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.