Article 1 provides that — U.S. Income Tax Treaty

the Republic of India ("India") except where the terms of the Convention provide otherwise. Under Article 4 (Residence) a person is treated as a resident of a Contracting State if that person is under the laws of that State liable to tax therein by reason of his domicile or other similar criteria, subject to certain limitations, as described in Article 4. If, however, a person is, under those criteria, a resident of both Contracting States, a single State of residence (or no state of residence) is assigned under Article 4. This definition governs for all provisions of the Convention. Certain provisions are applicable to persons who may not be residents of either Contracting State. For example, Article 19 (Remuneration and Pensions in Respect of Government Service) may apply to a citizen of a Contracting State who is resident in neither. Paragraph 1 of Article 26 (Nondiscrimination) applies to nationals of the Contracting States. Under Article 28 (Exchange of Information and Administrative Assistance), information may be exchanged with respect to residents of third states.

Paragraph 2 of Article 1 describes the relationship between the rules of the Convention, on the one hand, and the laws of the Contracting States and other agreements between the Contracting States, on the other. This paragraph makes explicit, on a reciprocal basis, the generally accepted principle that no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other allowance accorded by the tax laws of the Contracting States. Thus, for example, if a deduction would be allowed under the Internal Revenue Code ("the Code") in Computing the taxable income of a resident of India, the deduction will be available to that person in computing income under the treaty. In no event may the treaty increase the tax burden on residents of the Contracting States. Thus, a right to tax given by the treaty cannot be exercised by the United States unless that right also exists under the Code.

A taxpayer may always rely on the more favorable Code treatment. This does not mean, however, that a taxpayer may pick and choose between Code and treaty provisions in an inconsistent manner in order to minimize tax. For example, assume a resident of India has three separate businesses in the United States. One is a profitable permanent establishment and the other two are trades or businesses which would earn taxable income under the Code but which do not meet the permanent establishment threshold tests of the Convention. One is profitable and the other incurs a loss. Under the Convention the income of the permanent establishment is taxable, and both the profit and loss of the other two businesses are ignored. Under the Code, all three would be taxable. The loss would be offset against the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the profitable trade or business and invoke the Code to claim the loss of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84-17 I.R.B. 1984-1, 10.) If the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention with respect, for example, to any dividend income he may receive from the United States which is not effectively connected with any of his business activities in the United States.

Similarly, nothing in the Convention can be used to deny any benefit granted by any other agreement between the United States and India. For example, if certain benefits or protections, not found in the Convention, are afforded under a Treaty of Commerce, Friendship, and Navigation, or similar agreement, those benefits or protections will be available to residents of the Contracting States regardless of any provisions to the contrary (or silence) in the Convention.

Paragraphs 3 and 4 of Article 1 contain the traditional '"saving clause'" of the U.S. Model. Under paragraph 3, the United States and India reserve their right, except as provided in paragraph 4, to tax their residents and citizens as provided in their internal laws, notwithstanding any Convention provisions to the Contrary. If, for example, an Indian resident performs independent personal services in the United States, he is present in the United States for fever than 90 days in the taxable year and the income from the services is not attributable to a fixed base in the United States, Article 15 (Independent Personal Services) would normally prevent the United States from taxing the income. If, however, the Indian resident is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal rules. Residence, for the purpose of the saving clause, is determined under Article 4 (Residence). Thus, for example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of India under Indian law, and that individual has a permanent home available to him in India and not in the United States, he would be treated as a resident of India under Article 4 and this determination would apply for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty. Under paragraph 3 the Contracting States also reserve their right to tax former citizens whose loss of citizenship had as one of its principal purposes the avoidance of tax. In the United States, such a former citizen is taxable in accordance with the provisions of section 877 of the Code for 10 years following the loss of citizenship.

Paragraph 4 sets forth certain exceptions to the saving clause in cases where its application would contravene policies reflected in the treaties which are intended to extend a Contracting State's benefits to its citizens and residents. Paragraph 4(a) lists the provisions of the Convention which will be applicable to a Contracting State's citizens and residents despite the general saving clause rule of paragraph 3:

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment, and, particularly, permits the override of the statute of limitations for the purpose of refunding tax under such a correlative adjustment.

(2) Paragraphs 2 and 6 of Article 20 (Private Pensions, Annuities, Alimony and Child Support) deal with social security benefits and child support payments. Paragraph 2 of Article 20 provides for the taxation of social security benefits only in the State making the payment. Excepting this rule from the saving clause means that the United States may not apply the Code rules to tax its citizens or residents on Indian social security benefits. Paragraph 6 of Article 20 provides that child support payments by a resident of one Contracting State to a resident of the other may be taxed only by the State of residence of the payer. The inclusion of this paragraph in the exceptions to the saving clause means that a child support payment by an Indian resident to a U.S. resident or citizen will not be taxed by the United States.

(3) Article 25 (Relief from Double Taxation) confers the benefit of a foreign tax credit on the residents of a Contracting State. To apply the saving clause to this Article would render the Article meaningless.

(4) Article 26 (Nondiscrimination) prohibits discriminatory taxation by one Contracting State on the citizens and residents of the other. These prohibitions are intended to apply even if the citizen or resident is also a citizen or resident of the taxing State.

(5) Article 27 (Mutual Agreement Procedure) may confer a country's benefits on its citizens and residents by, for example, waiving the statute of limitations for refunds, or by permitting the competent authorities to use a definition of a term which differs from the internal law definition. These benefits are intended to be granted by a Contracting State to its citizens and residents.

Paragraph 4(b) provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted by a Contracting State to temporary residents, but not to permanent residents or, in the case of the United States, citizens. Viewed from the point of view of the United States as the host country, if beneficiaries of these provisions come to the United States from India and remain in the United States long enough to become residents under the Code, but do not acquire immigrant status (i.e., they do not become green card holders) and are not citizens of the United States, the United States will continue to grant these benefits even if they conflict with the Code rules. The benefits preserved by this paragraph are the following host country exemptions: Government service salaries and pensions under Article 19 (Remuneration and Pensions in Respect of Government Service); certain income of students and apprentices under Article 21 (Payments Received by Students and Apprentices); certain income of visiting professors, etc., under Article 22 (Payments Received by Professors, Teachers and Research Scholars); and the income of diplomatic and consular officers under Article 29 (Members of Diplomatic Missions and Consular Posts).