ARTICLE 12 Royalties and Fees for Included Services 　　Article 12 provides rules for source and residence country taxation of royalties and fees for included services. 　　Paragraph 1 grants to the residence State the right to tax royalties and fees for included services paid to its residents. 　　Paragraph 2 also grants to the source State the right to tax royalties and fees for included services according to its laws. However, if the beneficial owner of the royalties or fees or included services is a resident of the other Contracting State, the source State shall not impose a tax that exceeds certain limitations. Different limitations apply to payments of royalties and service fees depending the category to which the payments belong. 　　The first category of royalties and service fees consists of royalties defined in subparagraph (a) of paragraph 3 and fees for included services defined in paragraph 4, other than fees described in subparagraph (b) of paragraph 2. Subparagraph (a) of paragraph 2 limits the source State's right to tax such payments as follows. During the first five taxable years for which the Convention has effect, the source State's tax on the first category of royalties and fees may not exceed 15 percent of the gross amount of such royalties and fees if the payer of the royalties or fees is the Government, or a political subdivision or a public sector company, of a Contracting State. Otherwise the source State's tax is limited to 20 percent of the gross amount of such royalties or fees. During subsequent years, the source State's tax on the first category of royalties and fees may not exceed 15 percent. 　　The second category of royalties and service fees consists of royalties defined in subparagraph (b) of paragraph 3 (generally relating to payments for the use of, or the right to use, any industrial, commercial, or scientific equipment) and those fees for included services defined in paragraph 4 which are ancillary and subsidiary to the enjoyment of the property described in paragraph 3(b). Subparagraph (b) of paragraph 2 limits the source State's right to tax such payments to 10 percent of the gross amount during all years for which the Convention has effect. 　　Subparagraph (a) of paragraph 3 defines the term "royalties" as used in Article 12 to mean 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 cinematographic films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience. The term "information concerning industrial, commercial, or scientific experience" alludes to the concept of know-how and means information that is not publicly available and that cannot be known from mere examination of a product and mere knowledge of the progress of technique. As provided in the Commentaries on the Articles of the OECD Model Convention (paragraph 12 of the Art. 12 Comm.): "In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public". 　　The royalty definition under subparagraph (a) of paragraph 3 also applies to gains from the alienation of a right or property of the type described in that subparagraph only if the proceeds are contingent on the productivity, use, or further alienation thereof. Thus, a noncontingent payment for all rights to property described in subparagraph (a) is not a royalty. 　　The royalty definition in subparagraph (a) of paragraph 3 of the Convention differs from the comparable provision in the U.S. Model in two respects. First, the Convention's royalty definition includes payments received in connection with the use or right to use cinematographic films or films or tapes used for radio or television broadcasting. Such payments are excluded from the royalty definition in the U.S. Model. Second, the Convention's royalty definition does not include "other like right or property" at the end of its listing of the types of rights for which a use payment is considered to be a royalty. 　　Subparagraph (b) of paragraph 3 includes within the definition of royalties 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. The exclusion under Article 8 relates 　　(1) to income of an enterprise engaged in the operation of ships or aircraft in international traffic to the extent the income is from the operation by that enterprise of ships or aircraft in international traffic or to the extent the income is incidental to such an activity and 　　(2) to profits of an enterprise engaged in the operation of ships or aircraft in international traffic from the use, maintenance, or rental of containers and container equipment in connection with the operation of ships or aircraft in international traffic. 　　Paragraph 4 of Article 12 defines fees for included services to mean 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 either 　　(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. 　　Paragraph 5 of Article 12 excludes from the definition of included services any amount described in any of the following categories: 　　(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 payment; 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). 　　Thus, the relationship between Article 12 and Article 15 (Independent Personal Services) is clear. A payment to an individual or firm of individuals, such as a partnership, for professional services is not subject to tax under Article 12. 　　With respect to service fees that are described in paragraph 4 and not excluded under paragraph 5 ("included services"), Article 12 permits the source State to impose tax in an amount not to exceed the rate of tax on the gross amount under paragraph 2, if the fees are not attributable to a permanent establishment or fixed base in the other State. All services attributable to a permanent establishment or a fixed base (whether or not falling within the defined category of "included services") and all services other than those within the defined category of included services" are considered to be business profits, which are taxable in the source State only to the extent provided in Article 7 (Business Profits). The treatment of service fees provided under Article 12 is a departure from the domestic law of both Contracting States. Under Indian statutory law, a broad range of service fees (fees for technical, managerial or consultancy services performed anywhere) is subject to a 30 percent gross basis tax. Under U.S. statutory law, fees for services performed inside the United States are subject to tax on a net basis if effectively connected with a U.S. trade or business of a nonresident alien or foreign corporation or on a gross basis (30 percent) only if not effectively connected. Paragraph IV of the Protocol (Ad Article 12) clarifies that, where fees for included services may be taxed by the United States under Article 12 but are subject to net basis taxation under internal U.S. law, the level of that net basis taxation (or, where applicable, the sum of that net basis tax and the amount of the tax allowable under paragraph 1 of Article 14 (Permanent Establishment Tax) with respect to those fees) shall not exceed the gross basis tax limitations imposed by paragraph 2 of Article 12. The term "fees for included services" is new under the Convention and is defined in the Convention rather than in the domestic law of either Contracting State. 　　As explained in the Diplomatic Note Relating to the Memorandum of Understanding on Article 12, a memorandum of understanding was developed by the negotiators indicating how the provisions of the Article relating to the scope of "included services" are to be understood both by the competent authorities and by taxpayers in the Contracting States. As further explained in the Diplomatic Note, this memorandum of understanding represents the views of the Governments of both Contracting States when the Convention was signed. Both Governments anticipated that, as the competent authorities and taxpayers gain more experience with the concept of fees for included services, further guidance would be developed and made public. 　　The memorandum of understanding 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 ease of understanding, the examples in the Memorandum describe U.S. persons providing services to Indian persons, but the rules of Article 12 are reciprocal in application. 　　The memorandum of understanding first defines the terms "technical services" and "consultancy services", which are the only types of services that are considered "included services" if they are described in subparagraph (a) or (b) of paragraph 4 and are not excluded under paragraph 5. A technical service means a service requiring expertise in a technology. A consultancy service means an advisory service. These two categories 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. 　　The memorandum of understanding next explains the conditions, either of which must exist before a service can be considered described in paragraph 4. 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 a 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) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property1 or information for which a payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes 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 license or sale as described in paragraph 3(a), rather than as a royalty payment6 and the tax imposed on the dividend payment would be subject to the rate limitations of paragraph 2 of Article 10 (Dividends). 　　Notwithstanding the foregoing limitations on source country taxation of royalties, paragraph 3 of Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. 　　　　　　　　　　　　　　ARTICLE 13 　　　　　　　　　　　　　　　Gains 　　Article 13 provides that, except as provided in Article 8 (Shipping and Air Transport), each Contracting State may tax capital gains in accordance with the provisions of its domestic law. 　　The sole exception to the general rule relates to the taxation of gains of an enterprise operated by a resident of a Contracting State where the gains are derived from the alienation of ships, aircraft, or containers owned and operated by the enterprise, the income from which is taxable only in that State (i.e., income from the operation of such ships, aircraft, or containers in international traffic). Such gains shall be taxable only in the Contracting State in which the profits of the enterprise deriving such income are taxable according to Article 8. Article 8 exempts such income from source country taxation. 　　There is nothing in this article that precludes the imposition of any tax in force under U.S. domestic law or enacted in the future except the exemption of gains described in Article 8. Thus, for example, the United States preserves its right to impose the tax under section 897 of the Code on gains derived by foreign persons from the disposition of United States real property interests, the tax under section 871(a)(2) on capital gains of aliens present in the United States 183 days or more, the tax under section 872 or 882 on capital gain of a nonresident alien or foreign corporation that is effectively connected 'with the conduct of a U.S. trade or business, the withholding tax on a foreign partner's allocable portion of effectively connected taxable income consisting of gain. 　　Notwithstanding the foregoing limitations on source country taxation of certain gains, paragraph 3 of Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. ARTICLE 14 Permanent Establishment Tax 　　Article 14 provides for the imposition by the Contracting States of a permanent establishment or branch tax. Paragraph 1 of Article 14 confirms the right of the United States to impose a tax on the deemed distribution of certain profits of an Indian resident corporation with a U.S. trade or business and on the excess interest of such a corporation. Paragraphs 2 and 3, 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 payment 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 the 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 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). 　　The memorandum of understanding presented two examples of the application of paragraph 4(a). The first example illustrates services that are "included services Example (1) Facts: 　　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 payments 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 a 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 is 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 fees for included services under paragraph 4(a) of Article 12, regardless of whether the services are described in paragraph 4(b). Example 1 illustrates the application of paragraph 4(a) using services that are not also described in paragraph 4(b). These services are not described in section 4(b) because they do not make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The services described in Example 1 are limited to the provision of procurement and marketing information. 　　The second example illustrates services which are not "included services". 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 into 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 know 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). 　　Example 2 illustrates the treatment of a service that could be considered technical in nature but that is not described in paragraph 4(b) because it does not make available (as described below) to the purchaser technical knowledge or a technical plan, design or process. Because the service described in Example 2 is not "included services" within the meaning of example 4(a) or (b), it is not subject to tax under Article 12. The service is, therefore, taxable in India only to the extent provided under Article 7 (Business Profits) or Article 15 (Independent Personal Services). 　　Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. The memorandum of understanding explains that, for this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. The category described in paragraph 4(b) 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. 　　The memorandum of understanding states that generally 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. 　　As described in the memorandum of understanding, typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b), include: 　　1. engineering services (including the subcategories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering); 　　2. architectural services; and 　　3. computer software development. 　　As explained in the memorandum of understanding, technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, 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 memorandum of understanding provides examples (Examples 3 - 12) in order to 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. Arc 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, skills, etc., are made available to the Indian company, nor is there any development and transfer of a technical plan or design. The U.S. company is merely performing a contract manufacturing service.