ARTICLE 24 　　　　　　　　　　　Limitation on Benefits 　　Article 24 ensures that source basis tax benefits granted by a Contracting State pursuant to the Convention are limited to the intended beneficiaries -- residents of the other Contracting State -- and are not extended indirectly to residents of third States not having a substantial business in, or business nexus with, the other Contracting State. For example, a resident of a third State might establish an entity resident in a Contracting State for the purpose of deriving income from the other Contracting State and claiming source State benefits with respect to that income. Absent Article 24, the entity would generally be entitled to benefits as a resident of a Contracting State, subject, however, to such limitations (e.g., business purpose, substance-overform, step transaction or conduit principles) as may be applicable to the transaction or arrangement under the domestic law of the source State. 　　Paragraph 1 provides a two-part test, the so-called ownership and base erosion tests, both of which must be met by a person (other than an individual) if that person is to be entitled to benefits under this paragraph. If a person fails to qualify under this paragraph, benefits may still be granted if the person qualifies under the provisions of paragraphs 2 through 4. Under the tests of paragraph 1, benefits will be granted to a resident of a Contracting State, such as a corporation, partnership or trust, if both 　　(1) more than 50 percent of the beneficial interest in the person (or in the case of a corporation, more than 50 percent of each class of its shares) is owned, directly or indirectly, by individuals who are subject to tax in one of the Contracting States on worldwide income, or by one of the Contracting States, its political subdivisions or local authorities, and (2) the person's income is not used in substantial part, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) in the form of deductible payments to persons, other than persons who are residents of a Contracting State, U.S. citizens, or a Contracting State, political subdivision or local authority. 　　The first test would be satisfied if a corporation claiming benefits is owned by another corporation which itself is owned (either directly or through additional tiers) by individual residents of a Contracting State, or other qualified owners under subparagraph 1(a). The term "substantial" is not defined. Deductible payments which are less than 50 percent of the relevant income, however, will generally not be considered substantial, although in appropriate circumstances a lower percentage of income will be considered substantial. It is understood that the term "income", as used in subparagraph (b) is to be interpreted as "gross income" under U.S. law, as determined without regard to the residence of the income recipient. Thus, in general, the tern should be understood to mean gross receipts less cost of goods sold. 　　The rationale for this two-part test is that since treaty benefits can be indirectly enjoyed not only by equity holders of an entity, but also by that entity's various classes of obligees, such as lenders, licensors, service providers, insurers and reinsurers, and others, it is not enough, in order to prevent such benefits from inuring substantially to third-country residents, merely to require substantial ownership of the entity by treaty country residents or their equivalent. It is also necessary to require that the entity's deductible payments be made in substantial part to such treaty country residents or their equivalents. For example, a third-country resident could lend funds to an Indian-owned Indian corporation to be reloaned to the United States. The U.S. source interest income of the Indian corporation would be subject to reduced U.S. withholding tax under Article 11 (Interest) of the Convention. While the Indian corporation would be subject to Indian corporation income tax, its taxable income could be reduced to near zero by the deductible interest paid to the third-country resident. If, under a Convention between India and the third country, that interest is subject to reduced Indian tax, a substantial portion of the U.S. treaty benefit with respect to the U.S. source interest income will have flowed to the third-country resident. 　　Under paragraph 1, individuals who are residents of a Contracting State are, without further testing, entitled to benefits. It is most unlikely that an individual would be used to derive treaty-benefited income, as the beneficial owner of the income, on behalf of a third-country person. If an individual is receiving income as a nominee on behalf of a third-country resident, benefits will be denied with respect to those items of income under the articles of the Convention which grant the benefit, because of the requirements in those articles that the beneficial owner of the income be a resident of a Contracting State. 　　Paragraph 2 provides a test for eligibility for benefits which looks not solely at objective characteristics of the person deriving the income, but at the nature of the activity engaged in by that person and the connection between the income and that activity. Under the paragraph, a resident of a Contracting State deriving income from the other Contracting State is entitled to benefits, regardless of the income recipient's ownership, if the recipient is engaged in an active trade or business in its State of residence, and the item of income in question is derived in connection with, or is incidental to, that trade or business. The U.S. tax authorities can be expected to interpret this provision with some flexibility. Thus, for example, if an Indian parent corporation derives income from a U.S. subsidiary, and the income is derived in connection with activities in India carried on by an Indian subsidiary of the parent, the business connection would be deemed to be present. Income which is derived in connection with, or is incidental to, the business of making or managing investments will not qualify for benefits under this provision, unless the business is a bank or insurance company engaged in banking or insurance activities. 　　In general, it is expected that if a person qualifies for benefits under paragraphs 1 or 3, no inquiry will be made into whether the person qualifies for benefits under paragraph 2. If any of the other tests of Article 24 are satisfied, all items of income derived by the beneficial owner from the other Contracting State are entitled to treaty benefits. Under paragraph 2, however, the test is applied separately for each item of income. 　　It is intended that the provisions of paragraph 2 will be self-executing. Unlike the provisions of paragraph 4, discussed below, claiming benefits under this paragraph does not require advance competent authority ruling or approval. The tax authorities may, of course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. 　　Under paragraph 3, a corporation which is a resident of a Contracting State is entitled to treaty benefits from the other Contracting State if there is substantial and regular trading in the corporation's principal class of shares on-a recognized stock exchange. Benefits are granted to such a corporation whether or not the ownership and base erosion tests of paragraph 1, or the business connection tests of paragraph 2, are met. The term recognized stock exchange" is defined in paragraph 3 of the Article to mean, in the United States, the NASDAQ System and any stock exchange which is registered as a national securities exchange with the Securities and Exchange Commission, and, in India, any stock exchange which is recognized by the Central Government under the Securities Contracts Regulation Act, 1956. The competent authorities may, by mutual agreement, recognize additional exchanges for purposes of paragraph 3. 　Paragraph 4 provides that a resident of a Contracting State that derives income from the other Contracting State and is not entitled to the benefits of the Convention under other provisions of the Article may, nevertheless, be granted benefits at the discretion of the competent authority of the Contracting State in which the income arises. 　　The paragraph itself provides no guidance to competent authorities or taxpayers as to how the discretionary authority is to be exercised. It is understood, however, that in making determinations under paragraph 2, the competent authorities will take into account all relevant facts and circumstances. The factual criteria which the competent authorities are expected to take into account include the existence of a clear business purpose for the structure and location of the income earning entity in question; the conduct of an active trade or business (as opposed to a mere investment activity) by such entity; and a valid business nexus between that entity and the activity giving rise to the income. 　　It is assumed that, for purposes of implementing paragraph 2, a taxpayer will be permitted to present his case to the source State's competent authority for an advance determination based on the facts, and will not be required to wait until the tax authorities of one of the Contracting States have determined that benefits are denied. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever is later, provided that the taxpayer is otherwise entitled to claim such retroactive benefits. ARTICLE 25 Relief from Double Taxation 　　This Article describes the manner in which each Contracting States undertakes to relieve double taxation. Both countries use the foreign tax credit method. 　　In paragraph 1, the United States agrees to allow to its citizens and residents a credit against U.S. tax for Income taxes paid or accrued to India. The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of U.S. law, as that law may be amended over time, so long as the general principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the time a credit is given, of the U.S. statutory credit. 　　Paragraph 1 also provides for a deemed-paid credit, consistent with section 902 of the Code, to a U.S. corporation in respect of dividends received from an Indian corporation in which the U.S. corporation owns at least 10 percent of the voting shares. This credit is for the tax paid by the Indian corporation on the earnings out of which the dividends are considered paid. 　　The paragraph makes clear that all of the Indian taxes specified in Article 2 (Taxes Covered) as Indian covered taxes (including those taxes enacted subsequent to signature which become covered under paragraph 2 of Article 2 by virtue of being identical or substantially similar to covered taxes) are to be considered as income taxes for purposes of the U.S. foreign tax credit under the Convention. It is not U.S. policy to allow credit by treaty for taxes which are not creditable under the Code, and it was the understanding of the negotiators that all of these Indian taxes would be creditable taxes under the Code as well. 　　As indicated, the U.S. credit under the Convention is subject to the limitations of U.S. law, which generally limit the credit against U.S. tax to the amount of U.S. tax due with respect to net foreign source income within the relevant foreign tax credit limitation category (see Code section 904(a)). Nothing in the Convention prevents the limitation of the U.S. credit from being applied on a per-country or overall basis or on some variation thereof. 　　Paragraph 2 of the Article specifies the rules by which India, in imposing tax on its residents, provides a credit for U.S. taxes. It provides that India will allow a credit against Indian income tax for U.S. income taxes paid, whether by assessment or withholding at source, up to the amount of the Indian tax on the income in respect of which U.S. tax has been paid. It further provides that where the Indian resident claiming the credit is a corporation subject to surtax, the credit is to be claimed first against the income tax and only the excess can be claimed against the surtax. 　　Paragraph 3 provides rules for determining the source of income for purposes of the treaty foreign tax credit. The general rule is 　　(1) that income of a resident of a Contracting State is deemed to arise in the other Contracting State, if that other State is given the right to tax that income by the Convention, so long as that taxing right is not solely on the basis of citizenship in accordance with the saving clause of paragraph 3 of Article 1 (General Scope); and 　　(2) if a resident of a Contracting State derives income which, in accordance with the Convention, may not be taxed in the other State, the income is deemed, for purposes of the credit, to be sourced in the first-mentioned Contracting State. 　　If, however, the rules in the laws of a Contracting State for the determination of source of income for foreign tax credit purposes differ from the general rule stated above, the statutory rule will apply. This granting of precedence of statutory source rules over the treaty source rule, however, does not apply to determining the source for credit purposes of royalties and fees for included services dealt within Article 12 (Royalties and Fees for Included Services). The source of such income is determined by the general rule stated above, that income of a resident of a Contracting State is sourced in the other Contracting State if it may be taxed in that other State. Thus, such income which may be taxed by India under the provisions of Article 12, is to be treated as from Indian sources for U.S. foreign tax credit purposes even if the activities giving rise to the income take place in the United States or elsewhere outside of India. 　　The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this Article. Thus, the United States must grant the benefits of this Article to its citizens and residents, notwithstanding any less beneficial Code provisions to the contrary. ARTICLE 26 Nondiscrimination 　　This Article ensures that nationals of a Contracting State, in the case of paragraph 1, and residents of a Contracting State, in the case of paragraphs 2 through 4, will not be subject to discriminatory taxation in the other Contracting State. For this purpose, nondiscrimination means providing national treatment. 　　Paragraph 1 provides that a national of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State which are different from, or more burdensome than, the taxes and connected requirements imposed upon a national of that other State in the same circumstances. A national of a Contracting State is afforded protection under this paragraph even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph to the same treatment in India as an Indian national who is in similar circumstances. The term "national" is defined in subparagraph l (i) of Article 3 (General Definitions) as an individual possessing the nationality or citizenship of a Contracting State. 　　Paragraph 1 does not obligate the United States to apply the same taxing regime to an Indian national who is not resident in the United States and a U.S. national who is not resident in the United States. The reason for this is that paragraph 1 of the Article applies only when the nationals of the two Contracting States are in the same circumstances. United States citizens who are not residents of the United States but who are, nevertheless, subject to United States tax on their worldwide income are not in the same circumstances with respect to United States taxation as citizens of India who are not United States residents. Thus, for example, Article 26 would not entitle an Indian national not resident in the United States to the net basis taxation of U.S. source dividends or other investment income which applies to a U.S. citizen not resident in the United States. 　　Paragraph 2 of the Article provides that a permanent establishment in a Contracting State of an enterprise of the other Contracting State may not be less favorably taxed in the firstmentioned Contracting State than an enterprise of the first-mentioned Contracting State which is carrying on the same activities. This provision, however, does not obligate a Contracting State to grant to a resident of the other Contracting State any tax allowances, reliefs, etc., which it grants to its own residents on account of their civil status or family responsibilities. Thus, if an individual resident in India owns an Indian enterprise which has a permanent establishment in the United States, in assessing income tax on the profits attributable to the permanent establishment, the United States is not obligated to allow to the Indian resident the personal exemptions for himself and his family which would be allowed if the permanent establishment were a sole proprietorship owned and operated by a U.S. resident. Paragraph 2 does not afford protection with respect to the provisions of paragraph 3 of Article 7 (Business Profits). (For a discussion of the meaning of this exception, see the explanation, below, of paragraph 5 of this Article. See the explanation of paragraph 5 also for a discussion of the relationship between paragraph 2 and the imposition of the branch tax.) 　　Section 1446 of the Code imposes on any partnership with income which is effectively connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a foreign partner. In the context of the Convention, this obligation applies with respect to an Indian resident partner's share of the partnership income attributable to a U.S. permanent establishment.There is no similar obligation with respect to the distributive shares of U.S. resident partners. It is understood, however, that this distinction is not a form of discrimination within the meaning of paragraph 2 of the Article. No distinction is made between U.S. and Indian partnerships, since the law requires that partnerships of both domiciles withhold tax in respect of the partnership shares of non-U.S. partners. In distinguishing between U.S. and Indian partners, the requirement to withhold on the Indian but not the U.S. partner's share is not discriminatory taxation, but, like other withholding on nonresident aliens, is merely a reasonable method for the collection of tax from persons who are not continually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax jurisdiction. If tax has been overwithheld, the partner can, as in other cases of over-withholding, file for a refund. 　　Paragraph 3 prohibits discrimination in the allowance of deductions. When an enterprise of a contracting State pays interest, royalties or other disbursements to a resident of the other contracting State, the first-mentioned contracting State must allow a deduction for those payments in computing the 'taxable profits of the enterprise under the same conditions as if the payment had been made to a resident of the first-mentioned Contracting State. An exception to this rule is provided for cases where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest) or paragraph 8 of Article 12 (Royalties and Fees for Included Services( apply, because all of these provisions permit the denial of deductions in certain circumstances in respect of transactions between related persons. The term other disbursements is understood to include a reasonable allocation of executive and general administrative expenses, research and development expenses and other expenses incurred for the benefit of a group of related persons which includes the person incurring the expense. 　　Paragraph 4 requires that a Contracting State not impose other or more burdensome taxation or connected requirements on an enterprise of that State which is wholly or pertly owned or controlled, directly or indirectly, by one or more residents of the other contracting State, than the taxation or connected requirements which it imposes on other similar enterprise of that first-mentioned contracting State. 　　The 'Tax Reform Act of 1984 ("TRA") introduced section 367(e)(2) of the code which changed the rules for taxing corporations on distributions they make in liquidation. Under prior law, corporations were not taxed on distributions of appreciated property in complete liquidation, although non-liquidating distributions of the same property, with several exceptions, resulted in corporate-level tax. In part to eliminate this disparity, the law now generally taxes corporations on the liquidating distribution of appreciated property. The code provides an exception in the case of distributions by 80 percent or more controlled subsidiaries to their parent corporations, on the theory that the built-in gain in the asset will be recognized when the parent sells or distributes the asset. This exception does not apply to distributions to parent corporations which are tax-exempt organizations or, except to the extent provided in regulations, foreign corporations. It is understood that the inapplicability of the exception to the tax on distributions to foreign parent corporations does not conflict with paragraph 4 of the Article. While a liquidating distribution to a U.S. parent will not be taxed. and, except to the extent provided in regulations, a liquidating distribution to a foreign parent will, paragraph 4 merely prohibits discrimination among corporate taxpayers on the basis of U.S. or foreign stock ownership. Eligibility for the exception to the tax on liquidating distributions for distributions to nonexempt, U.S. corporate parents is not based upon the nationality of the owners of the distributing corporation, but rather is based upon whether such owners would be subject to corporate tax If they subsequently sold or distributed the same property. Thus, the exception does not apply to distributions to persons which would not be so subject -- not only foreign corporations, but also tax-exempt organizations and individuals. The policy of the legislation is to collect one corporate-level tax on the liquidating distribution of appreciated property; if and only if that tax can be collected on a subsequent sale or distribution does the legislation defer the tax. 　　For the reasons given above in connection with the discussion of paragraph 2 of the Article, it is also understood that the provision in section 1446 of the code for withholding of tax on non-U.S. partners does not violate paragraph 4 of the Article. 　　It is further understood that the ineligibility of a U.S. corporation with nonresident alien shareholders to make an election to be an "S" corporation does not violate paragraph 4 of the Article. If a corporation elects to be an S corporation (requiring 35 or fewer shareholders), it is generally not subject to income tax and the shareholders take into account their pro rate shares of the corporation's items of income, loss, deduction or credit. (The purpose of the provision is to allow an individual or small group of individuals to conduct business in corporate form while paying taxes at individual rates as if the business were conducted directly.) A nonresident alien does not pay U.S. tax on a net basis, and, thus, does not generally take into account items of loss, deduction or credit. Thus, the S corporation provisions do not exclude corporations with nonresident alien shareholders because such shareholders are foreign, but only because they are not net basis taxpayers. The provisions also exclude corporations with other types of shareholders where the purpose of the provisions cannot be fulfilled or their mechanics implemented. For example, corporations with corporate shareholders are excluded because the purpose of the provisions to permit individuals to conduct a business in corporate form at individual tax rates would not be furthered by their inclusion. 　　Paragraph 5 of the Article specifies that no provision of the Article will prevent either contracting State from imposing the tax described in Article 14 (Permanent Establishment Tax) or from applying the limitations described in paragraph 3 of Article 7 (Business Profits). Thus, even if the U.S. branch tax or the Indian extra tax were judged to violate the provisions of paragraphs 2 or 3 of the Article, neither Contracting State would be constrained from imposing the respective tax. Similarly, nothing in Article 26 shall be deemed to prevent India from applying its internal law limitations referred to in paragraph 3 of Article 7 on the amount of head office expenses that can be deducted by the Indian permanent establishment of a U.S. enterprise. As indicated in the explanation of Article 7, the internal law limitation referred to in Article 7 cannot be any less generous than that allowable under the Indian Income Tax Act as of September 12, 1989, the date of signature of the Convention. 　　Unlike the U.S. Model, the nondiscrimination article of the Convention applies only to the taxes covered as specified in Article 2 (Taxes Covered), and does not extend to all taxes at all levels of government. The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this Article, by virtue of the exceptions in subparagraph (a) of paragraph 4. Thus, for example, a U.S. citizen who is resident in India may claim benefits in the United States under this Article.