SIGNED AT NEW DELHI ON SEPTEMBER 12, 1989 GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1991 INTRODUCTION 　　This is a technical explanation of the Convention and Protocol between the United States of America and the Republic of India signed on September 12, 1989 ("the Convention"). Negotiations took as their starting point the U.S. Treasury Department's draft Model Income Tax Convention, published on June 16, 1981 ("the U.S. Model"), the Model Double Taxation Convention published by the United Nations in 1980 ("the U.N. Model") and other treaties of both countries. 　　The Technical Explanation is an official guide to the Convention. It reflects the policies behind particular Convention provisions, as well as understandings reached with respect to the application and interpretation of the Convention. 　　The explanations of each article will include explanations of any Protocol provisions relating to that article. 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--------------------------------Nondiscrimination Article 27--------------------------------Mutual Agreement Procedure Article 28--------------------------------Exchange or Information and Administrative Assistance Article 29--------------------------------Diplomatic Agents and Consular Officers Article 30--------------------------------Entry into Force Article 31--------------------------------Termination Protocol----------------------------------of 12 September, 1989 Diplomatic Notes-----------------------of 12 September, 1989 ARTICLE 1 General Scope 　　Article 1 provides that the Convention is applicable to residents of the United States or the Republic of India ("India") except where the terms of the Convention provide otherwise. Under Article 4 (Residence) a person is treated as a resident of a Contracting State if that person is under the laws of that State liable to tax therein by reason of his domicile or other similar criteria, subject to certain limitations, as described in Article 4. If, however, a person is, under those criteria, a resident of both Contracting States, a single State of residence (or no state of residence) is assigned under Article 4. This definition governs for all provisions of the Convention. Certain provisions are applicable to persons who may not be residents of either Contracting State. For example, Article 19 (Remuneration and Pensions in Respect of Government Service) may apply to a citizen of a Contracting State who is resident in neither. Paragraph 1 of Article 26 (Nondiscrimination) applies to nationals of the Contracting States. Under Article 28 (Exchange of Information and Administrative Assistance), information may be exchanged with respect to residents of third states. 　　Paragraph 2 of Article 1 describes the relationship between the rules of the Convention,　on the one hand, and the laws of the Contracting States and other agreements between the Contracting States, on the other. This paragraph makes explicit, on a reciprocal basis, the generally accepted principle that no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other allowance accorded by the tax laws of the Contracting States. Thus, for example, if a deduction would be allowed under the Internal Revenue Code ("the Code") in Computing the taxable income of a resident of India, the deduction will be available to that person in computing income under the treaty. In no event may the treaty increase the tax burden on residents of the Contracting States. Thus, a right to tax given by the treaty cannot be exercised by the United States unless that right also exists under the Code. 　　A taxpayer may always rely on the more favorable Code treatment. This does not mean, however, that a taxpayer may pick and choose between Code and treaty provisions in an inconsistent manner in order to minimize tax. For example, assume a resident of India has three separate businesses in the United States. One is a profitable permanent establishment and the other two are trades or businesses which would earn taxable income under the Code but which do not meet the permanent establishment threshold tests of the Convention. One is profitable and the other incurs a loss. Under the Convention the income of the permanent establishment is taxable, and both the profit and loss of the other two businesses are ignored. Under the Code, all three would be taxable. The loss would be offset against the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the profitable trade or business and invoke the Code to claim the loss of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84-17 I.R.B. 1984-1, 10.) If the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention with respect, for example, to any dividend income he may receive from the United States which is not effectively connected with any of his business activities in the United States. 　　Similarly, nothing in the Convention can be used to deny any benefit granted by any other agreement between the United States and India. For example, if certain benefits or protections, not found in the Convention, are afforded under a Treaty of Commerce, Friendship, and Navigation, or similar agreement, those benefits or protections will be available to residents of the Contracting States regardless of any provisions to the contrary (or silence) in the Convention. 　　Paragraphs 3 and 4 of Article 1 contain the traditional '"saving clause'" of the U.S. Model. Under paragraph 3, the United States and India reserve their right, except as provided in paragraph 4, to tax their residents and citizens as provided in their internal laws, notwithstanding any Convention provisions to the Contrary. If, for example, an Indian resident performs independent personal services in the United States, he is present in the United States for fever than 90 days in the taxable year and the income from the services is not attributable to a fixed base in the United States, Article 15 (Independent Personal Services) would normally prevent the United States from taxing the income. If, however, the Indian resident is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal rules. Residence, for the purpose of the saving clause, is determined under Article 4 (Residence). Thus, for example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of India under Indian law, and that individual has a permanent home available to him in India and not in the United States, he would be treated as a resident of India under Article 4 and this determination would apply for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty.Under paragraph 3 the Contracting States also reserve their right to tax former citizens whose loss of citizenship had as one of its principal purposes the avoidance of tax. In the United States, such a former citizen is taxable in accordance with the provisions of section 877 of the Code for 10 years following the loss of citizenship. 　　Paragraph 4 sets forth certain exceptions to the saving clause in cases where its application would contravene policies reflected in the treaties which are intended to extend a Contracting State's benefits to its citizens and residents. Paragraph 4(a) lists the provisions of the Convention which will be applicable to a Contracting State's citizens and residents despite the general saving clause rule of paragraph 3: 　　(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment, and, particularly, permits the override of the statute of limitations for the purpose of refunding tax under such a correlative adjustment. 　　(2) Paragraphs 2 and 6 of Article 20 (Private Pensions, Annuities, Alimony and Child Support) deal with social security benefits and child support payments. Paragraph 2 of Article 20 provides for the taxation of social security benefits only in the State making the payment. Excepting this rule from the saving clause means that the United States may not apply the Code rules to tax its citizens or residents on Indian social security benefits. Paragraph 6 of Article 20 provides that child support payments by a resident of one Contracting State to a resident of the other may be taxed only by the State of residence of the payer. The inclusion of this paragraph in the exceptions to the saving clause means that a child support payment by an Indian resident to a U.S. resident or citizen will not be taxed by the United States. 　　(3) Article 25 (Relief from Double Taxation) confers the benefit of a foreign tax credit on the residents of a Contracting State. To apply the saving clause to this Article would render the Article meaningless. 　　(4) Article 26 (Nondiscrimination) prohibits discriminatory taxation by one Contracting State on the citizens and residents of the other. These prohibitions are intended to apply even if the citizen or resident is also a citizen or resident of the taxing State. 　　(5) Article 27 (Mutual Agreement Procedure) may confer a country's benefits on its citizens and residents by, for example, waiving the statute of limitations for refunds, or by permitting the competent authorities to use a definition of a term which differs from the internal law definition. These benefits are intended to be granted by a Contracting State to its citizens and residents. 　　Paragraph 4(b) provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted by a Contracting State to temporary residents, but not to permanent residents or, in the case of the United States, citizens. Viewed from the point of view of the United States as the host country, if beneficiaries of these provisions come to the United States from India and remain in the United States long enough to become residents under the Code, but do not acquire immigrant status (i.e., they do not become green card holders) and are not citizens of the United States, the United States will continue to grant these benefits even if they conflict with the Code rules. The benefits preserved by this paragraph are the following host country exemptions: Government service salaries and pensions under Article 19 (Remuneration and Pensions in Respect of Government Service); certain income of students and apprentices under Article 21 (Payments Received by Students and Apprentices); certain income of visiting professors, etc., under Article 22 (Payments Received by Professors, Teachers and Research Scholars); and the income of diplomatic and consular officers under Article 29 (Members of Diplomatic Missions and Consular Posts). ARTICLE 2 Taxes Covered 　　This Article identifies the U.S. and Indian taxes to which the Convention applies. These are referred to in the Convention as '"United States tax" and "Indian tax'" respectively. 　　In the case of the United States, as indicated in paragraph 1(a), the covered taxes are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). With respect to the tax on insurance premiums, the Convention applies only to the extent that the risks covered by such premiums are not reinsured, directly or indirectly, with a person not entitled, under this or any other Convention, to exemption from the tax. The Article specifies that the Convention does not apply to the accumulated earnings tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are not covered by the Convention. 　　Providing Convention coverage for the U.S. insurance excise tax effectively exempts Indian companies which insure U.S. risks from the tax. The tax is applicable under the Code only when an Indian company earns premiums which are not effectively connected with a trade or business in the United States. Under Article 7 (Business Profits), the United States cannot subject the business profits of an Indian enterprise to tax (i.e., to a covered tax) if the income of the enterprise is not attributable to a permanent establishment which the enterprise has in the United States or to sales of goods or performance of activities by the Indian company which is of the same kind as the goods sold or the activities carried out through the permanent establishment. If the Indian company sells insurance through a permanent establishment in the United States, and also sells insurance in the United States directly from India, unconnected to the permanent establishment, under the Code, the income from both parts of the business would be subject to net basis taxation, and the excise tax would not apply. 　　Paragraph 1(b) specifies the existing Indian taxes which are covered by the Convention.They are the income tax, including any surcharge on the income tax, and the surtax. The income tax on the undistributed income of companies, imposed under the Income Tax Act, is not a covered tax. 　　For purposes of Article 28 (Exchange of Information and Administrative Assistance), the Convention applies to a broader range of taxes than those enumerated in Article 2. For the United States, Article 28 applies to all taxes imposed under Title 26 of the United States Code (i.e., the Internal Revenue Code). For India, Article 28 applies to the income tax, the wealth tax and the gift tax. 　　Paragraph 1 specifies that the taxes referred to in subparagraphs (a) and (b) do not include fines, penalties and other amounts payable in respect of default or omission in relation to the covered taxes. 　　Under paragraph 2, the Convention will apply to any taxes which are identical or substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to, or in place of, the existing taxes after September 12, 1989 (the date of signature of the Convention). The paragraph also provides that the U.S. and Indian competent authorities will notify each other of significant changes in their taxation laws. This refers to changes which are of significance to the operation of the Convention. They will also notify each other of official published material concerning the application of the Convention, such as this technical explanation, Internal Revenue Service rulings and court decisions. ARTICLE 3 General Definitions 　　Paragraph 1 defines a number of basic terms used in the Convention. Some terms are not defined in the Convention. These are dealt within paragraph 2. Certain others are defined in other articles of the Convention. For example, the term "resident of a Contracting State" is defined in Article 4 (Residence). The term '"permanent establishment" is defined in Article 5 (Permanent Establishment). The terms "dividends," "interest" and "royalties" are defined in Articles 10, 11 and 12, respectively, which deal with the taxation of those classes of income. 　　The terms "India" and "United States" are defined in paragraphs 1(a) and (b), respectively. The term "India" means the territory of India, and is further defined to include India's continental shelf. The term "United States'" is defined geographically to mean the territory of the United States, including its continental shelf. Though not specified, the term is understood not to include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. 　　The terms "a Contracting State'" and "the State" are defined in paragraph 1(c) to mean India, depending on the context in which the other Contracting the United States or term is used. 　　The term "tax'" is defined in paragraph 1(d) to mean either Indian tax or United States tax, depending on the context in which the term is used. 　　Paragraph 1(e) defines the term '"person'" to include an individual, an estate, a trust, a partnership, a company, and any other body of persons or taxable entity. This definition differs from that in the U.S. Model only in the addition of "any other taxable entity", which is implicitly included by the '"any other body of persons" language in the U.S. Model. 　　The term "company" is defined in paragraph 1(f) as a body corporate or an entity treated as a body corporate for tax purposes. Since the term "body corporate" is not defined in the Convention, in accordance with paragraph 2 of this Article, it has the meaning which it has under the law of the Contracting State whose tax is being applied. 　　The terms "enterprise of a Contracting State" and '"enterprise of the other Contracting State" are defined in paragraph l(g) as an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State. The term "enterprise'" is not defined in the Convention. 　　Paragraphs 1(h) defines the term "competent authority" for both the United States and India. The Indian competent authority is identified as the Central Government in the Ministry of Finance (Department of Revenue) or their authorized representative. The U.S. competent authority is identified as the Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who has, in turn, redelegated the authority to the Assistant Commissioner (International). With respect to interpretative issues, the Assistant Commissioner acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. 　　The term "national" is defined in paragraph 1(i) as an individual who is a citizen or national of the United States or India. This definition is comparable to that found in the U.S. Model, except that in that Model the definition is in Article 24 (Nondiscrimination). Since the term has application in other articles as well (e.g., Article 19 (Remuneration and Pensions in Respect of Government Service)), in this Convention it has been placed among the General Definitions. 　　Paragraph 1(j) defines the term '"international traffic'", which is significant principally in relation to Article 8 (Shipping and Air Transport). The term means any transport by a ship or aircraft operated by an enterprise of a Contracting State except when the vessel is operating solely between places within the other Contracting State. The exclusion' from international traffic of transport by, for example, an Indian carrier solely between places within the United States means that a carriage of goods or passengers between New York and Chicago by the Indian carrier, if such carriage were possible under U.S. law, would not be treated as international traffic. The substantive taxing rules in Article 8 of the Convention relating to the taxation of income from transport, therefore, would not apply to income from such carriage, and the United States would not be required to exempt the income under Article 8. The income would, however, be treated as business profits under Article 7 (Business Profits) and would, therefore, be taxable in the United States only if attributable to a U.S. permanent establishment, and then, only on a net basis. The gross basis U.S. tax (Code section 887) would never apply under the circumstances described. If, however, goods are carried by the Indian carrier from Bombay to New York, some of the goods are left in New York and the rest are taken to Chicago, the entire transport would be international traffic. 　　Several articles of the Convention use the term '"taxable year". Paragraph 1(k) defines the term, in relation to Indian tax, to mean the "previous year'" as that term is defined in the 1961 Indian Tax Act. In relation to U.S. tax, the term is defined in paragraph (a)(23) of section 7701 of the Code. 　　Paragraph 2 provides that, in the application of the Convention, any term used but not defined in the Convention, unless the context requires otherwise, will have the meaning which it has under the law of the Contracting State whose tax is being applied. If, however, the meaning of a term cannot be readily determined under the law of a Contracting State, or if there is a conflict in meaning under the laws of the two States which creates problems in the application of the Convention, the competent authorities may, pursuant to the provisions of paragraph 3 of Article 27 (Mutual Agreement Procedure), establish a common meaning in order to prevent double taxation or further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under the laws of either Contracting State. ARTICLE 4 Residence 　　This Article sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. Determination of residence is important because, as noted in the explanation to Article 1 (General Scope), as a general matter only residents of the Contracting States may claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. 　　The determination of residence for treaty purposes looks first to a person's liability to tax as a resident under the respective taxation laws of the Contracting States. A person who, under those laws, is a resident of one Contracting State and not of the other need look no further. That person is a resident for purposes of the Convention of the State in which he is resident under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Article proceeds, where possible, to assign one State of residence to such a person for purposes of the Convention through the use of tie-breaker rules. Paragraph 1 defines a "resident of a Contracting State". In general, this definition　incorporates the definitions of residence in U.S. and Indian law, by referring to a resident as a person who, under the laws of a Contracting State, is subject to tax there by reason of his domicile, residence, citizenship, place of management, place of incorporation or any other similar criterion. Residents of the United States include aliens who are considered U.S. residents under Code section 7701(b). U.S. citizens are treated as resident in the United States for purposes of the Convention. Even though they are not residents of the United States under the Code, it is appropriate for them to be treated as residents under the Convention because they are taxed by the United States in the same manner as residents, i.e., on their worldwide income. 　　If, under paragraph l(a), a person is liable to tax in a Contracting State only in respect of income from sources within that State, the person will not be treated as a resident of that contracting State for purposes of the Convention. Thus, for example, an Indian consular official in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention. Similarly, an Indian enterprise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with respect to its income which is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as is a U.S. resident. 　　Under paragraph l (b), a partnership, estate or trust will be treated as a resident of a Contracting State for purposes of the Convention to the extent that the income derived by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the income or in the hands of its partners or beneficiaries. Under U.S. law, a partnership is never, and an estate or trust is often not, taxed as such. Under the Convention income received by a partnership, estate or trust will be treated as income received by a U.S. resident only to the extent such income is subject to tax in the United States as the Income of a U.S. resident. Thus, for U.S. tax purposes, the question of whether income received by a partnership is received by a resident will be determined by the residence of its partners rather than by the residence of the partnership itself. To the extent the partners (looking through any partnerships which are themselves partners) are subject to U.S. tax as residents of the United States, the income received by the partnership will be treated as income received by a U.S. resident. Similarly, the treatment under the Convention of income received by a trust or estate will be determined by the residence for taxation purposes of the person subject to tax on such income, which may be the grantor, the beneficiaries or the estate or trust itself, depending on the circumstances. This rule regarding the residence of partnerships, estates or trusts is applied to determine the extent to which that person is entitled to treaty benefits with respect to income which it receives from the other Contracting State and the extent to which a resident of the other Contracting State is entitled to treaty benefits with respect to income paid by such person. 　　If, under the laws of the two Contracting States, and, thus, under paragraph 1, an individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are provided in paragraph 2 to determine a single State of residence for that individual. The first test is where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal and economic relations are closest, i.e., the location of his "center of vital interests". If that test is also inconclusive, or if he does not have a permanent home available to him in either State, he will be treated as a resident of the Contracting State where he maintains an habitual abode. If he has an habitual abode in both States or in neither of them, he will be treated as a resident of his Contracting State of citizenship. If he is a citizen of both States or of neither, the matter will be considered by the competent authorities, who will attempt by mutual agreement to assign a single State of residence. 　　Paragraph 3 seeks to settle dual-residence issues for companies. A company is treated as resident in the United States if it is created or organized under the laws of the United States or a political subdivision. If India used the same rule, dual-corporate residence between the United States and India could never arise. Under its law, however, a corporation is treated as a resident of India if it is managed and controlled there. Dual residence, therefore, can arise if a U.S. corporation is managed in India. Since neither party was prepared to give up its test of corporate residence under a tie-breaker, the paragraph provides that if a company is resident in both the United States and India under paragraph 1, that company shall be considered to be outside the scope of the Convention for most purposes. There are several exceptions. Paragraph 2 of Article 10 (Dividends) applies, such that if a dual resident corporation pays a dividend to a non-dual resident of India, the U.S. paying agent would withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the non-dual resident of India not by the dual resident. Similarly, Articles 26 (Nondiscrimination), 27 (Mutual Agreement procedure), 28 (Exchange of Information and Administrative Assistance), and 30 (Entry into Force) apply to dual resident corporations. Thus, a Contracting State cannot discriminate against a dual resident corporation; such corporations can bring issues to the competent authorities; and information can be exchanged with respect to them. 　　Paragraph 4 deals with the possibility of dual residents other than individuals or corporations, such as estates or trusts. In the event of dual residence of such persons, the competent authorities are instructed to settle the matter and determine the mode of application of the Convention to such persons.