, college or
other recognised educational institution in that State, and who was immediately
before that visit a resident of the other Contracting State, shall be exempted
from tax by the first-mentioned Contracting State on any remuneration for such
teaching or research for a period not exceeding two years from the date he
first visits that State for such purpose.
2. This Article shall apply to income from
research only if such research is undertaken by the individual in the public
interest and not primarily for the benefit of some other private person or
persons.
Article 23 - Other
income - 1. Subject to the provisions of paragraph 2, items of
income of a resident of a Contracting State, wherever arising, which are not
expressly dealt with in the foregoing Articles of this Convention shall be
taxable only in that Contracting State.
2. The provisions of paragraph 1 shall not apply
to income, other than income from immovable property as defined in paragraph 2
of Article 6 [Income from Immovable Property (Real Property)], if the
beneficial owner of the income, being a resident of a Contracting State,
carries on business in the other Contracting State through a permanent
establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the income is
attributable to such permanent establishment or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15 (Independent Personal
Services), as the case may be, shall apply.
3. Notwithstanding the provisions of paragraphs
1 and 2, items of income of a resident of a Contracting State not dealt with in
the foregoing articles of this Convention and arising in the other Contracting
State may also be taxed in that other State.
Article 24 - Limitation
on benefits - 1. A person (other than an individual) which is a
resident of a Contracting State and derives income from the other Contracting
State shall be entitled under this Convention to relief from taxation in that
other Contracting State only if :
(a) more than 50 per cent of the beneficial interest in such person (or
in the case of a company, more than 50 per cent of the number of shares of each
class of the company’s shares) is owned, directly or indirectly, by one or more
individual residents of one of the Contracting States, one of the Contracting
States or its political sub-divisions or local authorities, or other individuals
subject to tax in either Contracting State on their worldwide incomes, or
citizens of the United States ; and
(b) the income of such person is not used in substantial part, directly
or indirectly, to meet liabilities (including liabilities for interest or
royalties) to persons who are not resident of one of the Contracting States,
one of the Contracting States or its political sub-divisions or local
authorities, or citizens of the United States.
2. The provisions of paragraph 1 shall not apply
if the income derived from the other Contracting State is derived in connection
with, or is incidental to, the active conduct by such person of a trade or
business in the first-mentioned State (other than the business of making or
managing investments, unless these activities are banking or insurance
activities carried on by a bank or insurance company).
3. The provisions of paragraph 1 shall not apply
if the person deriving the income is a company which is a resident of a
Contracting State in whose principal class of shares there is substantial and
regular trading on a recognized stock exchange. For purposes of the preceding
sentence, the term “recognized stock exchange” means :
(a) in the case of United States, the NASDAQ System owned by the
National Association of Securities Dealers, Inc. and any stock exchange
registered with the Securities and Exchange Commission as a national securities
exchange for purposes of the Securities Act of 1934 ;
(b) in the case of India, any stock exchange which is recognized by the
Central Government under the Securities Contracts Regulation Act, 1956 ; and
(c) any other stock exchange agreed upon by the competent authorities
of the Contracting States.
4. A person that is not entitled to the benefits
of this Convention pursuant to the provisions of the preceding paragraphs of
this Article may, nevertheless, be granted the benefits of the Convention if
the competent authority of the State in which the income in question arises so
determines.
Article 25 - Relief
from double taxation - 1. In accordance with the provisions and
subject to the limitations of the law of the United States (as it may be
amended from time to time without changing the general principle hereof), the
United States shall allow to a resident or citizen of the United States as a
credit against the United States tax on income—
(a) the income-tax paid to India by or on behalf of such citizen or
resident ; and
(b) in the case of a United States company owning at least 10 per cent
of the voting stock of a company which is a resident of India and from which
the United States company receives dividends, the income-tax paid to India by
or on behalf of the distributing company with respect to the profits out of
which the dividends are paid.
For the
purposes of this paragraph, the taxes referred to in paragraphs 1(b) and
2 of Article 2 (Taxes Covered) shall be considered as income taxes.
2. (a) Where a resident of India derives
income which, in accordance with the provisions of this Convention, may be
taxed in the United States, India shall allow as a deduction from the tax on
the income of that resident an amount equal to the income-tax paid in the
United States, whether directly or by deduction. Such deduction shall not,
however, exceed that part of the income-tax (as computed before the deduction
is given) which is attributable to the income which may be taxed in the United
States.
(b)
Further, where such resident is a company by which a surtax is payable in
India, the deduction in respect of income-tax paid in the United States shall
be allowed in the first instance from income-tax payable by the company in
India and as to the balance, if any, from surtax payable by it in India.
3. For the purposes of allowing relief from
double taxation pursuant to this article, income shall be deemed to arise as
follows :
(a) income derived by a resident of a Contracting State which may be
taxed in the other Contracting State in accordance with this Convention [other
than solely by reason of citizenship in accordance with paragraph 3 of article
1 (General Scope)] shall be deemed to arise in that other State ;
(b) income derived by a resident of a Contracting State which may not
be taxed in the other Contracting State in accordance with the Convention shall
be deemed to arise in the first-mentioned State.
Notwithstanding
the preceding sentence, the determination of the source of income for purposes
of this article shall be subject to such source rules in the domestic laws of
the Contracting States as apply for the purpose of limiting the foreign tax
credit. The preceding sentence shall not apply with respect to income dealt
with in article 12 (Royalties and Fees for Included Services). The rules of
this paragraph shall not apply in determining credits against United States tax
for foreign taxes other than the taxes referred to in paragraphs 1(b)
and 2 of article 2 (Taxes Covered).
Article 26 - Non-discrimination - 1.
Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected therewith which
is other or more burdensome than the taxation and connected requirements to
which nationals that other State in the same circumstances are or may be
subjected. This provision shall apply to persons who are not residents of one
or both of the Contracting States.
2. Except where the provisions of paragraph 3 of
article 7 (Business Profits) apply, the taxation on a permanent establishment
which an enterprise of a Contracting State has in the other Contracting State
shall not be less favourably levied in that other State than the taxation
levied on enterprises of that other State carrying on the same activities. This
provision shall not be construed as obliging a Contracting State to grant to
residents of the other Contracting State any personal allowances, reliefs and
reductions for taxation purposes on account of civil status or family
responsibilities which it grants to its own residents.
3. Except where the provisions of paragraph 1 of
article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or
paragraph 8 of article 12 (Royalties and Fees for Included Services) apply,
interest, royalties, and other disbursements paid by a resident of a
Contracting State to a resident of the other Contracting State shall, for the
purposes of determining the taxable profits of the first-mentioned resident, be
deductible under the same conditions as if they had been paid to a resident of
the first-mentioned State.
4. Enterprises of a Contracting State, the
capital of which is wholly or partly owned or controlled, directly or
indirectly, by one or more residents of the other Contracting State, shall not
be subjected in the first-mentioned State to any taxation or any requirement
connected therewith which is other or more burdensome than the taxation
connected requirements to which other similar enterprises of the
first-mentioned State are or may be subjected.
5. Nothing in this article shall be construed as
preventing either Contracting State from imposing the taxes described in
Article 14 (Permanent Establishment Tax) or the limitations described in
paragraph 3 of Article 7 (Business profits).
ARTICLE 27 - Mutual agreement procedure - 1. Where a person considers that the actions of
one or both of the Contracting States result or will result for him in taxation
not in accordance with the provisions of this Convention, he may, irrespective
of the remedies provided by the domestic law of those States, present his case
to the competent authority of the Contracting State of which he is a resident
or national. This case must be presented within three years of the date of
receipt of notice of the action which gives rise to taxation not in accordance
with the Convention.
2. The competent authority shall endeavour, if
the objection appears to it to be justified and if it is not itself able to
arrive at a satisfactory solution, to resolve the case by mutual agreement with
the competent authority of the other Contracting State, with a view to the
avoidance of taxation which is not in accordance with the Convention. Any
agreement reached shall be implemented notwithstanding any time limits or other
procedural limitations in the domestic law of the Contracting States.
3. The competent authorities of the Contracting
States shall endeavour to resolve by mutual agreement any difficulties or
doubts arising as to the interpretation or application of the Convention. They
may also consult together for the elimination of double taxation in cases not
provided for in the Convention.
4. The competent authorities of the Contracting
States may communicate with each other directly for the purpose of reaching an
agreement in the sense of the preceding paragraphs. The competent authorities,
through consultations, shall develop appropriate bilateral procedures,
conditions, methods and techniques for the implementation of the mutual
agreement procedure provided for in this Article. In addition, a competent
authority may devise appropriate unilateral procedures, conditions, methods and
techniques to facilitate the above-mentioned bilateral actions and the
implementation of the mutual agreement procedure.
ARTICLE 28 - Exchange of information and
administrative assistance - 1. The competent authorities of the Contracting
State shall exchange such information (including documents) as is necessary for
carrying out the provisions of this Convention or of the domestic laws of the
Contracting States concerning taxes covered by the Convention insofar as the
taxation thereunder is not contrary to the Convention, in particular, for the
prevention of fraud or evasion, of such taxes. The exchange of information is
not restricted by Article 1 (General Scope). Any information received by a
Contracting State shall be treated as secret in the same manner as information
obtained under the domestic laws of that State. However, if the information is
originally regarded as secret in the transmitting State, it shall be disclosed
only to persons or authorities (including Courts and administrative bodies)
involved in the assessment, collection, or administration of, the enforcement
or prosecution in respect of or the determination of appeals in relation to,
the taxes which are the subject of the Convention. Such persons or authorities shall
use the information only for such purposes, but may disclose the information in
public Court proceedings or in judicial decisions. The competent authorities
shall, through consultation, develop appropriate conditions, methods and
techniques concerning the matters in respect of which such exchange of
information shall be made, including, where appropriate, exchange of
information regarding tax avoidance.
2. The exchange of information or documents
shall be either on a routine basis or on request with reference to particular
cases, or otherwise. The competent authorities of the Contracting States shall
agree from time to time on the list of information or documents which shall be
furnished on a routine basis.
3. In no case shall the provisions of paragraph
1 be construed so as to impose on a Contracting State the obligation :
(a) to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in
the normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade, business,
industrial, commercial, or professional secret or trade process, or information
the disclosure of which would be country to public policy (ordre public).
4. If information is requested by a Contracting
State in accordance with this Article, the other Contracting State shall obtain
the information to which the request relates in the same manner and in the same
form as if the tax of the first-mentioned State were the tax of that other
State and were being imposed by that other State. if specifically requested by
the competent authority of a Contracting State, the competent authority of the
other Contracting State shall provide information under this Article in the
form of depositions of witnesses and authenticated copies of unedited original
documents (including books, papers, statements, records accounts and writings),
to the same extent such depositions and documents can be obtained under the
laws and administrative practices of that other State with respect to its own
taxes.
5. For the purposes of this Article, the
Convention shall apply, notwithstanding the provisions of Article 2 (Taxes
Covered) :
(a) in the United States, to all taxes imposed under Title 26 of the
United States Code; and
(b) in India, to the income-tax, the wealth-tax and the gift-tax.
ARTICLE 29 - Diplomatic agents and consular officers
- Nothing in this Convention shall affect the fiscal privileges of diplomatic
agents or consular offices under the general rules of international law or
under the provisions of special agreements.
ARTICLE 30 - Entry into force - 1. Each
Contracting State shall notify the other Contracting State in writing, through
diplomatic channels, upon the completion of their respective legal procedures
to bring this Convention into force.
2. The Convention shall enter into force on the
date of the letter of such notifications and its provisions shall have effect :
(a) in the United States—
(i) in respect of taxes withheld at source, for
amounts paid or credited on or after the first day of January next following
the date on which the Convention enters into force;
(ii) in respect of other taxes, for taxable periods
beginning on or after the first day of January next following the date on which
the Convention enters into force; and
(b) in India, in respect of income arising in any taxable year
beginning on or after the first day of April next following the calendar year
in which the Convention enters into force.
ARTICLE 31 - Termination - This Convention shall remain in force indefinitely but either of the
Contracting States may, on or before the thirtieth day of June in any calendar
year beginning after the expiration of a period of five years from the date of
the entry into force of the Convention, give the other Contracting State
through diplomatic channels, written notice of termination and, in such event,
this Convention shall cease to have effect :
(a) in the United States—
(i) in respect of taxes withheld at source, for
amounts paid or credited on or after the first day of January next following
the calendar year in which the notice of termination is given; and
(ii) in respect of other taxes, for taxable periods
beginning on or after the first day of January next following the calendar year
in which the notice of termination is given; and
(b) in India, in respect of income arising in any taxable year
beginning on or after the first day of April next following the calendar year
in which the notice of termination is given.
In witness
whereof, the undersigned, being duly authorised by their respective
Governments, have signed this Convention.
Done at New
Delhi in duplicate, this 12th day of September, 1989, in the English and Hindi
languages, both texts being equally authentic. In case of divergence between
the two texts, the English text shall be the operative one.
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For the
Government of
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For the Government
of the
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the
Republic of India :
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United
States of America :
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Sd/- |
Sd/- |
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N.K.
Sengupta
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John R.
Hubbard
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Secretary
to the
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Ambassador
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Government
of India
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Protocol
At the signing
today of the Convention between the United States of America and the Republic
of India for the Avoidance of Double Taxation and the prevention of Fiscal
Evasion with respect to Taxes on Income, the undersigned have agreed upon the
following provisions, which shall form an integral part of the Convention :
I. AD ARTICLE 5 - It is understood that where an enterprise of a Contracting State has a
permanent establishment in the other Contracting State in accordance with the
provisions of paragraph 2(j), 2(k) or 2(l) of Article 5
(Permanent Establishment), and the time period referred to in that paragraph
extends over two taxable years, a permanent establishment shall not be deemed
to exist in a year, if any, in which the use, site, project or activity, as the
case may be, continues for a period or periods aggregating less than 30 days in
that taxable year. A permanent establishment will exist in the other taxable
year, and the enterprise will be subject to tax in that other Contracting State
in accordance with the provisions of Article 7 (Business Profits), but only on
income arising during that other taxable year.
II. AD ARTICLE 7 - Where the law of the Contracting State in which a permanent
establishment is situated imposes, in accordance with the provisions of paragraph
3 of Article 7 (Business Profits), a restriction on the amount of executive and
general administrative expenses which may be allowed as a deduction in
determining the profits of such permanent establishment, it is understood that
in making such a determination of profits the deduction in respect of such
executive and general administrative expenses in no case shall be less than
that allowable under the Indian Income-tax Act as on the date of signature of
this Convention.
III. AD ARTICLES 7, 10, 11, 12, 15 and 23 - It is understood that for the implementation
of paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 4 of Article
10 (Dividends), paragraph 5 of Article 11 (Interest), paragraph 6 of Article 12
(Royalties and Fees for Included Services), paragraph 1 of Article 15
(Independent Personal Services), and paragraph 2 of Article 23 (Other Income),
any income attributable to a permanent establishment or fixed base during its
existence is taxable in the Contracting State in which such permanent
establishment or fixed base is situated even if the payments are deferred until
such permanent establishment or fixed base has ceased to exist.
IV. AD ARTICLE 12 - It is understood that fees for included services, as defined in
paragraph 4 of Article 12 (Royalties and Fees for Included Services) will, in
accordance with United States law, be subject to income-tax in the United
States based on net income and, when earned by a company, will also be subject
to the taxes described in paragraph 1 of Article 14 (Permanent Establishment
Tax). The total of these taxes which may be imposed on such fees, however, may
not exceed the amount computed by multiplying the gross fee by the appropriate
tax rate specified in sub-paragraph (a) or (b) whichever is
applicable or paragraph 2 of Article 12.
V. AD ARTICLE 14 - It is understood that references in paragraph 1 of Article 14
(Permanent Establishment tax) to profits that are subject to tax in the United
States under Article 6 [Income from Immovable Property (Real Property)], under
Article 12 (Royalties and Fees for Included Services), as fees for included
services as defined in that Article, or under Article 13 (Gains) of this
Convention, are intended to refer only to cases in which the profits in
question are subject to United States tax based on net income (i.e., by
virtue of being effectively connected, or being treated as effectively
connected, with the conduct of a trade or business in the United States). Any
income which is subject to tax under those Articles based on gross income is
not subject to tax under Article 14.
IN WITNESS
WHEREOF, the undersigned, being
duly authorised by their respective Governments, have signed this Protocol.
DONE at New
Delhi in duplicate, this 12th day of September, 1989, in the English and Hindi
languages, both texts equally authentic. In case of divergence between the two
texts, the English text shall be the operative one.
For the Government of |
For the Government of the
|
|
the
Republic of India :
|
United States of America :
|
Sd/- |
Sd/- |
|
N.K.
Sengupta
|
John R. Hubbard
|
|
Secretary
to the
|
Ambassador
|
|
Government
of India
|
|
|
|
Embassy of United States of America |
|
|
New Delhi, September 12, 1989.
|
|
Excellency
:
|
|
I have the honour
to refer to the Convention between the Government of the United States of
America and the Government of the Republic of India for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
which was signed today (hereinafter referred to as “the Convention”) and to
confirm, on behalf of the Government of the United States of America, the
following understandings reached between the two Governments :
Both sides
agree that a tax sparing credit shall not be provided in Article 25 (Relief
from Double Taxation) of the convention at this time. However, the Convention
shall be promptly amended to incorporate a tax sparing credit provision if the
United States hereafter amends its laws concerning the provision of tax sparing
credits, or the United States reaches agreement on the provision of a tax
sparing credit with any other country.
Both sides
also agree that, for purposes of paragraph 4(c) of Article 5 (Permanent
Establishment) of the Convention, a person shall be considered to habitually
secure orders in a Contracting State, wholly or almost for an enterprise, only
if :
1. such person
frequently accepts orders for goods or merchandise on behalf of the enterprise;
2.
substantially all of such person’s sales related activities in the Contracting
State consist of activities for the enterprise;
3. such person
habitually represents to persons offering to buy goods or merchandise that
acceptance of an order by such person constitutes the agreement of the
enterprise to supply goods or merchandise under the terms and conditions
specified in the order; and
4. The
enterprise takes actions that give purchasers the basis for a reasonable belief
that such person has authority to bind the enterprise.
I have the
honour to request Your Excellency to confirm the foregoing understandings of
Yours Excellency’s Government.
Accept,
Excellency, the renewed assurances of my highest consideration.
His Excellency |
Sd/- |
|
Dr. N.K.
Sengupta,
|
John R. Hubbard
|
|
Secretary
(Revenue),
|
Ambassador
|
|
Ministry
of Finance,
|
|
|
New
Delhi.
|
|
|
Secretary,
Government of India
|
|
|
Ministry
of Finance (Department of Revenue)
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|
|
New
Delhi, September 12, 1989.
|
|
|
Excellency
:
|
|
I have the honour
to acknowledge receipt of Your Excellency’s Note of today’s date, which reads
as follows :
“I have the honour to refer to the
Convention between the Government of the United States of America and the
Government of the Republic of India for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income which was
signed today (hereinafter referred to as “the Convention”) and to confirm, on
behalf of the Government of the United States of America, the following understandings
reached between the two Governments :
Both sides agree that a tax
sparing credit shall not be provided in Article 25 (Relief from Double
Taxation) of the Convention at his time. However, the Convention shall be
promptly amended to incorporate a tax sparing credit provision if the United
States hereafter amends its laws concerning the provision of tax sparing
credits, or the United States reaches agreement on the provision of a tax
sparing credit with any other country.
Both sides
also agree that, for purposes of paragraph 4(c) of Article 5 (Permanent
Establishment) of the convention, a person shall be considered to habitually
secure orders in a Contracting State, wholly or almost wholly for an
enterprise, only if :
1. such person
frequently accepts orders for goods or merchandise on behalf of the
enterprise ;
2.
substantially all of such person’s sales related activities in the Contracting
State consist of activities for the enterprise ;
3. such person
habitually represents to persons offering to buy goods or merchandise that
acceptance of an order by such person constitutes the agreement of the
enterprise to supply goods or merchandise under the terms and conditions
specified in the order; and
4. the
enterprise takes actions that give purchasers the basis for a reasonable belief
that such person has authority to bind the enterprise.
I have the
honour to confirm the understandings contained in Your Excellency’s Note, on
behalf of the Government of the Republic of India.
Accept, Excellency,
the renewed assurances of my highest consideration.
His Excellency |
Sd/- |
|
Dr. John
R. Hubbard
|
N.K. Sengupta
|
|
Ambassador
of the
|
|
|
United
States of America
|
|
|
New
Delhi.
|
|
|
Embassy
of the United States of America
|
|
|
New Delhi,
September 12, 1989.
|
|
|
Excellency
:
|
|
I have the
honour to refer to the Convention signed today between the United States of
America and the Republic of India for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to taxes on Income and to inform you on behalf
of the United States of America of the following :
During the
course of the negotiations leading to conclusion of the Convention signed
today, the negotiators developed and agreed upon a memorandum of understanding
intended to give guidance both to the taxpayers and the tax authorities of our
two countries in interpreting aspects of Article 12 (Royalties and Fees for
Included Services) relating to the scope of included services. This memorandum
of understanding represents the current views of the United States Government
with respect to these aspects of Article 12, and it is my Government’s
understanding that it also represents the current views of the Indian Government.
It is also my Government’s view that as our Government gain experience in
administering the Convention, and particularly Article 12, the competent
authorities may develop and publish amendments to the memorandum of
understanding and further understandings and interpretations of the Convention.
If this
position meets with the approval of the Government of the Republic of India,
this letter and your reply thereto will indicate that our Governments share a
common view of the purpose of the memorandum of understanding relating to
Article 12 of the Convention.
Accept,
Excellency, the renewed assurances of my highest consideration.
His Excellency |
Sd/- |
|
Dr. N.K.
Sengupta,
|
John R. Hubbard
|
|
Secretary
(Revenue),
|
Ambassador
|
|
Ministry
of Finance,
|
|
|
New
Delhi.
|
|
|
Government
of India, Ministry of Finance
|
|
|
(Department
of Revenue)
|
|
|
New
Delhi, September 12, 1989.
|
|
|
Excellency
:
|
|
I have the
honour to acknowledge receipt of Your Excellency’s Note of today’s date, which reads
as follows :
“I have the honour to refer to the
Convention signed today between the United States of America and the Republic
of India for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and to inform on behalf of the United
States of America of the following :
During the course of the
negotiations leading to conclusion of the Convention signed today, the
negotiators developed and agreed upon a memorandum of understanding intended to
give guidance both to the taxpayers and the tax authorities of our two
countries in interpreting aspects of Article 12 (Royalties and Fees for
Included Services) relating to the scope of included services. The memorandum
of understanding represents the current views of the United States Government
with respect to these aspects of Article 12, and it is my Government’s
understanding that it also represents the current views of the Indian
Government. It is also my Government’s view that as our Governments gain
experience in administering the Convention, and particularly Article 12, the
competent authorities may develop and publish amendments to the memorandum of
understanding and further understandings and interpretations of the Convention.
If this position meets with the approval
of the Government of the Republic of India, this letter and your reply thereto
will indicate that our Governments share a common view of the purpose of the
memorandum of understanding relating to Article 12 of the Convention.”
I have the
honour to confirm the understanding contained in Your Excellency’s Note, on
behalf of the Government of the Republic of India.
Accept,
Excellency, the renewed assurances of my highest consideration.
His Excellency |
Sd/- |
|
Dr. John
R. Hubbard
|
Dr. N.K. Sengupta,
|
|
Ambassador
of the
|
|
|
United
States of America
|
|
|
New
Delhi.
|
|
May 15,
1989
U.S. - India Tax Treaty
Memorandum of understanding concerning fees for included services in
Article 12
Paragraph 4
(in general)
This memorandum
describes in some detail the category of services defined in paragraph 4 of
Article 12 (Royalties and Fees for Included Services). It also provides
examples of services intended to be covered within the definition of included
services and those intended to be excluded, either because they do not satisfy
the tests of paragraph 4, or because, notwithstanding the fact that they meet
the tests of paragraph 4, they are dealt with under paragraph 5. The examples
in either case are not intended as an exhaustive list but rather as
illustrating a few typical cases. For case of understanding, the example in
this memorandum described U.S. persons providing services to Indian persons,
but the rules of Article 12 are reciprocal in application.
Article 12
includes only certain technical and consultancy services. But technical
services, we mean in this context services requiring expertise in a technology.
By consultancy services, we mean in this context advisory services. The
categories of technical and consultancy services are to some extent overlapping
because a consultancy service could also be a technical service. However, the
category of consultancy services also includes an advisory service, whether or
not expertise in a technology is required to perform it.
Under
paragraph 4, technical and consultancy services are considered included
services only to the following extent: (1) as described in paragraph 4(a),
if they are ancillary and subsidiary to the application or enjoyment of a
right, property or information for which are royalty payment is made; or (2)
as described in paragraph 4(b), if they make available technical
knowledge, experience, skill, know-how, or processes, or consist of the
development and transfer of a technical plan or technical design. Thus, under
paragraph 4(b), consultancy services which are not of a technical nature
cannot be included services.
Paragraph
4(a)
Paragraph 4(a)
of Article 12 refers to technical or consultancy services that are ancillary
and subsidiary to the application or enjoyment of any right, property, or
information for which a payment described in paragraph 3(a) or (b)
is received. Thus, paragraph 4(a) includes a technical and consultancy
services that are ancillary and subsidiary to the application or enjoyment of
an intangible for which a royalty is received under a licence or sale as
described in paragraph 3(a), as well as those ancillary and subsidiary
to the application or enjoyment of industrial, commercial, or scientific
equipment for which a royalty is received under a lease as described in
paragraph 3(b).
It is
understood that, in order for a service fee to be considered “ancillary and
subsidiary” to the application or enjoyment of some right, property, or
information for which a payment described in paragraph 3(a) or (b)
is received, the service must be related to the application or enjoyment of the
right, property, or information. In addition, the clearly predominant purpose
of the arrangement under which the payment of the service fee and such other
payments are made must be the application or enjoyment of the right, property,
or information described in paragraph 3. The question of whether the service is
related to the application or enjoyment of right, property, or information
described in paragraph 3 and whether the clearly predominant purpose of the
arrangement is such application or enjoyment must be determined by reference to
the facts and circumstances of each case. Factors which may be relevant to such
determination (although not necessarily controlling) include :
1. The extent to which the services in question
facilitate the effective application or enjoyment of the right, property, or
information described in paragraph 3 ;
2. The extent to which such services are customarily
provided in the ordinary course of business arrangements involving royalties
described in paragraph 3 ;
3. Whether the amount paid for the services (or
which would be paid by parties operating at arm’s length) is an insubstantial portion
of the combined payments for the services and the right, property, or
information described in paragraph 3 ;
4. Whether the payment made for the services and
the royalty described in paragraph 3 are made under a single contract (or a set
of related contracts) ; and
5. Whether the person performing the services is
the same person as, or a related person to, the person receiving the royalties
described in paragraph 3 [for this purpose, persons are considered related if
their relationship is described in Article 9 (Associated Enterprises) or if the
person providing the service is doing so in connection with an overall
arrangement which includes the payer and recipient of the royalties].
To the extent
that services are not considered ancillary and subsidiary to the application or
enjoyment of some right, property, or information for which a royalty payment
under paragraph 3 is made, such services shall be considered “included
services” only to the extent that they are described in paragraph 4(b).
Example 1
Facts :
A U.S.
manufacturer grants rights to an Indian company to use manufacturing processes
in which the transferor has exclusive rights by virtue of process, patents or
the protection otherwise extended by law to the owner of a process. As part of
the contractual arrangement, the U.S. manufacturer agrees to provide certain
consultancy services to the Indian company in order to improve the
effectiveness of the latter’s use of the processes. Such services include, for
example, the provision of information and advice on sources of supply for
materials needed in the manufacturing process, and on the development of sales
and service literature for the manufactured product. The payment allocable to
such services do not form a substantial part of the total consideration payable
under the contractual arrangement. Are the payments for these services fees for
“included services” ?
Analysis :
The payments
are fees for included services. The services described in this example are
ancillary and subsidiary to the use of manufacturing process protected by law
as described in paragraph 3(a) of Article 12 because the services are
related to the application or enjoyment of the intangible and the granting of
the right to use the intangible as the clearly predominant purpose of the
arrangement. Because the services are ancillary and subsidiary to the use of
the manufacturing process, the fees for these services are considered for
included services under paragraph 4(a) of Article 12, regardless of
whether the services are described in paragraph 4(b).
Example 2
Facts :
An Indian
manufacturing company produces a product that must be manufactured under
sterile conditions using machinery that must be kept completely free of
bacterial or other harmful deposits. A U.S. company has developed a special
cleaning process for removing such deposits from that type of machinery. The
U.S. company enters in to a contract with the Indian company under which the
former will clean the latter’s machinery on a regular basis. As part of the
arrangement, the U.S. company leases to the Indian company a piece of equipment
which allows the Indian company to measure the level of bacterial deposits on
its machinery in order for it to known when cleaning is required. Are the
payments for the services fees for included services ?
Analysis :
In this
example, the provision of cleaning services by the U.S. company and the rental
of the monitoring equipment are related to each other. However, the clearly
predominant purpose of the arrangement is the provision of cleaning services.
Thus, although the cleaning services might be considered technical services,
they are not “ancillary and subsidiary” to the rental of the monitoring
equipment. Accordingly, the cleaning services are not “included services”
within the meaning of paragraph 4(a).
Paragraph
4(b)
Paragraph 4(b)
of Article 12 refers to technical or consultancy services that make available
to the person acquiring the services, technical knowledge, experience, skill,
know-how, or processes, or consist of the development and transfer of a
technical plant or technical design to such person. (For this purpose, the
person acquiring the service shall be deemed to include an agent, nominee, or
transferee of such person). This category is narrower than the category described
in paragraph 4(a) because it excludes any service that does not make
technology available to the person acquiring the service. Generally speaking,
technology will be considered “made available” when the person acquiring the
service is enabled to apply the technology. The fact that the provision of the
service may require technical input by the person providing the service does
not per se mean that technical knowledge, skills, etc., are made
available to the person purchasing the service, within the meaning of paragraph
4(b). Similarly, the use of a product which embodies technology shall
not per se be considered to make the technology available.
Typical
categories of services that generally involve either the development and
transfer of technical plants or technical designs, or making technology
available as described in paragraph 4(b), include :
1. Engineering services (including the
sub-categories of bio-engineering and aeronautical, agricultural, ceramics,
chemical, civil, electrical, mechanical, metallurgical, and industrial
engineering) ;
2. Architectural services ; and
3. Computer software development.
Under
paragraph 4(b), technical and consultancy services could make technology
available in a variety of settings, activities and industries. Such services
may, for examples, relate to any of the following areas :
1. Bio-technical services ;
2. Food processing ;
3. Environmental and ecological services ;
4. Communication through satellite or otherwise
;
5. Energy conservation ;
6. Exploration or exploitation of mineral oil or
natural gas ;
7. Geological surveys ;
8. Scientific services ; and
9. Technical training.
The following
examples indicate the scope of the conditions in paragraph 4(b) :
Example 3
Facts :
A U.S. manufacturer
has experience in the use of a process for manufacturing wallboard for interior
walls of houses which is more durable than the standard products of its type.
An Indian builder wishes to produce this product for its own use. It rents a
plant and contracts with the U.S. company to send experts to India to show
engineers in the Indian company how to produce the extra-strong wallboard. The
U.S. contractors work with the technicians in the Indian firm for a few months.
Are the payments to the U.S. firm considered to be payments for “included
services” ?
Analysis :
The payments
would be fees for included services. The services are of a technical or
consultancy nature; in the example, they have elements of both types of
services. The services make available to the Indian company technical
knowledge, skill and processes.
Example 4
Facts :
A U.S.
manufacturer operates a wallboard fabrication plant outside India. An Indian
builder hires the U.S. company to produce wallboard at that plant for a fee.
The Indian company provides the raw materials, and the U.S. manufacturer
fabricates the wallboard in its plant, using advanced technology. Are the fees
in this example payments for included services ?
Analysis :
The fees would
not be for included services. Although the U.S. company is clearly performing a
technical service, no technical knowledge, skill, etc., are made available to
the Indian company, nor is there any development and transfer of a technical
plant or design. The U.S. company is merely performing a contract manufacturing
service.
Example 5
Facts :
An Indian firm
owns inventory control software for use in its chain of retail outlets
throughout India. It expands its sales operation by employing a team of
travelling salesmen to travel around the countryside selling the company’s
wares. The company wants to modify its software to permit the salesmen to
assess the company’s central computers for information on what products are
available in inventory and when they can be delivered. The Indian firm hires a U.S.
computer programming firm to modify its software for this purpose. Are the fees
which the Indian firm pays treated as fees for included services ?
Analysis :
The fees are
for included services. The U.S. company clearly performs a technical service
for the Indian company, and it transfers to the Indian company the technical
plan (i.e., the computer programme) which it has developed.
Example 6
Facts :
An Indian
vegetable oil manufacturing company wants to produce a cholesterol-free oil
from a plant which produces oil normally containing cholesterol. An American
company has developed a process for refining the cholesterol out of the oil.
The Indian company contracts with the U.S. company to modify the formulas which
it uses so as to eliminate the cholesterol, and to train the employees of the
Indian company in applying the new formulas. Are the fees paid by the Indian
company for included services ?
Analysis :
The fees are
for included services. The services are technical, and the technical knowledge
is made available to the Indian company.
Example 7
Facts :
The Indian
vegetable oil manufacturing firm has mastered the science of producing
cholesterol-free oil and wishes to market the product world wide. It hires an
American marketing consulting firm to do a computer simulation of the world
market for such oil and to adverse it on marketing strategies. Are the fees
paid to the U.S. company for included services ?
Analysis :
The fees would
not be for included services. The American company is providing a consultancy
service which involves the use of substantial technical skill and expertise. It
is not, however, making available to the Indian company any technical
experience, knowledge or skill, etc., nor is it transferring a technical plan
or design. What is transferred to the Indian company through the service
contract is commercial information. The fact that technical skills were
required by the performer of the service in order to perform the commercial
information service does not make the service a technical service within the
meaning of paragraph 4(b).
Paragraph 5
Paragraph 5 of
Article 12 describes several categories of services which are not intended to
be treated as included services even if they satisfy the tests of paragraph 4.
Set forth below are examples of cases where fees would be included under
paragraph 4, but are excluded because of the conditions of paragraph 5.
Example 8
Facts :
An Indian company
purchases a computer from a U.S. computer manufacturer. As part of the purchase
agreement, the manufacturer agrees to assist the Indian company in setting up
the computer and installing the operating system, and to ensure that the staff
of the Indian company is able to operate the computer. Also, as part of the
purchase agreement, the seller agrees to provide, for a period of ten years,
any updates to the operating system and any training necessary to apply the
update. Both of these service elements to the contract would qualify under
paragraph 4(b) as an included service. Would either or both be excluded
from the category of included services, under paragraph 5(a), because
they are ancillary and subsidiary, as well as inextricably and essentially linked,
to the sale of the computer ?
Analysis :
The
installation assistance and initial training are ancillary and subsidiary to
the sale of the computer, and they are also inextricably and essentially linked
to the sale. The computer would be of little value to the Indian purchaser
without these services, which are most readily and usefully provided by the
seller. The fees for installation assistance and initial training,
therefore/are not fees for included services, since these services are not the
predominant purpose of the arrangement.
The services
of updating the operating system and providing associated necessary training
may well be ancillary and subsidiary to the sale of the computer, but they are
not inextricably and essentially linked to the sale. Without the upgrades, the
computer will continue to operate as it did when purchased, and will continue
to accomplish the same functions. Acquiring the updates cannot, therefore, be
said to be inextricably and essentially linked to the sale of the computer.
Example 9
Facts :
An Indian
hospital purchases an X-ray machine from a U.S. manufacturer. As part of the
purchase agreement, the manufacturer agrees to instal the machine, to perform
an initial inspection of the machine in India, to train hospital staff in the
use of the machine, and to service the machine periodically during the usual
warranty period (2 years). Under an optional service contract purchased by the
hospital, the manufacturer also agrees to perform certain other services
throughout the life of the machine, including periodic inspections and repair
services, advising the hospital about developments in X-ray film or techniques
which could improve the effectiveness of the machine, and training hospital
staff in the application of those new developments. The cost of the initial
installation, inspection, training and warranty service is relatively minor as
compared with the cost of the X-ray machine. Is any of the services described
here ancillary and subsidiary, as well as inextricably and essentially linked,
to the sale of the X-ray machine ?
Analysis :
The initial
installation, inspection, and training services in India and the periodic
service during the warranty period are ancillary and subsidiary, as well as
inextricably and essentially linked, to the sale of the X-ray machine because
the usefulness of the machine to the hospital depends on the service, the
manufacturer has full responsibility during this period and this cost of the
services is a relatively minor component of the contract. Therefore, under
paragraph 5(a) these fees are not fees for included services, regardless
of whether they otherwise would fall within paragraph 4(b).
Neither the
post-warranty period inspection and repair services, nor the advisory and
training services relating to new developments are “inextricably and
essentially linked” to the initial purchase of the X-ray machine. Accordingly,
fees for these services may be treated as fees for included services if they
meet the tests of paragraph 4(b).
Example 10
Facts :
An Indian
automobile manufacturer decides to expand into the manufacturer of helicopters.
It sends a group of engineers from its design staff to a course of study
conducted by the Massachusetts Institutes of Technology (MIT) for two years to
study aeronautical engineering. The Indian firms pays tuition fees to MIT on
behalf of the firm’s employees. Is the tuition fee a fee for an included
service within the meaning of Article 12 ?
Analysis :
The tuition
fee is clearly intended to acquire a technical service for the firm. However,
the fee paid is for teaching by an educational institution, and is, therefore,
under paragraph 5(c), not an included service. It is irrelevant for this
purpose whether MIT conducts the course on its campus or at some other
location.
Example 11
Facts :
As in Example
10, the automobile manufacturer wishes to expand into the manufacturer of
helicopters. It approaches an Indian university about establishing a course of
study in aeronautical engineering. The university contracts with a U.S. helicopter
manufacturer to send an engineer to be a visiting professor of aeronautical
engineering on its faculty for a year. Are the amounts paid by the university
for these teaching services fees for included services ?
Analysis :
The fees are
for teaching in an educational institution. As such, pursuant to paragraph 5(c),
they are not fees for included services.
Example 12
Facts :
An Indian
wishes to install a computerized system in his home to control lighting, heating
and air-conditioning, a stereo sound system and a burglar and firm alarm
system. He hires an American electrical engineering firm to design the
necessary wiring system, adapt standard software, and provide instructions for
installations. Are the fees paid to the American firm by the Indian individual
fees for included services ?
Analysis :
The services
in respect of which the fees are paid are of the type which would generally be
treated as fees for included services under paragraph 4(b). However, because
the services are for the personal use of the individual making the payment,
under paragraph 5(d) the payments would not be fees for included
services.
Indo-US
Double Taxation Avoidance Convention (DTAC) - Suspension of Collection during
Mutual Agreement Procedure
Article 27 of
the Indo-USA DTAC provides for Mutual Agreement Procedure (MAP) for avoidance
of double taxation. Paragraph 4 of article 27 authorises the competent
authorities to develop appropriate bilateral procedures, conditions, methods and
techniques for implementation of MAP provided for in the article. Accordingly,
with a view to avoid the unintended hardship to the taxpayers, as well as for
the efficient management of collection of revenue, the Competent Authorities of
India and USA had entered into a Memorandum of Understanding (MoU) regarding
suspension of collection during the pendency of MAP.
2. This MoU was brought to the notice of field
formation vide Instruction No. 2/2003, dated 28-4-2003 (F. No.
500/56/99-FTD) wherein it was stated that the collection of outstanding taxes
in the case of a taxpayer, who is a resident of USA and whose request under MAP
is under consideration of the Competent Authorities, shall be kept in abeyance
subject to furnishing of a bank guarantee of an amount equal to the amount of
tax under dispute and interest accruing thereon as per the provisions of the
Income-tax Act.
3. Now references have been received for
extending the applicability of MoU to Indian resident entities in cases where
Mutual Agreement Procedure has been invoked by the US resident. In order to
avoid hardship to Indian resident taxpayers especially in cases involving
transfer pricing, where the Indian resident entity is liable to pay taxes on
such income which may have been charged to tax in the hands of the associated
entity in USA, it has been decided to extend the applicability of the MoU to
such Indian resident entities during the course of the pendency of the MAP
invoked by a resident of USA.
4. On receipt of a formal request for suspension
of collection of outstanding tax in terms of the MoU from a taxpayer being, a
resident of USA or an Indian resident entity, in a case where MAP has been
invoked through US Competent Authority and the same has been admitted by the
Indian Competent Authority, the Assessing Officers are required to keep the
enforcement of collection of outstanding taxes in abeyance in respect of such
taxpayers—
(i) after
obtaining a confirmation regarding pendency of MAP from the Foreign Tax and Tax
Research Division of the Central Board of Direct Taxes and
(ii) on
receipt of a bank guarantee in the model draft format annexed to the MoU for an
amount calculated in accordance with the manner indicated therein.
5. All the other conditions of MoU as enumerated
in Instruction No. 2 of 2003, dated 28-4-2003 shall remain the same.
6. These instructions are issued under section
119 of the Income-tax Act and the same may be brought to the notice of all the
officers in your charge.
Instruction
: No. 10/2007, dated
23-10-2007.
Judicial Analysis
See ITO v. Pan American World Airways [1990]
35 ITD 206 (Delhi-Trib.).
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