percent, and interest received by either of the two Governments, by certain governmental financial
institutions, and by residents of a Contracting State on certain Government approved loans, is exempt
from tax at source.
The royalty provisions contain several significant departures from standard United States tax treaty
policy. In general, industrial and copyright royalties are taxable at source at a maximum rate of 20
percent for the first five years, dropping to 15 percent thereafter. Where the payor of the royalty is one
of the Governments, a political subdivision or a public sector corporation, tax will be imposed from the
date of entry into force of the treaty at a maximum rate of 15 percent. Payments for the use of, or the
right to use, industrial, commercial or scientific equipment are treated as royalties, rather than as
business profits, and are subject to a maximum rate of tax at source of 10 percent. The most significant
departure from past policy in the royalty article is the fact that certain service fees, referred to in the
Convention as "fees for included services", are treated in the same manner as royalties, and not, as
would normally be the case, as business profits. Included services are defined as technical consultancy
services which either: (i) are ancillary and subsidiary to the licensing of an intangible or the rental of
tangible personal property, both of which give rise to royalty payments, or, (ii) if not ancillary or
subsidiary, make available to the payor of the service fee some technical knowledge, experience, skill,
etc., or transfer to that person a technical plan or design. A detailed memorandum of understanding was
developed by the negotiators to provide guidance as to the intended scope of the concept of “included
services” and the effect of the memorandum is agreed to in an exchange of notes. These are included for
information only. Fees for all other services are treated either as business profits or as independent
personal services income. Although not reflected in the convention, under Indian law, certain service
fees related to defense contracts are exempt from Indian tax..
The Convention preserves for the United States the right to impose the branch profits tax. It
preserves for both Contracting States their statutory taxing rights with respect to capital gains.
The Convention also contains rules for the taxation of business profits which, consistent with other
United States tax treaties with developing countries, provide a broader range of circumstances under
which one partner may tax the business profits of a resident of the other. The Convention defines
permanent establishment to include a construction site or a drilling rig where the site or activity continues
for a period of 120 days in a year. This compares with a twelve month threshold under the United
States Model, and six months under the typical developing country tax treaty. In addition, the
Convention contains reciprocal exemption at source for shipping and aircraft operating income, including
income from the incidental leasing of ships, aircraft or containers (i.e., where the lessor is an operator of
ships and aircraft). The Convention differs from the United States Model in that income from the non-
incidental leasing of ships, aircraft or containers (i.e., where the lessor is not an operator of ships or
aircraft) is not covered by the article. Income from such non-incidental leasing is treated as a royalty,
taxable at source at a maximum rate of 10 percent.
The treatment under the Convention of various classes of personal service income is similar to that
under the United States tax treaties with developing countries.