Bain Capital's acquisition of 30% stake in Genpact heads for income-tax fight

Bain Capital's acquisition of a 30% stake in Genpact, the country's largest ITeS company for $1 billion, could set the private equity fund - founded by US presidential nominee Mitt Romney - on collision course with India's income-tax authorities over payment of tax in the country.

This will be the first deal to be scrutinized after a recent change in law that allows Indian authorities to tax overseas transactions involving indirect transfer of Indian assets, and could present an intriguing case for newly appointed Finance Minister P Chidambaram, an accomplished lawyer.

The income-tax authorities are of the view that prima facie the Genpact transaction is a case of indirect transfer of Indian assets, since a substantial part of the company's revenues are generated from delivery centres based in the country, and hence should attract a tax claim.

The tax authorities are expected to soon send a letter asking for facts and circumstances of the transaction and its tax implications. "As a first step, the assessing officer will write a letter to ascertain facts of the development," said an official with the department. He said it was too early to comment on what the possible tax claim could be as that would be determined on the basis of the value of Indian operations in the overall value of the global asset.

But a legal executive close to the transaction said there was no tax liability either of the buyer or the sellers in India as Genpact is an NYSE-listed company with operations and income from over 80 countries.

"These companies will be bound by regulations of NYSE and will pay taxes accordingly. It is similar to the norms for Indian GDRs and ADRs listed on overseas exchanges," he said. Bain is a US fund as are the two sellers - General Atlantic and Oak Hill Capital. The transaction was being done outside India and the question of Bain Capital having to withhold tax in India did not arise, added the executive.

Another person said controlling stake was not being sold in this transaction and, therefore, there was no transfer of underlying assets, a precondition for imposing tax on such deals in India.

Genpact Chief Executive Officer NV 'Tiger' Tyagarajan declined to comment on the tax liability.

Tax a Controversial Issue for Long

"It's a question you should ask Oak Hill, General Atlantic and Bain Capital, as this is a deal between them. As far as we are concerned, shares are changing hands from one investor to another," Tyagarajan said. Oak Hill Capital Partners, one of the two sellers, declined comment. (Economic Times)