Agreement between the Republic of India and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to taxes on income and capital - 0680(E) - Income Tax

Agreement between the Republic of India and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to taxes on income and capital Notification Number: 0680(E) Dated 26/08//1985 File Number: 501/2/80-FTD Whereas the annexed Protocol between the Republic of India and the Federal Republic of Germany amending the Agreement between the Government of India and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation of income has been ratified and the instrument of ratification exchanged as required by Article XVI of the said Protocol on 10th July, 1985; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), and section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government hereby directs that all the provisions of the said Protocol shall be given effect to in the Union of India. ANNEXURE PROTOCOL Amending the agreement between the Government of the Federal Republic of Germany and the Government of India for the Avoidance of Double Taxation of income signed on 18th March, 1959, the Republic of India and the Federal Republic of Germany; Desiring to amend the Agreement for the Avoidance of Double Taxation of Income signed in New Delhi on 18th March, 1959, between both States (hereinafter referred to as " The Agreement "); Have agreed as follows: ARTICLE I The title of the agreement shall be deleted and replaced by the following text: AGREEMENT BETWEEN THE REPUBLIC OF INDIA AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND CAPITAL ARTICLE II Sub-paragraphs (a) and (b) of paragraph (1) of Article I of the Agreement shall be deleted and replaced by the following text: " (a) in the Federal Republic of Germany: (i) the income-tax (Eimkommensteuer), (ii) the corporation tax (Koerperschaftsteuer), (iii) the capital tax (Vermoegensteuer), and (iv) the trade tax (Gewerbesteuer) (hereinafter referred to as " German tax "); (b) in India: (i) the income-tax including any surcharge thereon, (ii) the surtax, and (iii) the wealth-tax (hereinafter referred to as " Indian tax "). ARTICLE III After Article I of the Agreement, a new Article IA shall be inserted with the following text: " (1) for the purposes of this Agreement, the term " resident of a Contracting State " means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. (2) Where by reason of the provisions of paragraph (1), an individual is a resident of both Contracting States, then his status shall be determined as follows: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. (3) Where by reason of the provisions of paragraph (1), a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. " ARTICLE IV (1) Sub-paragraphs (a), (b) and (c) of paragraph (1) of Article II of the Agreement shall be deleted and replaced by the following text: " (a) the term ' Federal Republic ' means the Federal Republic of Germany, and when used in a geographical sense, the area in which the tax law of the Federal Republic of Germany is in force; (b) the term ' India ' means the Republic of India, and when used in a geographical sense, the area in which the tax law of the Republic of India is in force; (c) the terms ' a Contracting State ' and ' the other Contracting State ' means the Federal Republic of India, as the context requires. " (2) Sub-paragraph (g) of paragraph (1) of Article II of the Agreement shall be deleted and sub-paragraphs (h), (i), (j), (k) and (1) shall be renumbered as (g), (h), (i), (j) and (k), respectively. (3) Sub-paragraph (h) of paragraph (1) of Article II of the Agreement, as renumbered by paragraph (2), shall be deleted and replaced by the following text: " (h) (aa) the term ' permanent establishment ' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. (bb) the term ' permanent establishment ' includes especially: (i) a place of management; (ii) a branch; (iii) an office; (iv) a factory; (v) a workshop; (vi) a sales outlet; (vii) a warehouse; and (viii) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. (cc) A building site or construction or installation project constitutes a permanent establishment only if it lasts for more than six months. (dd) Notwithstanding the preceding provisions of this Article, the term " permanent establishment " shall be deemed not to include: (i) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (ii) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (iii) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (iv) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise; (v) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (vi) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (i) to (v) provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. (ee) A person acting in a Contracting State on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom sub-paragraph (ff) applies, shall be deemed to be a permament establishment of that enterprise in the first-mentioned Contracting State: (i) if he has, and habitually exercises in that Contracting State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (ii) if he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to the enterprise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (iii) if he habitually secures orders in the first-mentioned Contracting State exclusively, or almost exclusively, for the enterprise itself, or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it. (ff) An enterprise shall not be deemed to have a permanent establishment in a Contracting State, merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. (gg) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other; " (4) After sub-paragraph (k) of paragraph (1) of Article II of the Agreement, as renumbered by paragraph (2), the following new sub-paragraph (1) shall be added: " (1) the term ' fiscal year ' means: (i) in relation to Indian tax, the previous year as defined in the Income-tax Act, 1961; (ii) in relation to German tax, the calendar year. " (5) The terms " territory ", " territories ", " Federal Republic tax " and " resident of one of the territories ", wherever appearing in the Agreement, shall be replaced by the terms " Contracting State ", " Contracting States ", " German tax " and " resident of a Contracting State ", respectively. ARTICLE V Article III of the Agreement shall be deleted and replaced by the following text: (1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. (2) Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State, be attributed to that permanent establishment, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (3) In the determination of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the Contracting State in which the permanent establishment is situated. (4) In so far as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. (5) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. (6) For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. (7) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. " ARTICLE VI Article VI of the Agreement shall be deleted and replaced by the following text: " (1) Profits derived from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. (2) Notwithstanding the provisions of paragraph (1), such profits may be taxed in the other Contracting State from which they are derived provided that the tax so charged shall not exceed: (a) during the first five fiscal years after the entry into force of the Protocol signed on June 28, 1984, 50 per cent., and (b) during the subsequent five fiscal years, 25 per cent., of the tax otherwise imposed by the internal law of that State. Sub-sequently, only the provisions of paragraph (1) shall be applicable. (3) The provisions of paragraphs (1) and (2) shall also apply to profits from the participation in a pool, a joint business or an international operating agency. (4) Paragraphs (1) and (2) shall not apply to profits arising as a result of coastal traffic. The term " coastal traffic " means traffic which originates and terminates in the territorial waters of the same Contracting State. " ARTICLE VII Article VII of the Agreement shall be deleted and replaced by the following text: " (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. (2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State. But if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of the Federal Republic, 15 per cent. of the gross amount of the dividends; (b) in the case of India, where the dividends relate in whole or in part to a new contribution, 15 per cent. of the gross amount of the dividends attributable to the new contribution. In this Article, the term " new contribution " means any share capital, other than bonus shares issued after the date of entry into force of the Protocol signed on June 28, 1984, by a company which is a resident of India and beneficially owned by a resident of the Federal Republic. (3) The term " dividends " as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debtclaims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment trust. (4) The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case, the provisions of Article III shall apply. (5) Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except in so far as such dividends are paid to a resident of that other State or in so far as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. " ARTICLE VIII Article VIII of the Agreement shall be deleted and replaced by the following text: " (1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State. But the tax so charged on interest payable in respect of a loan given or debt created after the date of entry into force of the Protocol and signed on June 28, 1984, shall not exceed: (a) 10 per cent. of the gross amount, if such interest is paid on any loan of whatever kind granted by a bank, and (b) 15 per cent. of the gross amount in all other cases. (3) Notwithstanding the provisions of paragraph (2), (a) interest arising in the Federal Republic and paid to the Indian Government or the Reserve Bank of India shall be exempt from German tax; (b) interest arising in India and paid to the Government of the Federal Republic of Germany, the Deutache Budesbank, the Kreditanstalt fur Wiederaufbau or the Deutache Gesellschaft fur Wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Indian tax. (4) The term " interest " as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. (5) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a land, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated. (6) The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, and the debtclaim in respect of which the interest is paid is effectively connected with such permanent establishment. In such a case, the provisions of Article III shall apply. " ARTICLE IX After Article VIII of the Agreement, a new Article VIIIA shall be inserted with the following text: " (1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State. But in so far as the fees for technical services are concerned, the tax so charged shall not exceed 20 per cent. of the gross amount of such fees. (3) The term ' royalties ' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (4) The term ' fees for technical services ' as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. (5) The provisions of paragraphs (1) and (2) of this Article shall not apply if the benefical owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment. In such a case, the provisions of Article III shall apply. (6) Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a land, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the obligation to make the payments was incurred and the payments are borne by that permanent establishment, then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment is situated. (7) Where, owing to a special relationship between the payer and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement. " ARTICLE X (1) The existing text of Article X of the Agreement shall be numbered as paragraph (1). (2) The following shall be added as paragraph (2): " However, gains from the alienation of ships or aircraft operating in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. " ARTICLE XI After Article XV of the Agreement, a new Article XVA shall be inserted with the following text: " (1) Capital represented by immovable property referred to in Article IX, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State. (2) Capital represented by movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State may be taxed in that other State. (3) Capital represented by ships and aircraft operated in international traffic and by movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. (4) Capital represented by shares in a company shall be taxable in the Contracting State in which such company is resident. (5) All other elements of capital of a resident of a Contracting State shall be taxable only in that State. " ARTICLE XII Paragraphs (2) and (3) of Article XVI of the Agreement shall be deleted and replaced by the following text: " (2) Where a resident of India derives income or owns capital which, in accordance with the provisions of this Agreement may be taxed in the Federal Republic, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the Federal Republic, whether directly or by deduction; and as a deduction from the tax on the capital of that resident an amount equal to the capital tax paid in the Federal Republic. Such deduction, in either case, shall not, however, exceed that part of the income-tax or capital tax (as computed before the deduction is given) which is attributable, as the case may be, to the income or the capital which may be taxed in the Federal Republic. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in the Federal Republic shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India. (3) Subject to the provisions of paragraph (1) above, tax shall be determined in the case of a resident of the Federal Republic as follows: (a) Unless the provisions of sub-paragraph (b) apply, there shall be excluded from the basis upon which German tax is imposed any item of income arising in India and any item of capital situated within India, which, according to this Agreement, may be taxed in India. The Federal Republic, however, retains the right to take into account in the determination of its rate of tax the items of income and capital so excluded. In the case of income from dividends, the foregoing provisions shall apply only to such dividends as are paid to a company (not including partnerships) being a resident of the Federal Republic by a company being a resident of India at least 10 per cent. of the capital of which is owned directly by the first-mentioned company. For the purposes of taxes on capital, there shall also be excluded from the basis upon which German tax is imposed any shareholding, the dividends of which are excluded or, if paid, would be excluded, according to the immediately foregoing sentence, from the basis upon which German tax is imposed. (b) Subject to the provisions of German tax law regarding credit for foreign tax (as it may be amended from time to time without changing the general principle hereof), there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in India, the Indian tax paid under the laws of India and in accordance with this Agreement on: (aa) profits derived from the operation of ships in international traffic; (bb) dividends not dealt with in sub-paragraph (a); (cc) interest; (dd) royalties and fees for technical services. (c) For the purpose of items (bb) to (dd) of sub-paragraph (b), the term " Indian tax " shall be deemed to include any amount which would have been payable as Indian tax under the laws of India and in accordance with this Agreement for any year but for an exemption from, or reduction of, tax granted for that year under: (a) sections 10(4), 10(4A), 10(15)(iv) and 80K of the Income-tax Act, 1961; (b) any other provision of similar character to be agreed between the competent authorities of both Contracting States. If this amount is less than 50 per cent. of the German tax chargeable on such income, the term " Indian tax " shall be deemed to be at least this 50 per cent. of the German tax. (d) The provisions of sub-paragraph (a) shall not apply to the profits of, and to the capital represented by, movable and immovable property forming part of the business property of a permanent establishment and to the gains from the alienation of such property; to dividends paid by, and to the shareholding in a company unless the resident of the Federal Republic concerned proves that the receipts of the permanent establishment or company are derived exclusively or almost exclusively: (aa) from producing or selling goods or merchandise, giving technical advice or rendering engineering services, or doing banking or insurance business, within India, or (bb) from dividends paid by one or more companies, being residents of India, more than 25 per cent. of the capital of which is owned by the first-mentioned company, which themselves derive their receipts exclusively or almost exclusively from producing or selling goods or merchandise, giving technical advice or rendering engineering services, or doing banking or insurance business, within India. In such a case, Indian tax payable under the laws of India and in accordance with this Agreement on the above-mentioned items of income and capital shall, subject to the provisions of German tax law regarding credit for foreign tax (as it may be amended from time to time without changing the general principle hereof), be allowed as a credit against German income or corporation tax payable on such items of income or against German capital tax payable on such items of capital. " ARTICLE XIII Article XVIII of the Agreement shall be deleted and replaced by the following text: " (1) Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement. (2) The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Agreement. Any Agreement reached shall be implemented notwithstanding any time-limits in the domestic law of the Contracting States. (3) The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Agreement. (4) The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. " ARTICLE XIV This Protocol shall also apply to Land Berlin, provided that the Government of the Federal Republic of Germany does not make a contrary declaration to the Government of India within three months of the date of entry into force of this Protocol. ARTICLE XV Sub-paragraph (a) of Article XXI of the Agreement shall be deleted and replaced by the following text: " (a) in respect of Indian tax, in relation to income and capital assessable for the assessment years commencing on or after the first day of April in the calendar year next following that in which the notice of termination is given, and " ARTICLE XVI (1) This Protocol shall be ratified and the instruments of ratification shall be exchanged at New Delhi as soon as possible. (2) This Protocol shall enter into force one month after the date of exchange of the instrument of ratification and shall have effect: (a) in the Federal Republic: (i) in respect of tax withheld at the source on amounts paid or credited to non-residents on or after the first day of January, 1984; and (ii) in respect of other German tax for taxation years beginning on or after the first day of January, 1984; (b) In India, in respect of income and capital assessable for any assessment year commencing on or after the first day of April, 1984. ARTICLE XVII (1) This Protocol shall form an integral part of the Agreement and shall continue in force as long as the Agreement remains effective. (2) The competent authorities of the Contracting States are authorised to publish the text of the Agreement, as modified by this Protocol, after this Protocol comes into force. DONE at Bonn this 28th day of June, 1984, in two originals, each in the German, English and Hindi languages, all texts being authentic. In the case of any divergence of interpretation, the English text shall prevail. For the Federal For the Republic of India Republic of Germany Sd/- Sd/- EXCHANGE OF NOTES State Secretary Bonn , June 28, 1984 of the Federal Foreign Office Excellency, With reference to the Protocol, signed today, amending the Agreement between the Government of the Federal Republic of Germany and the Government of India for the Avoidance of Double Taxation of income, signed in New Delhi on 18th March, 1959, I have the honour on behalf of the Government of the Federal Republic of Germany to inform you that the two Contracting States have reached agreement on the following: 1. Notwithstanding the provisions of Articles VII and VIII of the Agreement, dividends and interest arising in a Contracting State may be taxed in that State and according to the law of that State. (a) if they are derived from rights or debt claims carrying a right to participate in profits (including income derived by a sleeping partner from his participation as such, and in the case of the Federal Republic from a " partiarisches Darlehen " and from " Gewinnobligationen "), and (b) under the condition that they are deductible in the determination of profits of the debtor of such income. 2. Where a company being a resident of the Federal Republic distributes income derived from sources within India, sub-paragraph (a) of paragraph (3) of Article XVI of the Agreement shall not preclude the compensatory imposition of corporation tax on such distributions in accordance with the provisions of German tax law, designed to ensure the crediting of the underlying tax against the income-tax payable by the shareholder. 3. Notwithstanding the provisions of paragraph (3) of Article III of the Agreement, no deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of- (a) royalties, fees or similar payments in return for the use of patents or other similar rights; (b) commission for specific services performed or for management; and (c) interest on moneys lent to the permanent establishment, except in the case of a banking institution. 4. It is understood that the deductions in respect of the head office expenses as referred to in paragraph (3) of Article III of the Agreement shall, in no case, be less than what are allowable under the Indian Income-tax Act as on the date of entry into force of this Protocol. 5. It is understood that the taxation of royalty income as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any date, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, shall not exceed 20 per cent. of the gross amount of such payments. 6. It is also understood that in relation to Article XVII of the Agreement, the term " information " shall include documents. It is further understood that the German tax law provides for the transmission of information under certain conditions-upon request-and it would be possible to furnish information to the competent authority in India under these provisions irrespective of the said Article. I shall be grateful if you will kindly confirm your agreement to the above; in such case, this note and your reply thereto shall be deemed to be part of the Protocol. Accept, Excellency, the assurance of my highest consideration. His Excellency R. D. Sathe, ( Sd. ) Ambassador of the Republic of India in the Federal Republic of Germany , Bonn . EXCHANGE OF NOTES Ambassador of India Bonn , June 28, 1984 Bonn Excellency, I have the honour to acknowledge receipt of your note of today which reads as follows: " With reference to the Protocol, signed today, amending the Agreement between the Government of the Federal Republic of Germany and Government of India for the Avoidance of Double Taxation of income, signed in New Delhi on March 18, 1959, I have the honour on behalf of the Government of the Federal Republic of Germany to inform you that the two Contracting States have reached agreement on the following: 1. Notwithstanding the provisions of Articles VII and VIII of the Agreement, dividends and interest arising in a Contracting State may be taxed in that State and according to the law of that State. (a) If they are derived from rights or debt claims carrying a right to participate in profits (including income derived by a sleeping partner from his participation as such, and in the case of the Federal Republic from a " partiarisches darlehen " and from " Gewinnobligationen "), and (b) under the condition that they are deductible in the determination of profits of the debtor of such income. 2. Where a company being a resident of the Federal Republic distributes income derived from sources within India, sub-paragraph (a) of Paragraph (3) of Article XVI of the Agreement shall not preclude the compensatory imposition of corporation tax on such distributions in accordance with the provisions of German tax law, designed to ensure the crediting of the underlying tax against the income-tax payable by the shareholder, 3. Notwithstanding the provisions of paragraph (3) of Article III of the Agreement, no deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of- (a) royalties, fees or similar payments in return for the use of patents or other similar rights; (b) commission for specific services performed or for management, and (c) interest on moneys lent to the permanent establishment, except in the case of a banking institution. 4. It is understood that the deductions in respect of the head office expenses as referred to in paragraph (3) of Article III of the Agreement shall, in no case, be less than what are allowable under the Indian Income-tax Act as on the date of entry into force of this Protocol. 5. It is understood that the taxation of royalty income as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any date, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, shall not exceed 20 per cent. of the gross amount of such payments. 6. It is also understood that in relation to Article XVII of the Agreement, the term " information " shall include documents. It is further understood that the German tax law provides for the transmission of information under certain conditions-upon request-and it would be possible to furnish information to the competent authority in India under these provisions irrespective of the said Article. I shall be grateful if you will kindly confirm your agreement to the above; in such case, this note and your reply thereto shall be deemed to be part of the Protocol. " I have the honour to inform you that my Government agrees to the above. Accept, Excellency, the assurance of my highest consideration. ( Sd. ) R. D. Sathe His Excellency Dr. Andreas Meyer-Landrut State Secretary of the Federal Foreign Office Bonn .