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 traveling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit the salesmen to access 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. computerprogramming 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 program) which it has developed. Example (6) Facts: 　　An Indian vegetable oil manufacturing company wants to produce a cholesterolfree 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 worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil advise it on marketing strategies. Are the 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 4(b). Examples 3, 5 and 6 illustrate services that would be described in paragraph 4(b).Example 3 refers to services that could be considered typical of the type of service that is　described in that paragraph because the Indian builder is paying to have a technical process made available to it. Examples 5 and 6 illustrate other services, each of which is technical in nature under circumstances in which a technical process is made available to the purchaser. 　　Examples 4 and 7, however, do not illustrate a service that is described in paragraph 4(b) because, although performing each service requires technical knowledge and skill, no technical knowledge, plan, design or process is made available to the purchaser. In Example 4, the technical knowledge used in making wallboard is retained by the U.S. company acting as a contract manufacturer in the transaction. The Indian purchaser is paying for the manufacture of a product by the U.S. company -- a type of commercial service. Similarly, in Example 7, the technical knowledge required to complete a computer survey of the world market for a product is retained by the marketing consultant. The Indian purchaser is paying for a commercial service. 　　Under subparagraphs (a) through (e), paragraph 5 of Article 12 describes several categories of services which are not intended to be treated as included services even if they otherwise satisfy the tests of paragraph 4. The memorandum of understanding provides examples of cases where fees would be included under paragraph 4, but are excluded because of the application of one 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 install 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 service 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 this service, the manufacturer has full responsibility during this period, and the 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 manufacture of helicopters. It sends a group of engineers from its design staff to a course of study conducted by MIT for two years to study aeronautical engineering. The Indian firm 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 manufacture 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 fire alarm system. He hires an American electrical engineering firm to design the necessary wiring system, adapt standard software, and provide instructions for installation.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. 　　Paragraph 6 of Article 12 provides an exception from the applicability of paragraphs 1 and 2. This exception applies where the beneficial owner of the royalties carries on business through a permanent establishment in the source State or performs independent personal services from a fixed base situated in the source State and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such cases the provisions of Article 7 (Business profits) or Article 15 (Independent personal Services) will apply and the source State will generally retain the right to tax such royalties on a net basis rather than a gross basis. 　　Paragraph III of the Protocol elaborates on paragraph 6 by incorporating into the Convention the principle of Code section 864(c)(6). Like the Code section on which it is based, Paragraph III of the Protocol provides that any income or gain attributable to a permanent establishment or fixed base during its existence is taxable in the Contracting State where the permanent establishment or fixed base is situated even if the payments are deferred until after the permanent establishment or fixed base no longer exists. 　　Paragraph 7 of Article 12 provides source rules for royalties and fees for included services. Under subparagraph (a), royalties and fees for included services will be deemed to arise in a contracting State when the payer is that State itself, a political subdivision, a local authority, or a resident of that State. Where the payer is a nonresident of a Contracting State that has a permanent establishment or fixed base in the Contracting State in connection with which the liability to pay the royalties and fees for related services, was incurred and the amounts are borne by the permanent establishment or fixed base, then the royalties and fees will be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. Thus a royalty payment by a resident of India is sourced in India unless the payer has a permanent establishment or fixed base in the United States and the payment is both in satisfaction of a liability incurred in connection with the permanent establishment or fixed base and borne by the permanent establishment or fixed base. 　　Under subparagraph (b), a royalty that does not arise in one of the Contracting States under subparagraph (a) and that relates to the use of, or the right to use, a right or property in one of the Contracting States will be deemed to arise in that State. Similarly, a fee for included services that does not arise in one of the Contracting States under subparagraph (a) and that relates to services performed in one of the Contracting States will be deemed to arise in that State. Thus, for example, a royalty that is paid by an individual who is an Indian citizen and German resident will be deemed to arise in India if the payment is for the use of a right in India, even if the German resident has no permanent establishment or fixed base in India. Such a royalty will be deemed to arise in the United States if it is for the use of a right in the United States. 　　Paragraph 8 provides that, in cases involving special relationships between the payer and beneficial owner of a royalty, Article 12 applies only to the extent of royalty payments that would have been made absent such special relationships (i.e., an arm's length royalty payment). Any excess amount of royalties paid remains taxable according to the laws of the United States and India, respectively, with due regard to the other provisions of the Convention. Thus, for example, if the excess amount is treated as a distribution of profits under national law, such excess amount will be taxed as a dividend respectively, of Article 14 confirm the right of India to subject a U.S. company to tax in India at a rate higher than that applicable to Indian companies and to tax the Interest paid to a banking company's head office by a permanent establishment in India of the U.S. bank. 　　The base of the U.S. permanent establishment tax described in subparagraph (a)(i) of paragraph 1 is the "dividend equivalent amount". The Convention does not define this term, which is defined under section 884(b) of the Code and the regulations thereunder. Generally the dividend equivalent amount is the earnings and profits of the foreign corporation that are effectively connected with the conduct of its trade or business in the United States after payment of the corporate income tax, decreased by any increase during the taxable year in the corporation's U.S. assets ("U.S. net equity") or increased by any decrease in its U.S. net equity. 　　Under the Convention, the dividend equivalent amount is roughly the amount that would be distributed as a dividend if the permanent establishment were operating as a locally incorporated subsidiary, subject to several adjustments. The dividend equivalent amount is determined taking into account not only effectively connected profits (or profits that are deemed to be effectively connected) that are attributable to a permanent establishment in the United States but also profits from the disposition or operation of real estate which are subject to net basis income taxation in the United States under Article 6 (Income from Immovable Property (Real Property)) or Article 13 (Gains), as well as fees for included services if the United States is permitted to tax them under Article 12 (Royalties and Fees for Included Services). 　　Paragraph V of the Protocol (Ad Article 14) emphasizes that such profits described in Articles 6, 12, 13, are only taken into account in paragraph 1 to the extent to which the profits are subject to U.S. 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. 　　Determining the dividend equivalent amount taking into account fees for included services that are not attributable to a permanent establishment of an Indian company in the United states is appropriate because India imposes a high gross basis tax on such fees paid to a U.S. company to the extent the fees are not attributable to a permanent establishment of the company in India. The total U.S. tax imposed with respect to fees for such included services may not exceed the limitation provided under paragraph 2 of Article 12. 　　Thus, for example, the United States may impose a permanent establishment tax under subparagraph (a)(i) of paragraph 1 on the business profits of an Indian company attributable to a permanent establishment in the United States. In addition. the United States may impose this tax on income of an Indian corporation that is, in accordance with the Convention, subject to taxation under internal U.S. law on a net basis either because the Indian corporation has elected under Code section 882(d) to treat income from real property not otherwise taxed on a net basis as effectively connected income or because the income is gain which is taxable on a net basis, such as gain that arises from the disposition of a United States Real Property Interest (although not including, under current U.S. law, an interest in a United States corporation). Finally, the United States may impose this tax on income from services that are subject to U.S. tax under Article 12. The United States may not impose its branch tax on the business profits of an Indian corporation that are effectively connected with a U.S. trade or business but that are not included within any of the above-described categories. 　　The rationale for the net equity adjustment to the permanent establishment tax provided in subparagraph (a)(i) of paragraph 1 is that the corporation decreases the amount of earnings available to the home office to the extent it increases its U.S. net equity (i.e., to the extent it reinvests its U.S. earnings in its U.S. business). Conversely, the corporation increases the amount of earnings available to the home office to the extent it decreases its U.S. net equity (i.e., to the extent it withdraws from the United States its previously reinvested earnings). 　　Subparagraph (a)(ii) of paragraph 1 provides for the imposition of the U.S. tax on excess interest. Under section 884(f)(l)(B) of the Code, excess interest is the excess of the total amount allowable as a deduction in computing the U.S. effectively connected income of a foreign corporation over the total interest paid by the foreign corporation's U.S. trade or business. Under the Convention, the tax on excess interest applies only to the excess of interest which is deductible 　　(1) in computing the U.S. tax on net profits that are attributable to a permanent establishment of an Indian corporation in the United States and 　　(2) in computing the U.S. tax on net income or gain from real property (although not including, under current U.S. law, gain on shares in a domestic corporation) and fees for included services, over the interest paid by the foreign corporation's U.S. permanent establishment or U.S. trade or business. 　　It is understood that interest paid is determined without regard to capitalized interest. The excess interest tax can be viewed as a withholding tax on deemed interest payments from the U.S. branch of a foreign corporation to its head office. 　　Subparagraph (c)(i) of paragraph 1 provides that the rate applicable to the permanent establishment tax described in subparagraph (a)(i) shall not exceed the rate provided in paragraph 2(a) of Article 10 (Dividends). Thus, the rate shall not exceed 15 percent of the dividend equivalent amount. 　　Subparagraph (c)(ii) of paragraph 1 provides that the rate applicable to the excess interest tax described in subparagraph (a)(ii) shall not exceed the rate specified in paragraph 2(a) or (b) of Article 11 (Interest). Thus, the rate shall not exceed 10 percent if imposed on a bank carrying on a bona fide banking business or a similar financial institution (including an insurance company) ; the rate shall not exceed 15 percent in all other cases. 　　In the case of India, paragraph 2 provides that 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 Indian companies. The maximum difference between the tax rate imposed on a U.S. and an Indian company shall not, however, exceed the difference of 15 percentage points that existed at the time the treaty was signed. 　　Under paragraph 3, India may impose a tax on interest considered under Indian law to be paid by a permanent establishment in India of a banking company that is a U.S. resident to the head office of such company. However, the rate shall not exceed the rate specified in paragraph 2(a) of Article 11 (Interest). Thus, the rate shall not exceed 10 percent. Such interest is deductible in determining the profits of the banking company's permanent establishment in India under Indian law and paragraph 3 of Article 7 (Business Profits).