Foreign exchange difference conundrum

pushkar mangaldas mahajan (CMA) (36 Points)

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.