ARTICLE 8 Shipping and Air Transport 　　This Article provides the rules which govern the taxation of profits from the operation of ships and aircraft in international traffic. The term "international traffic" is defined in paragraph 1(j) of Article 3 (General Definitions) to mean any transport by 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. 　　Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that Contracting State. By virtue of paragraph 6 of Article 7 (Business Profits), profits of an enterprise of a Contracting State that are exempt in the other Contracting State under this paragraph remain exempt even if the enterprise has a permanent establishment in that other Contracting State. 　　Paragraph 2 defines profits from the operation of ships or aircraft in international traffic as 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. Such transportation includes the sale of tickets for such transportation on behalf of other enterprises, other activity directly connected with such transportation, and rental of ships or aircraft incidental to any activity directly connected with such transportation. Thus, income of an enterprise from the rental of ships or aircraft constitutes profits from the operation of ships or aircraft in international traffic only if it is incidental to the operation by the enterprise of ships or aircraft in international traffic. For example, under the Convention only bareboat leasing that is incidental to the operation by the enterprise of ships in international traffic is within the scope of Article 8. This provision is narrower than the provision in the U.S. Model, which covers not only rental profits that are incidental to transportation activities of the lessor but also any rental profits derived from the operation of ships or aircraft in international traffic by the lessee. 　　Paragraph 3 provides that the profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance or rental of containers (including equipment for their transport) which are used for the transport of goods in international traffic will be exempt from tax in the other Contracting State. Thus, in order to qualify for the exemption, the recipient of the income must be engaged in the operation of ships or aircraft in international traffic and the container or related equipment must be used for the transport of goods in international traffic. The comparable provision in the U.S. Model (Article 8, paragraph 3) is not limited to situations in which the lessor is engaged in the operation of ships or aircraft in international traffic. 　　Paragraph 4 clarifies that the provisions of the preceding paragraphs apply equally to profits derived by an enterprise of a Contracting State from participation in a pool, joint business or international operating agency. As with any benefit of the Convention, the enterprise claiming the benefit must be entitled to the benefit under the provisions of Article 24 (Limitation on Benefits). 　　Paragraph 5 provides that interest on funds connected with the operation of ships or aircraft in international traffic are considered profits derived from the operation of ships or aircraft and that the provisions of Article 11 (Interest) will not apply in relation to such interest.This provision, which is not included in the U.S. Model, provides an exemption from tax in the source State for interest income derived from the working capital of the enterprise needed for the operation of ships or aircraft in international traffic. 　　Paragraph 6 provides that gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft and containers are taxable only in that State if the ships, aircraft and containers are owned and operated by the enterprise and the income from them is taxable only in that State. This provision is narrower than the comparable provision in the U.S. Model (paragraph 4 of Article 13 (Gains)) because the U.S. Model covers all gains from the alienation of ships, aircraft, or containers operated in international traffic. 　　This Article is subject to the saving clause of paragraph 3 of Article 1 of the Convention. The United States, therefore, may tax the shipping or air transport profits of a resident of India if that Indian resident is a citizen of the United States. ARTICLE 9 Associated Enterprises 　　This Article incorporates into the Convention the general principles of section 482 of the Code. It provides that when related persons engage in transactions that are not at arm's length, the Contracting States may make appropriate adjustments to the taxable income and tax liability of such related persons to reflect what the income or tax of these persons with respect to such transactions would have been had there been an arm's length relationship between the persons. 　　Paragraph 1 deals with the circumstance where an enterprise of a Contracting State is related to an enterprise of the other Contracting State, and those related persons make arrangements or impose conditions between themselves in their commercial or financial relations which are different from those that would be made between independent persons dealing at arm's length. Paragraph 1 provides that, under those circumstances, the Contracting States may adjust the income (or loss) of the enterprise to reflect the income which would have been taken into account in the absence of such a relationship. The paragraph specifies what the term "related persons" means in this context. An enterprise of one Contracting State is related to an enterprise of the other Contracting State if either participates directly or indirectly in the management, control, or capital of the other. The two enterprises are also related if any third person or persons participate directly or indirectly in the management, control, or capital of both. The term "control" includes any kind of control, whether or not legally enforceable and however exercised or exercisable. 　　Paragraph 2 provides that, where a Contracting State has made an adjustment that is consistent with the provisions of paragraph 1 and the other Contracting State agrees that the adjustment was appropriate to reflect arm's length conditions, that other Contracting State is obligated to make a corresponding adjustment to the tax liability of the related person in that other Contracting State. The Contracting State making such an adjustment will take the other provisions of the Convention, where relevant, into account. Thus, for example, if the effect of a correlative adjustment is to treat an Indian corporation as having made a distribution of profits to its U.S. parent corporation, the provisions of Article 10 (Dividends) will apply, and India may impose a 15 percent withholding tax on the dividend. The competent authorities are authorized, if necessary, to consult to resolve any differences in the application of these provisions. For example, there may be a disagreement over whether an adjustment made by a Contracting State under paragraph 1 was appropriate. 　　If a correlative adjustment is made under paragraph 2, it is to be implemented, pursuant to paragraph 2 of Article 27 (Mutual Agreement Procedure), notwithstanding any time limits or other procedural limitations in the law of the Contracting State making the adjustment. The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to paragraph 2 of Article 9 (see the exceptions to the saving clause in subparagraph (a) of paragraph 4 of Article 1). Thus, even if the statute of limitations has run, or there is a closing agreement between the Internal Revenue Service and the taxpayer, a refund of tax can be made in order to implement a correlative adjustment. Statutory or procedural limitations, however, cannot be overridden to impose additional tax, because, under subparagraph (a) of paragraph 2 of Article 1 of the Convention, the Convention cannot restrict any statutory benefit. 　　Paragraph 3 of Article 9 of the U.S. Model is not included in the Convention. That paragraph of the U.S. Model preserves the rights of the Contracting States to apply internal law provisions relating to adjustments between related parties when necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such persons. That paragraph is intended merely to clarify that internal law arm's length provisions, such as the rules and procedures under section 482 of the Code, may be applied whether or not explicitly provided for in paragraph 1. The absence of paragraph 3 of the U.S. Model in the Convention, therefore, can not be viewed as casting doubt on the applicability of these statutory provisions. 　　It is understood that the "commensurate with income" standard for determining appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform Act of 1986, does not represent a departure in U.S. practice or policy from the arm's length standard. It merely suggests alternative approaches, beyond those spelled out in current regulations, for achieving appropriate transfer prices. It is anticipated, therefore, that the application of this standard by the Internal Revenue Service will be in accordance with the general principles of paragraph 1 of Article 9 of the Convention. ARTICLE 10 Dividends 　　Article 10 provides rules for source, and in some cases residence, country taxation of dividends and similar amounts paid by a company resident in one Contracting State to a resident of the other Contracting State. Generally, the article limits the source country's right to tax dividends and amounts treated as dividends. 　　Paragraph 1 preserves the residence country's general right to tax dividends arising in the source country by permitting a Contracting State to tax its residents on dividends paid by a company that is a resident of the other Contracting State. 　　Paragraph 2 grants the source country the right to tax dividends paid by a company that is a resident of that country if the beneficial owner of the dividend is a resident of the other Contracting State. The source country tax, however, is limited to 15 percent of the gross amount of the dividend if the beneficial owner is a company that holds at least 10 percent of the voting shares of the company paying the dividend and 25 percent of the gross amount of the dividend in all other cases. The term "beneficial owner" is not defined in the Convention; it is, instead, defined by domestic law of the Contracting States. A nominee or agent which is a resident of a Contracting State may not claim the benefits of this Article if the dividend is received on behalf of a person who is not a resident of that Contracting State. However, dividends received by a nominee for the benefit of a resident would qualify for the benefits of this Article. 　　The second and third sentences of paragraph 2 relax the limitations on source country taxation for dividends paid by U.S. Regulated Investment Companies and Real Estate Investment Trusts. Dividends paid by Regulated Investment Companies are denied the 15 percent direct dividend rate and subjected to the 25 percent portfolio dividend rate regardless of the percentage of voting shares held by the recipient of the dividend. Generally, the reduction of the dividend rate to 15 percent is intended to relieve multiple levels of corporate taxation in cases where the recipient of the dividend holds a substantial interest in the payer. Because Regulated Investment Companies and Real Estate Investment Trusts do not themselves generally pay corporate tax with respect to amounts distributed, the rate reduction from 25 to 15 percent cannot be justified by the "relief from multiple levels of corporate taxation" rationale. Further, although amounts received by a Regulated Investment Company may have been subject to U.S. corporate tax (e.g., dividends paid by a publicly traded U.S. company to a Regulated Investment Company), it is unlikely that a 10 percent shareholding in a Regulated Investment Company by an Indian resident will correspond to a 10 percent shareholding in the entity that has paid U.S. corporate tax (e.g., the publicly traded U.S. company). Thus, in the case of dividends received by a Regulated Investment Company and paid out to its shareholders the requirement of a substantial shareholding in the entity paying the corporate tax is generally lacking. 　　The third sentence of paragraph 2 further limits the availability of the 25 percent portfolio dividend rate in the case of dividends paid by Real Estate Investment Trusts. The 25 percent rate is available only to individual residents of India holding a less than 10 percent interest in the Real Estate Investment Trust. The exclusion of corporate shareholders and 10 percent or greater individual shareholders from the 25 percent portfolio rate is intended to prevent indirect investment in U.S. real property through a Real Estate Investment Trust from being treated more favorably than investment directly in such real property. Dividends paid by a Real Estate Investment Trust (other than amounts subject to tax as effectively connected income under section 897(h) of the Code) that are not entitled to the 25 percent portfolio rate are subject to the U.S. statutory rate of 30 percent. 　　Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid. 　　Paragraph 3 defines the term dividends as used in Article 10 to mean the following: 　　income from shares or other rights, not being debt-claims, participating in profits; income from other corporate rights which are subjected to the sane taxation treatment as income from shares by the laws of the Contracting 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 characterized under the laws of the source State. 　　Paragraph 4 provides that the provisions of paragraphs 1 and 2 of Article 10 shall not apply if the beneficial owner of the dividends, 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 there, or performs in that other State independent personal services from a fixed base situated there, and the dividends are attributable to such permanent establishment or fixed base. Paragraph 4 provides that, in such case, the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. 　　Paragraph 4 excludes dividends paid with respect to holdings that form part of the business property of a permanent establishment or fixed base from the general source country limitations. Such dividends will be taxed on a net basis using the rates and rules of taxation generally applicable to residents of the State in which the permanent establishment or fixed base is located, as modified by this article and Articles 7 (Business Profits) and 15 (Independent Personal Services). 　　Paragraph III of the Protocol elaborates on paragraph 4 of Article 10 by incorporating the principle of Code section 864(c)(6) into the Convention. 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 permanent establishment or fixed base no longer exists. 　　Paragraph 5 bars one Contracting State from imposing any tax on dividends paid by a company resident in the other Contracting State except insofar as such dividends are otherwise subject to net basis taxation in the first-mentioned Contracting State because such dividends arepaid to a resident of such first mentioned Contracting State or the holding in respect of which the dividends are paid forms part of the business property of a permanent establishment or fixed base situated in such first-mentioned State. 　　Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 3 of Article 1 of the Convention (General Scope) permits the United States to tax dividends received by its residents and citizens as if the Convention had not come into effect. ARTICLE 11 Interest 　　Article 11 provides rules for source and residence country taxation of interest. 　　Paragraph 1 grants to the residence State the right to tax interest derived and beneficially owned by its residents. 　　Paragraph 2 grants to the source State the right to tax the interest payment. However, if the beneficial owner of the interest is a resident of the other Contracting State, the amount of the tax is limited to: 　　(a) 10 percent of the gross amount of the interest that 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 percent of the gross amount of the interest in all other cases. The term "beneficial owner" is not defined in the Convention; it is, instead, defined by domestic law of the Contracting States. A nominee or agent which is a resident of a Contracting State may not claim the benefits of this Article if the interest is received on behalf of a person who is not a resident of that Contracting State. However, interest received by a nominee for the benefit of a resident would qualify for the benefits of this Article. 　　Paragraph 2 differs from the comparable provision in the U.S. Model, which provides that only the residence State may tax interest derived and beneficially owned by a resident of a Contracting State, unless the interest is attributable to a permanent establishment or fixed base of the beneficial owner in the other Contracting State. 　　Paragraph 3 provides exceptions from the rule of paragraph 2 that allows a source country to tax. The exceptions apply to interest that is included in any of three categories. The first category of interest that is exempt from tax in the source State is interest that is derived and beneficially owned by the Government of the other Contracting State, a political subdivision or local authority thereof, the Reserve Bank of India, or the Federal Reserve Banks 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). The second category of interest that is exempt from tax in the source State is interest with respect to loans or credits extended or endorsed by the Export-Import Bank of the United States when the interest arises in India and by the EXIM Bank of India when the interest arises in India. 　　The third category of interest that is exempt from tax in the source State is interest derived and beneficially owned by a resident of the other Contracting State other than a person referred to in the first or second category if the transaction giving rise to the debt-claim has been approved in this behalf by the Government of the source State. The Indian delegation explained that a lender may apply to the Government of India for approval of the tax exemption. This category of interest is exempt under the Indian tax statute. 　　Paragraph 4 defines the term "interest" as used in Article 11 to include, inter alia, income from debt claims of every kind, whether or not secured by a 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 are excluded from the definition of interest. Income dealt within Article 10 (Dividends) is also excluded from the definition of interest. Thus, for example, income from a debt obligation carrying the right to participate in profits is not covered by Article 11 to the extent characterized as a dividend under the laws of the Contracting State in which the income arises. The definition of interest in the Convention differs from the definition of interest in the U.S. Model only as to the exclusion of amounts characterized as dividends under Article 10. 　　Paragraph 5 limits the right of one Contracting State to impose a gross bas 5 tax on interest payments where the beneficial owner of the interest is a person that is a resident of the other Contracting State. A gross basis tax may not be imposed if 　　(1) the person carries on a business in the Contracting State in which the interest arises through a permanent establishment situated there or performs in the Contracting State in which the interest arises independent personal services from a fixed base situated here and 　　(2) the interest is 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. 　　Paragraph III of the Protocol elaborates on paragraph 5 by incorporating the principle of Code section 864(c)(6) into the Convention. Like the Code section on which it is based, Paragraph III of the Protocol provides that any annual 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 6 provides a source rule for interest. It provides that interest shall be deemed to arise in a Contracting State when the payer is that State itself or a political subdivision, local authority, or resident of that State. The exception to the general rule that interest is sourced in the State of the payer's residence is the case in which the payer of the interest carries on business through a permanent establishment in the other State or performs independent personal services from a fixed base situated in the other State and the interest is borne by such permanent establishment or fixed base. 　　Thus, under Article 11 the United States may tax interest that is paid by a U.S. trade or business of a foreign corporation in the United States and attributable to the corporation's permanent establishment in the United States. As U.S. source interest paid, the interest is subject to tax at the rate provided in paragraph 2 when the beneficial owner is a resident of India. The tax allowed under the Convention on the excess interest of a corporation resident in India is not considered interest paid. The tax on excess interest is described in and subject to limitations of Article 14 (Permanent Establishment Tax). 　　Paragraph 7 provides that, in the case of interest paid by a person with a special relationship to the beneficial owner of the interest, Article 11 applies only to interest payments that would have been made absent such special relationship (i.e., an arm's length interest payment). Any excess amount of interest 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 would be treated as a distribution of profits, such amount could be taxed as a dividend rather than as interest, but the tax would be subject to the rate limitations of paragraph 2 of Article 10 (Dividends). 　　Notwithstanding the limitations under Article 11 on source country taxation of interest,　the saving clause of paragraph 3 of Article 1 (General Scope) permits the United States to tax its residents and citizens as if the Convention had not come into force.