GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1991 TABLE OF ARTICLES Article 1---------------------------------General Scope Article 2---------------------------------Taxes Covered Article 3---------------------------------General Definitions Article 4---------------------------------Residence Article 5---------------------------------Permanent Establishment Article 6---------------------------------Income from Immovable Property (Real Property) Article 7---------------------------------Business Profits Article 8---------------------------------Shipping and Air Transport Article 9---------------------------------Associated Enterprises Article 10--------------------------------Dividends Article 11--------------------------------Interest Article 12--------------------------------Royalties and Fees for Included Services Article 13--------------------------------Gains Article 14--------------------------------Permanent Establishment Tax Article 15--------------------------------Independent Personal Services Article 16--------------------------------Dependent Personal Services Article 17--------------------------------Directors' Fees Article 18--------------------------------Income Earned by Entertainers and Athletes Article 19--------------------------------Remuneration and Pensions in Respect of Government Service Article 20--------------------------------Private Pensions, Annuities, Alimony and Child Support Article 21--------------------------------Payments Received by Students and Apprentices Article 22--------------------------------Payments Received by Professors, Teachers and Research Scholars Article 23--------------------------------Other Income Article 24--------------------------------Limitation on Benefits Article 25--------------------------------Relief from Double Taxation). Article 26--------------------------------Non-discrimination Article 27--------------------------------Mutual Agreement Procedure Article 28--------------------------------Exchange of Information and Administrative Assistance Article 29--------------------------------Diplomatic Agents and Consular Officers Article 30--------------------------------Entry Into Force Article 31--------------------------------Termination Protocol----------------------------------of 12 September, 1989 Notes of Exchange 1-------------------of 12 September, 1989 Notes of Exchange 2-------------------of 12 September, 1989 Memorandum of Understanding-----of 15 May, 1989 Letter of Submittal---------------------of 24 October, 1989 Letter of Transmittal-------------------of 31 October, 1989 The "Saving Clause"-------------------Paragraph 3 of Article 1 MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING 　　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, TOGETHER WITH A RELATED PROTOCOL, 　　　　　SIGNED AT NEW DELHI ON SEPTEMBER 12, 1989 　　　　　　　　　　　LETTER OF SUBMITTAL 　　　　　　　　　　　　　　　　　　　　　　DEPARTMENT OF STATE, 　　　　　　　　　　　　　　　　　　　　　　Washington, October 24, 1989. The PRESIDENT, The White House. 　　DEAR Mr. PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, 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, together with a related Protocol, signed at New Delhi on September 12, 1989. 　　The Convention would be the first tax treaty between the United States and India. In general, it follows the pattern of the United States model tax convention but differs in a number of respects to reflect India's status as a developing country. 　　The Convention provides maximum rates of tax at source on payments of dividends, interest and royalties which, in each case, are higher than the rates specified in the United States Model. Dividends from a subsidiary to a parent corporation are taxable at a maximum rate of 15 percent; other dividends may be taxable at source at a 25 percent rate. Interest is, in general, taxable at source at a maximum rate of 15 percent, although interest received by a financial institution is taxable at a maximum rate of 10 percent, and interest received by either of the two Governments, by certain governmental financial institutions, and by residents of a Contracting State on certain Government approved loans, is exempt from tax at source. The royalty provisions contain several significant departures from standard United States tax treaty policy. In general, industrial and copyright royalties are taxable at source at a maximum rate of 20 percent for the first five years, dropping to 15 percent thereafter. Where the payor of the royalty is one of the Governments, a political subdivision or a public sector corporation, tax will be imposed from the date of entry into force of the treaty at a maximum rate of 15 percent. Payments for the use of, or the right to use, industrial, commercial or scientific equipment are treated as royalties, rather than as business profits, and are subject to a maximum rate of tax at source of 10 percent. The most significant departure from past policy in the royalty article is the fact that certain service fees, referred to in the Convention as "fees for included services", are treated in the same manner as royalties, and not, as would normally be the case, as business profits. Included services are defined as technical consultancy services which either: (i) are ancillary and subsidiary to the licensing of an intangible or the rental of tangible personal property, both of which give rise to royalty payments, or, (ii) if not ancillary or subsidiary, make available to the payor of the service fee some technical knowledge, experience, skill, etc., or transfer to that person a technical plan or design. A detailed memorandum of understanding was developed by the negotiators to provide guidance as to the intended scope of the concept of "included services" and the effect of the memorandum is agreed to in an exchange of notes. These are included for information only. Fees for all other services are treated either as business profits or as independent personal services income. Although not reflected in the convention, under Indian law, certain service fees related to defense contracts are exempt from Indian tax.. 　　The Convention preserves for the United States the right to impose the branch profits tax. It preserves for both Contracting States their statutory taxing rights with respect to capital gains. The Convention also contains rules for the taxation of business profits which, consistent with other United States tax treaties with developing countries, provide a broader range of circumstances under which one partner may tax the business profits of a resident of the other. The Convention defines permanent establishment to include a construction site or a drilling rig where the site or activity continues for a period of 120 days in a year. This compares with a twelve month threshold under the United States Model, and six months under the typical developing country tax treaty. In addition, the Convention contains reciprocal exemption at source for shipping and aircraft operating income, including income from the incidental leasing of ships, aircraft or containers (i.e., where the lessor is an operator of ships and aircraft). The Convention differs from the United States Model in that income from the nonincidental leasing of ships, aircraft or containers (i.e., where the lessor is not an operator of ships or aircraft) is not covered by the article. Income from such non-incidental leasing is treated as a royalty, taxable at source at a maximum rate of 10 percent. The treatment under the Convention of various classes of personal service income is similar to that under the United States tax treaties with developing countries. The Convention contains provisions designed to prevent third-country residents from treaty shopping, i.e., from taking unwarranted advantage of the Convention by routing income from one Contracting State through an entity created in the other. These provisions consistent with recent tax legislation, identify treaty shopping in terms both of third-country ownership of an entity, and of the substantial use of the entity's income to meet liabilities to third-country persons. Notwithstanding the presence of these factors, however, treaty benefits will be allowed if the income is incidental to or earned in connection with the active conduct of a trade or business in the State of residence, if the shares of the company earning the income are traded on a recognized stock exchange, or if the competent authority of the source State so determines. 　　As with all United States tax treaties, the Convention prohibits tax discrimination, creates a dispute resolution mechanism and provides for the exchange of otherwise confidential tax information between the tax authorities of the parties. The Convention authorizes access by the General Accounting Office and the tax writing committees of Congress to certain information exchanged under the Convention which is relevant to the functions of these bodies in overseeing the administration of United States laws. In an exchange of notes, the United States and India agree that, although the Convention does not contain a tax sparing credit, if United States policy changes in this regard, the Convention will be promptly amended to incorporate a tax sparing provision. These notes are also included for information only. A technical memorandum explaining in detail the provisions of the Convention and the related　Protocol is being prepared by the Department of the Treasury and will be submitted separately to the Senate Committee on Foreign Relations. 　　The Department of the Treasury, with the cooperation of the Department of State, was primarily responsible for the negotiation of the Convention and related Protocol. Respectfully submitted, JAMES A. BAKER III. Enclosures: As stated. LETTER OF TRANSMITTAL THE WHITE HOUSE, October 31, 1989. To the Senate of the United States: 　　I transmit herewith for Senate advice and consent to ratification 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, together with a related Protocol, signed at New Delhi on September 12, 1989. I also transmit the report of the Department of State on the convention. 　　The convention would be the first tax treaty between the United States and India. It includes special provisions that take into account India's status as a developing nation and that reflect changes in U.S. tax treaty policy resulting from the Tax Reform Act of 1986. 　　Of particular importance are the provisions limiting the withholding tax rates on various categories of investment income, as well as those designed to prevent third-country residents from taking unwarranted advantage of the convention by routing income from one Contracting State through an entity created in the other. The convention also provides for the exchange of information by the competent authorities of the Contracting States. I recommend the Senate give early and favorable consideration to the convention, together with a related protocol, and give its advice and consent to ratification. GEORGE BUSH.