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DTAA between India and USA

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June 16, 2022

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14 mins read

DTAA between India and USA

The Double Taxation Avoidance Agreement DTAA between India and USA has been entered for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income .

This DTAA between India and USA shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.

This DTAA between India and USA shall also contain Memorandum of understanding concerning fee for included services in Article 12 .

Thus, it contains commentary and numerous examples on Fee for Technical Services or Included services which is really helpful for interpreting clauses of Fee for Technical services.

This DTAA between India and USA contains following articles :

Article 1 – GENERAL SCOPE

Article 2 – TAXES COVERED

Article 3 – GENERAL DEFINITIONS

Article 4 – RESIDENCE

Article 5 – PERMANENT ESTABLISHMENT

Article 6 – INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)

International Taxation Services

Article 7 – BUSINESS PROFITS

Article 8 – SHIPPING AND AIR TRANSPORT

Article 9 – ASSOCIATED ENTERPRISES

Article 10 – DIVIDENDS

Article 11 – INTEREST

Article 12 – ROYALTIES AND FEES FOR INCLUDED SERVICES

Article 13 – GAINS

Article 14 – PERMANENT ESTABLISHMENT TAX

Article 15 – INDEPENDENT PERSONAL SERVICES

Article 16 – DEPENDENT PERSONAL SERVICES

Article 17 – DIRECTORS’ FEES

Article 18 – INCOME EARNED BY ENTERTAINERS AND ATHLETES

Article 19 – REMUNERATION AND PENSIONS IN RESPECT OF GOVERNMENT SERVICE

Article 20 – PRIVATE PENSIONS, ANNUITIES, ALIMONY AND CHILD SUPPORT

Article 21 – PAYMENTS RECEIVED BY STUDENTS AND APPRENTICES

Article 22 – PAYMENTS RECEIVED BY PROFESSORS, TEACHERS AND RESEARCH SCHOLARS

Article 23 – OTHER INCOME

Article 24 – LIMITATION ON BENEFITS

Article 25 – RELIEF FROM DOUBLE TAXATION

Article 26 – NON-DISCRIMINATION

Article 27 – MUTUAL AGREEMENT PROCEDURE

Article 28 – EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE

Article 29 – DIPLOMATIC AGENTS AND CONSULAR OFFICERS

Article 30 – ENTRY INTO FORCE

Article 31 – TERMINATION

Article 1 of the DTAA between India and USA – Applicability

Article 1 , Paragraph 1 , of the DTAA between India and USA , deals with the General Scope of the DTAA . This Article provides that the DTAA shall apply to the following persons : –

  • Persons who are residents of India ;
  • Persons who are residents of USA ;
  • Persons who are residents of both India and USA .

The term person generally covers  an individual or an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity having income in both India and the USA.

Paragraph 2 of Article 1 provides that any of the following benefits available to person covered under the DTAA, by the laws of either India or  USA, cannot be denied by the application of the DTAA : –

  • Exclusion from taxable income ;
  • Exemption of taxable income ;
  • Deduction of expenditure or any allowance

Article 2  of the DTAA between India and USA –  Taxes covered

The  Taxes covered under   India  USA DTAA, for which benefit can be claimed include the following

  • In India , benefit can be claimed for Indian income-tax, including any surcharge thereon
  • In United States,   Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social security taxes

However,  any payment for any default in respect of the income tax, or any penalty paid relating to the taxes shall not be allowed as a deduction.

International Taxation Services

Article 3  of the DTAA between India and USA –   General Definitions

Article 3  General Definitions, defines certain terms for the purpose of the DTAA between India and USA. It further provides that any term which is not defined in the DTAA, shall have the meaning ascribed to it under the local laws of the country, which is applying the tax laws.

Article 4  of the DTAA between India and USA –   Residence

The benefit of the DTAA between India and USA, is available only to person who qualify as a resident of  either India or USA . Therefore,   it is important to determine the residential status of the taxpayer, else the benefit of the tax treaty will not be available .

As per India – US DTAA,  a person shall be considered as a resident of contracting state , if he is  liable to tax in either India or USA, by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.

In certain cases, the application of the above rule, can result in a person, becoming a resident of more than one country. in such a case, that tie breaker rule has to be applied , to ascertain the country of which a person is a resident .

In the case of an individual, who becomes a tax resident of both countries ,  the following  steps will be  followed –

  • An individual would be considered as a resident of a state, if he has a permanent home available therein.
  • If the permanent home is available in both of the contracting states, then he would be considered to be a resident of the state in which he has closer economic and personal relations
  • If the taxpayer does not have a permanent home in either of the states, then he would be resident of a state where he has a habitual abode. If he has a habitual abode in both of the states then he will be a resident of a state of which he is a national.
  • If the taxpayer is a national of both of the states or neither of them, then the residency will be decided by mutual agreement.

In the case of an company, who becomes a tax resident of both countries ,  the  Company shall be outside the scope of the tax treaty , except for the purpose of prescribed  Article

In the case a person other than an individual or a company,  becomes a tax resident of both countries the  Competent Authorities    of both the countries shall settle this question by mutual agreement.

Article 5  of the DTAA between India and USA –   Permanent Establishment

The taxation of business profit derived by a foreign enterprise, from business operation in the state of source, are generally taxable only when the foreign enterprise has a Permanent Establishment in the state of source. Article 5 provides  various situations, under which a foreign enterprise can have a PE in the State of Source . This could be in the form of an office, place of management, agent or otherwise. The illustrative condition under which an enterprise may have a permanent establishment in source country are provided in Article 5. The various type of PE which can arise, under the India USA treaty are as under : –

  • Fixed place PE – This Article provides the rule for Fixed Place PE, also called the Basic Rule of PE. A PE would exist where : –
    • Foreign enterprise has a business ;
    • Foreign enterprise has a fixed place of business in other Contracting State, which is at its disposal ;
    • Such place of business is the one through which the business of the enterprise is carried on ;
    • Business of the enterprise could be carried on wholly or partly through such place;

Article 5(2) provides , certain specific inclusions which create a PE through which an enterprise may be carrying on business in Source State .

  • Article 5(3)   of the Treaty provides cases, where certain activities, even when done through a fixed place of business in the source state  do not constitute a permanent establishment because they are a preparatory or auxiliary character .
  • Article 5(4) of the Treaty provides  for the case of a dependent agent, who is acting in the source state on behalf of  a Foreign entperise. Generally, the authority to conclude contract on behalf of the nonresident, as well as maintaining stock of goods in the source state , from which goods are regularly delivered, would result in a person being a dependent agent of the non resident and thereby constituting a Permanent Establishment .
  • Article 5(5) of the Treaty provides  for the case of an independent agent. an independent agent does not constitute a permanent establishment for the foreign enterprise, and is excluded from the applicability of Article 5(4) .     generally, a broker, a general Commission agent or any  other agent of an independent status would  be covered within the meaning of this clause and therefore will not constitute a permanent establishment.
  • Article 5(6) of the Treaty provides that, the mere fact  that a foreign enterprise, controls another enterprise in the source state, would not result in the foreign enterprise having a permanent establishment in the source state.

Click here to view complete DTAA between India and USA

https://www.incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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One Reply to “DTAA between India and USA”

  1. neeta says:

    how much to deduct TDS on NRI doctor for his services resides in USA and provided his services in India u/s 195?

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