Last Chance: Get 10% OFF on CAclubindia Pro Subscriptions. Subscribe Now!

Foreign exchange difference conundrum

442 views 1 replies

pushkar mangaldas mahajan

CMA

36 Points Posted on 19 February 2016

Our organization had entered into a LSTK contract with a foreign contractor, denominated in euros. As per a provisional order u/s 195(2) from I.T. deptt,, 5% amount was being withheld by us from each running bill of the contractor. These 5% retention amounted to a total of EURO 156,804 (INR 1.05 Crores on the relevant date). After about 3 years, we received a final order from I.T. deptt, instructing us to pay around Rs. 12 Lakhs towards tax and interest from the amount withheld earlier. So, after paying Rs. 12 Lakhs to I. T. deptt, around Rs. 93 Lakhs are outstanding to the contractor. But, this liability has to be settled in euros. Now, we are in a fix as to which foreign exchange rate should we apply for calculating the amount outstanding in euros. There are 3 relevant dates here- 1) Original date of recognition of 5% retained amount in EUROS (08.10.2012); 2) Date of payment of tax IN INR (01.10.2015) out of the retained amount; and 3) Future date of payment of balance amount in EUROS to the contractor. Which of these dates should be considered for fixing the amount in EUROS payable to the contractor?

Please advise ASAP.

Replies (1)

Santosh Arukh

Manager- Accounts & Taxation

23 Points Posted on 31 August 2016

Generally IT dept should not issue an instruction for depositing Tax & interest on with held money if the contracts is described to hold. Becuase while any Running account bill (RA Bill)is passed for payment then it is passed Gross work done of aparticular period where the contractee is deducted all statutory deduction such as TDS ( Income tax) WCT ( vat) & Labour cess @ 1% etc.

The TDS (Income tax) is deducted from RA Bill for recording in the books opf account & next month of 7th day is the due date of depositing TDS ( IT).

In your case:

1) Please check whether the RA Bill deducted TDS (IT) on that particular period while passed for payment & deposited on due date. If so then no need to pay gain with interest.

2) If your company failed to deduct the TDS on with held amount @ rate 5% then the orginal date of recognisation of 5% retained in euro ( 08-10-2012) is to be taken into consideration.

Now it will be clear based on your tranasction as expalined above.