Merchant Trade – Intermediary Trade

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ALOK KUMAR GHOSH

| Fema / RBI - Articles
31 Dec 2020
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What is Merchant Trade: Merchanting trade is one where shipment of goods takes place
from one foreign country to another foreign country without touching DTA i.e. Customs. In
Indian Context, the trade is called Merchanting Trade when,

– The supplier of goods will be resident in one foreign country

– The buyer of goods will be resident in another foreign country

– The merchant or the intermediary will be resident in India In simple terms, Merchanting
transaction is one which involves shipment of goods from one foreign country to another
foreign country involving an Indian Intermediary. Hence, It is also called Intermediary
Trade

Goods involved in the merchanting trade transactions would be the ones that are
permitted for exports (except Export Declaration Form)/imports (except Bill of Entry)
under the prevailing Foreign Trade Policy (FTP) of India.

BASIC CONCEPTS

Merchanting Trade transaction is a transaction which involves shipment of goods

from one foreign country to another foreign country involving an Indian Trader.
Such transactions are basically procurement and/or supply under “Bill to-Ship-to”
arrangement.
A ‘person/ consignor’ in India, without physically importing the goods into India,
procures goods from a supplier outside India and supplies the same goods to
another ‘person/consignee’ outside India.
The commencement of merchanting trade would be the date of shipment/export leg
receipt or import leg payment, whichever is first. The completion date would be the
date of shipment / export leg receipt or import leg payment, whichever is the last .
If merchant trade transaction reach 5% of annual export earnings, the names of
defaulting merchanting traders would be caution-listed.
This is a trade transaction where both import transactions and export transactions
are involved.
The supplier of goods will be resident in one foreign country
The buyer of goods will be resident in another foreign country

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 The merchant or the intermediary will be resident in India
Goods do not actually enter or leave the host country i.e. Merchant Trader
In some cases goods acquired may require certain specific processing/ value-
addition. In that case goods so acquired may be allowed transformation provide AD
bank is satisfied with the documentary evidence and bonafides of the transaction.
The Merchant Trader receives inward remittance for goods exported to the buyer.
The Merchant Trader effects outward remittance bought from the seller.
The difference between the inward remittance and outward remittance is the profit
for the Merchant Trader
In Merchanting Trade, we receive and pay Foreign currency, without actual
movement of goods to and from the country.
For export leg we receive currency from the customer without submitting any
evidence i.e. shipping bill. Similarly for import leg we pay foreign currency to
overseas supplier without submitting evidence i.e. Bill of Entry.
Payment for import leg would be allowed to be made out of the fund received
towards export payment and remaining amount would only then be passed on to the
merchant trader . The profit booked is treated as merchanting margin.
The acquisition of goods by merchants is to be shown under goods as a negative
export of the country in which the merchant is resident. The subsequent sale of the
goods is shown under “goods sold under merchanting” as a positive export of the
country in which the merchant is resident. The difference between sales and
purchases of merchanted goods is shown as “net exports of goods under
merchanting.“
As per FEMA, Merchanting transaction is one which involves shipment of goods
from one foreign country to another foreign country involving an Indian Intermediary.
As per RBI, the tradeis called Merchanting Trade when, the supplier of goods will
be resident in one foreign country, the buyer of goods will be resident in another
foreign country and the merchant or the intermediary will be resident in India i.e.
the merchant or the intermediary will be resident in India.

HOW IT WORKS:

When instead of importing of goods directly by the trader in home country it is sold
directly from the third country to ultimate buyer of another country. The transaction
takes place in between three parties and all are residents in three different foreign
countries. – A) Trader, B) Supplier and C) Buyer
The trader in country A of one foreign country places order on another foreign
country B for supply of goods to third foreign country C directly i.e. goods never
touch the country A.
Here country A is the merchant trader, Country B is the supplier and Country C is
the end user i.e. buyer

EXTERNAL TRADE:

There are two types of trade : one is internal(wholesale/retail) and other one is external
(exports/imports/merchant trade). We are here talking about external trade more precisely
about merchanting trade. The similarities and dissimilarities of three external trade are

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given under 21 (twenty one heads) in next slide to differentiate the nature of transactions
involved and how all these are categorized.
EXPORTS
When a trader from home
country sells goods to a
trader in another country.
The link is between
exporter and buyer.
The end user is buyer.
The originator is seller.
No intermediator.
Direct relationship between
buyer and seller.
No fund is earmarked.
Duty drawback schemes
are applicable for customs
duty paid goods.
Incoterm exists.
Transport documents,
shipping bill as an
evidence of exports.
Transport risk, quality risk,
delivery risk and exchange
risk.
Third party exports (except
Deemed Export) as
defined in Chapter 9 shall
be allowed under FTP.
IMPORTS
When a trader in home
country purchases goods
from a trader in another
country.
The link is between importer
and seller.
The end user is buyer.
The originator is seller.
No intermediator.
Direct relationship between
buyer and seller.
No fund is earmarked.
Goods attract customs duty
and no incentive scheme is
available.
Incoterm exists.
Transport documents, Bill of
entry as an evidence of
imports.
Transport risk, quality risk,
delivery risk and exchange
risk.
Third party exports (except
Deemed Export) as defined
in Chapter 9 shall
be allowed under FTP.
MERCHANT TRADE
The purchase of goods by
a resident from a non-
resident and subsequent
resale of goods to
another non-resident.
During this process goods
does not enter the
territory of the resident.
The link is between
trader, supplier and buyer.
The end user is buyer.
The originator is seller.
Trader is an
intermediator.
Indirect relationship
between buyer and seller.
Fund is earmarked.
No customs duty and no
duty drawback.
No Incoterm.
Transport documents as
an evidence of merchant
trade.
Transport risk, quality
risk, delivery risk,
exchange risk and higher
risk of fraud and money
laundering.
No third party payments
are allowed either in the
import leg or in the export
leg of the Merchanting
Trade Transaction.
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Purpose code P0108 is
required to be furnished for
goods sold under exports.
In case of advance
received from customer ,
the exporter should ensure
that shipment of goods
should take place within 1
year from the date of
receipt of fund. If exporter
fails to make shipment
within stipulated period no
refund of unutilized fund is
permissible without
approval of RBI .
The due date of settlement
of export bill is 270 days
from the date of shipment.
AD bank has the authority
to extend the realisation
period up to 6 months. If it
exceeds beyond one year
the total outstanding of the
exporter does not exceed
USD 1 million or 10 % of
the average export
realizations during the
preceding 3 financial
years, whichever is higher.
Export declaration to be
made in SDF or EDF.
Export transactions are
recorded in EDPMS.
AD can consider closure of
shipping bill in EDPMS that
involves write off to the
extent of 5% of invoice
value.
Purpose code S0108 is
required to be furnished for
goods sold under exports.
Advance remittance up to
USD 200,000 is allowable.
Beyond USD 200,000 bank
guarantee from international
bank is required. In cases
where the importer is unable
to obtain BG from overseas
suppliers and AD is satisfied
about the track record
advance remittances up to
USD 5,000,000 is
permissible.
The due date of settlement
of import bill is 180 days
from the date of shipment of
goods.
Remittances against imports
should be completed not
later than six months from
the date of shipment, except
where AD may permit
settlement of import dues
delayed due to disputes,
financial difficulties, etc. for a
period of less than three
years from the date of
shipment.
Import declaration is required
to be provided under
DECLARATION-CUM-
UNDERTAKING.
Import transactions are
recorded in IDPMS.
AD can consider closure of
BoE in IDPMS that involves
write off to the extent of 5%
of invoice value.
Purpose code PO108 and
SO108 both are required
to be furnished for goods
sold under export leg and
goods acquired under
import leg.
In case of Merchant trade
advance is received and
goods are supplied for full
value, unrealized portion
needs to be refunded as it
fails to adhere one to one
matching principle.
The due date of
settlement of export bill is
270 days from the date of
shipment.
No such extension of
beyond permissible
period 270 days or 9
months from the date of
shipment.
Merchant trade
transaction is required to
be given in Merchant
Trade Declaration.
No such platforms are
available to record
Merchant Trade
Transaction.
AD can consider closure
to the extent of 5% of
invoice value.
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 The export of goods or
services is considered as a
zero-rated supply. GST will
not be levied on export of
any kind of goods or
services.
So import of goods and
services into India will attract
IGST.
Transactions which shall
be treated neither as a
Supply of Goods nor a
Supply of Services if
supply of goods from a
place in the non-taxable
territory to another place
in the non-taxable
territory without such
goods entering into India.
So there is no GST on
Merchant trade.

No margin and entire fund No margin and entire fund is Only merchanting margin
is credited to seller. debited to buyer. is credited to trader.

GST ON MERCHANT TRADE

Section 7(5)(a) states that supply of goods or services or both when the supplier is
located in India and the place of supply is outside India shall be treated to be a supply of
goods or services or both in the course of inter-state trade or commerce.

Section 11 of IGST Act dealing with place of supply of goods imported into, or exported
from India. The place of supply of goods-

a) Imported into India shall be the location of the importer

b) Exporter from India shall be the location outside India.

Section 7 schedule III of CGST Act, 2017-Activities or Transactions which shall be

treated neither as a Supply of Goods nor a Supply of Services if supply of goods from a
place in the non-taxable territory to another place in the non-taxable territory without such
goods entering into India. So there is no GST on Merchant trade.

Case Study

M/s Synthite Industries Ltd. (applicant) are in the business of trading in spices and spice
products. They receives order from a customer in USA for supply of spices. They place a
corresponding order to a supplier in China for supply of goods ordered by USA. The
supplier in China ship the goods directly to customer in USA and goods do not come to
India. The Chinese supplier issues invoice to the applicant, for which, payment will be
made by the applicant in due course. Subsequently, the applicant will raise invoice on the
customer in USA, and collect the proceeds.

Since both USA and China are in non-taxable territory and goods did not enter in Indian
territory there would not be any GST liability.

GUIDELINES OF SETTLEMENT MECHANISM OF MERCHANT TRADE

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 Entire cycle of merchant trade has to be completed within 9 months there should
not be any outlay of foreign exchange beyond four months.
In case of an advance payment there can’t be any pending foreign exchange to be
paid or received beyond 4 months of making the first payment for final settlement.
So if you settle import leg first, export collection should come before 4 months so
that entire transaction should be completed at the end of 4 months.
Similarly in case of advance collection from customer, foreign exchange outlay
should be made within 4 months from the date of receipt of fund.
The start date for the merchant trade would be either when the trader receives
exports leg advance or pays in advance for the import leg. In cases where the
advance payment isn’t made, the date of shipment would be considered.
If the transaction is under LC, LC to be opened against confirmed export order and
completion of the transaction should be within nine months
The transaction can be considered to have ended on the date of payment of import
settlement, or on the date of export settlement, whichever comes later. In cases
where payments are received or paid in advance, the shipment date would be
considered as completion date of the transaction.
Both export and import leg of the transaction should be routed through the same AD
bank.
AD bank should ensure one-to-one matching in case of each merchanting trade
transaction .If the merchant trader receives an advance payment against the export,
AD bank should tag the same for making the payment under import leg of the
transaction.
In case advance against the export leg is received by the merchanting trader, AD
bank should ensure that the same is earmarked for making respective import
payment.
Advance payment of import payment is allowed ,where inward remittance from the
overseas buyer is not received before outward remittance, to the extent of export
receivable but it should not exceed USD 200,000 and that should be against bank
guarantee/LC.

DOCUMENTS REQUIRED:

Following end to end thirteen (13) documents are required to be submitted for clearance
of merchant trade and import payment and export collection both are required to be
routed same AD bank.

Purchase Order : Purchase order placed by overseas buyer to Merchant trader.

Deliver proof – goods are delivered by the supplier to the freight forwarder residing
in the supplier’s country.
Transport documents i.e. Airway bill/ Bill of lading, dispatch note, packing list
Import invoice i.e. Invoice raised by overseas seller
Packing list i.e. contains details of goods having information on weight and units.
Import manifest i.e. the details about shipper, consignee, number of packages, kind
of packages, description of goods, airway bill or bill of lading number and date, flight
or vessel details etc.

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 Collection Order- Total amount of export proceeds receivable
Export invoice: invoice raised by exporting country
Swift Message: Evidence of purpose of remittance
Inward Remittance Certificate: evidence of receipt of export proceeds.
Merchant trade declaration: declaration by the merchant trader confirming of
maintaining guidelines
Form A2: Application cum Declaration (To be completed by the applicant)
Application for drawal of foreign exchange
Debit authority for import payment: Payment instruction.

MERCHANT TRADE CYCLE:

The entire cycle of merchant trade should be completed within an overall period of 9
(nine) months/270 days from the date of commencement to completion date. The
commencement date would be date of shipment, export leg receipt or import leg payment
whichever is first. Similarly the completion date would be date of shipment , export leg
receipt and import leg payment whichever is last. If export collection is received first
import payment is required to be settled within four months.

Commencement Completion Duration

Date of shipment Import leg payment 9 months

Export leg receipt Import leg payment 4 months

Import leg payment Export leg receipt 9 months

ONE TO ONE MATCHING PRINCIPLE:

Thumb rule:

There are 18 (eighteen) check points identified as a standard practice to be followed to

assess the authentication and bona fide of the transaction. In next five slides check points
along with the parameters to be checked have been elaborated keeping in view “one to
one matching principles”. There are 8(eight) documents should be in hand while verifying
the content and 18(eighteen) match points to be considered as a full proof evidence. As
an exception there are other aspects deviated from standards given in “Exception -one to
one matching principles” slide needs to be considered based on facts of incidents.

Documents Match Points

Import Invoice Origin and Destination

Export Invoice Consignee Name

Packing list Bill to & Ship to

Import Manifest Qty

Airway Bill/Bill of Lading Description of goods

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Swift Message Invoice Reference

Collection Order Purchase Order

Despatch particulars Due Date

Date of shipment Amount Collected

Purpose Template Payment Reference

Buyer-Remitter ACU Mechanism

Airway Bill Weight/Volume

Shipper name

Doc-1 Doc-2 Doc-3 Doc-4 Doc-5 Match Remarks

Point

Import Export Packing Import Qty Qty in all four

Invoice Invoice list Manifest documents
should match
except in
special case.

Import Export Packing Description Description of

Invoice Invoice list of goods goods in all
three
documents
should match.

Import Export Import Invoice Export Invoice

Invoice Invoice Manifest Reference and Import
Manifest
should
contain Import
Invoice No.

Import Packing Import Purchase All three

Invoice list Manifest Order No. documents
should carry
same
Purchase
Order No.

Airway Import Origin & Port of

Bill Manifest Destination Loading and
Port of
Discharge
should be
same.

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Import Export Packing Import Airway Consignee Same
Invoice Invoice list Manifest Bill Name Consignee
name should
be reflected in
all five
documents.

Import Export Packing Import Airway Bill to & “Bill to” in

Invoice Invoice list Manifest Bill Ship to export invoice
should be in
line with “Ship
to” in Import
Invoice.
Further “Bill
to” in export
invoice should
be same as
compared
with Packing
list, Import
Manifest and
Airway Bill
under the
head
Consignee.

Airway Import Airway Bill Same House

Bill Manifest No. Airway Bill
Number
should appear
in Import
Manifest.

Airway Import Weight or Same weight

Bill Manifest Volume should be
shown in both
documents.

Airway Import Date of The date of

Bill Manifest Despatch despatch
shown in
Import
Manifest
should be
prior to actual
date of
despatch .

Airway Import Shipper Same shipper

Bill Manifest Name name should
be in line with
both
documents.

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Export Swift Import Airway Bill Import Buyer- The Buyer
Invoice Message Manifest Invoice Remitter and remitter
should be
same in all
five
documents.

Export Swift Collection Amount The total

Invoice Message Order Remitted amount
received
should match
with Export
invoice and
Collection
Order.

Swift Payment he swift

Message Reference message
should
contain either
proforma
invoice
no/Import
Invoice
No/Export
Invoice No.

Swift ACU The Swift

Message Mechanism message
if it pertains should
to Asian contain
Countries message
confirming
ACU
mechanism
followed or
Name of the
Banker of
India Origin.

Export Import Despatch Inward Purpose Purpose

Invoice Invoice Particulars Remittance Template template
should
mention
purpose code
PI008 under
merchant
trade and
request for
ear mark of
fund should
be mentioned.

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 Airway Due date Permissible
Bill of settlement
Shipment period is 270
days from the
date of
shipment.
Breach in
merchant
trade cycle
should be
reported to
RBI for
approval for
import
payment.
Fund will
remain on
hold until
permission for
import
payment.

Airway Import Import Export Export invoice

Bill Manifest Invoice Invoice date should
be prior to
date of all
three
documents.

EXCEPTIONS- ONE TO ONE MATCHING PRINCIPLE:

Weight/Volume :

The question of mismatch of weight of the consignment in comparison to weight

displayed on commercial invoice always arise but following points to be considered
before coming to the conclusion the material fact.

Whether shipment is full container load (FCL) or Less than container load (LCL)
Whether shipment by the shipper is made consolidating goods of multiple supplier.
Maximum allowable weight of the consignment

In case of FCL the exporter has goods to accommodate in one full container load even if
he might not have fully loaded cargo . It may be half loaded or quarter loaded. In case of
LCL shipper does not have enough goods to accommodate in one full container, he
books cargo with a consolidator to console his goods along with goods of other shippers.

In respect of mode of shipment prevailing practice is to opt shipment by sea rather than
air shipment just because of (1) more capacity can be loaded and (2) low cost of freight.
Any shipment weighing more than 500 kg is expensive for Air freight.

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Sometimes overseas buyer places order to multiple supplier and prefers shipment to be
executed through their own arrangement. In that case buyer asks merchant trader to
instruct their supplier accordingly and goods to be delivered from warehouse to shipper’s
warehouse. After having received goods from multiple supplier , the shipper ships goods
after consolidating all deliveries in one single shipment. So the weight displayed on
commercial invoice raised by the supplier gets deviated from the weight displayed on
import manifest.

Maximum allowable weight for sea shipment is 67,200 lbs (30240 kg) and for air shipment
is 350lbs(158 kg.). Again maximum allowable weight depends on the size of the container
– for 20’ container (62,150 lbs=28,000 kg) and for 40’ container (59,200lbs=26640
kg.).Maintaining Stability of the ship while loading containers plays an important role in
safety of all cargo in a cargo ship.

Weight displayed on commercial invoice is taken at warehouse level of the supplier but
customs have their own warehouse management system (WMS) . As the cargo moves
down the conveyor, weight and dimensions are automatically captured and recorded in
the WMS. So final weight to be considered is weight mentioned in Import manifest and
airway bill. If there is a mismatch , that point needs to be addressed.

Mismatch in Buyer and remitter :

In ideal situation the buyer name displayed on export invoice under ”Bill to”, on import
invoice under “Ship to”, on import manifest and airway bill under “consignee” and finally
on the swift message should be same. Any deviation on any document should be treated
as “Buyer-Remitter” mismatch. Sometimes company go for amalgamation or name
change happens during the transition period and the same was not incorporated in
transport documents , commercial invoice , export invoice and not reported to customs.

To validate the name change following documents are required to produced to come into
final conclusion or accept the name change.

CIN : Company identification number. CIN number should be same pre and post
shipment of goods. So the copy of CIN needs to be produced as an evidence along
with application to ROC.
Letterhead: The copy of the letterhead carrying the CIN also needs to be shared.
Court Order: The copy of the court order is also to be placed as an evidence.
Address proof : Copy of the utility bills as a supporting to be produced as an
evidence to authenticate the same entity.
PAN: Both the copy of PAN of pre amalgamation/change in company stage and
copy of new PAN applicable for new company are required for verifying the subject
matter.
Import Manifest : Filling of import manifest by the carrier is done through computer,
so signed copy of IGM is not required.

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 Bill of Lading: A bill of lading is a document of title, a receipt for shipped goods,
and a contract between a carrier and shipper. This document must accompany the
shipped goods and must be signed by an authorized representative from the
carrier, shipper, and receiver.
In most of cases express bill of lading is used . Express Bill of lading is an electronic
data copy of bill of lading is sufficient for the carrier in final destination to release the
cargo to final consignee. So in case of express bill of lading signed copy is not
required.

As per RBI guideline names of defaulting merchant trader where outstanding reach 5% of
annual export earning would be caution listed.

Merchant trader is caution listed when Merchant trader fails to adhere the merchant trade
guideline i.e. Breach in merchant trade :

a) Export proceeds crosses the permissible deadline -270 days from the date of
shipment.

b) In case of advance payment foreign exchange outlay happens beyond 4 months from
the date of receipt of fund

c) Merchant trader fails to produce clear evidence of shipment i.e. transport documents
as per requirement.

d) Merchant trader executed transaction for restricted items falling negative list of import
as per FTP Policy.

e) Merchant trader fails to achieve margin on merchant trade or lower margin after
subtracting import payments and related expenses from export proceeds for the specific
MTT.

f) Merchant trade import dues (excluding other import dues i.e. direct import, deemed
import) reaches 5% of annual merchant export (excluding normal exports) earning .

g) Merchant trade declares export proceeds as normal exports without declaring it as

towards merchant trade and avail the facility of direct credit of fund without ear marking of
same.

WRITE OFF – MERCHANT EXPORT DUES :

For the Export Leg, the unrealized amount may be written off by the AD Bank if requested
by the Merchanting Trader in the following cases:

The Merchanting Trade Transaction buyer is declared insolvent along with proof
from the Liquidator who certifies that the amount cannot be recovered from the
buyer.

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 Auction of the goods exported or Destruction of the goods exported by the
authorities in the importing country (by Port or Customs or Health authorities) and
certified proof of the same is provided. If goods was auctioned or destroyed by the
buyer post release of good form customs , destruction certificate duly authenticated
by the representative of the exporter with signature and stamp will be required.
The unrealized amount is the balance due in a settlement case intervened by the
Indian Embassy, Foreign Chamber of Commerce etc.
No KYC or AML concerns.
The transaction being written off is not being investigated by any agencies under the
Foreign Exchange Management Act (FEMA) of India.
The country should not in the updated Financial Action Task Force’s (FATF).
An exporter who has not been able to realize the outstanding export dues despite
best efforts, may either self-write off or approach the AD bank with appropriate
supporting documentary evidence. The allowable percentage of self write off by the
exporter is 5% of export dues.
Short receipt of export proceeds due to damaged goods received by the buyer or
short supply of goods against purchase order. In both cases if shortage or short
supply is identified post shipment of goods then destruction certificate duly
authenticated by the representative of the merchant trader along with proof of
damaged goods. If short supply is identified pre shipment of goods , credit note
copy from the supplier along with delivery proof should be the basis to consider the
write off amount. Correspondence or email conversation between supplier, buyer
and merchant trader needs to be produced as an evidence.
If write off amount exceeds allowable 5% of the invoice value, matter to be referred
to RBI for approval.

MARGIN ON MERCHANT TRADE:

Before revised guidelines of RBI on Merchant trade was restricted to reasonable

charge. Revised guideline of RBI on merchant trade ,calculation of margin on
merchant trade is formula based:
Export Receivable- Import Payment- Related expense i.e. follow up charge of
merchant trade transaction for overdue bills beyond 9 months and follow up charge
of merchant trade transaction for outlay beyond 4 months. The charge related
expense vary from bank to bank.
If the merchant trader fails to achieve margin basis on above formula , would be
referred to RBI for clarification.

HOW EAR MARK OF FUND WORKS:

International wire transfers are generally done on the SWIFT (Society for Worldwide
Interbank Financial Telecommunication ) network. It’s a secure messaging system
banks use to quickly send each other information, including instructions for
international wire transfers.
Every wire transfer will have a Unique End-to-End Transaction Reference (UETR)
which will be carried forward from initiating bank to intermediary banks to
beneficiary bank.

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 Transfers typically happen quickly. Generally, domestic bank wires are completed in
three days, at most. If transfers occur between accounts at the same financial
institution, they can take less than 24 hours. Wire transfers via a non-bank money
transfer service may happen within minutes. If we send money to another country it
may take as many as five days for the recipient to receive their funds.
Whenever bank receives SWIFT from overseas country , keeps the money on first
instance in NOSTRO account i.e. bank holds in a foreign currency in another bank.
Post receipt of fund bank asks recipient to declare purpose under which fund was
asked for. Post activity the process of fund management starts.
If the purpose is declared other than Merchant trade , bank initiates to credit the
fund post receipt of satisfactory clarification from recipient. Whenever purpose of
fund receipt is declared towards Merchant trade , bank as per guideline ear mark
the fund till final settlement of import liability.
The cooling period for keeping money in NOSTRO is 45 days from the date of
receipt of fund. Without having satisfactory purpose declaration bank is supposed to
return the fund.

LETTER OF CREDIT UNDER MERCHANT TRADE:

As per RBI guidelines to open LC with supplier is that the Letter of credit to the supplier is
permitted against confirmed export order keeping in view the outlay and completion of the
transaction within nine months.

As per Rule 4 of Merchant Trade under FEDAI

Banks will make remittances or open letter of credit in favor of the overseas
suppliers provided an advance remittance for the full value or an irrevocable letter of
credit for the full value has been received/ opened in favor of the merchanting trader
.
If foreign currency remittance are received in advance from the overseas buyer, the
banks may at the specific request of merchanting trade customer hold the foreign
currency funds in their Nostro account without converting the amount into Indian
Rupee till the date of payment to the overseas supplier. Bank shall not apply buying
and selling rates of exchange and commission at 0.25%.
Back-to-back letter will be treated as separate transaction and commission as per
Rule 3 II.C. shall be charged to the customer.
Back-to-back letters of credit are actually made up of two distinct LoCs, one issued
by the buyer’s bank to the intermediary and the other issued by the intermediary’s
bank to the seller. With the original LC from the buyer’s bank in place, the broker
goes to his own bank and has a second LC issued, with the seller as
the beneficiary.

CHANGE IN REGULATORY GUIDELINE IN MERCHANT TRADE:

Earlier Guideline:

The state of the goods should not undergo any transformation.

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Revised Guideline:

Considering that in some cases, the goods acquired may require certain specific
processing/ value-addition, the state of goods so acquired may be allowed transformation
subject to the AD bank being satisfied with the documentary evidence and bonafide of the
transaction.

Comparing both guidelines we have noticed that in earlier guideline transformation was
not allowed but basis on growth Govt. of India has amended earlier guidelines and
allowed transformation except for certain products as per FTP.

Now the question is how this can be materialized keeping in view of following facts that

The supplier of goods will be resident in one foreign country

The buyer of goods will be resident in another foreign country
The merchant or the intermediary will be resident in India
Goods do not actually enter or leave the host country i.e. Merchant Trader

Second question automatically arise in next phase after getting clarified about clear
guideline

Do we need to keep goods in Customs Bonded warehouse for transformation

Is this allowed to change the point of origin in case of transformation.
Is Transhipment is the solution to adhere the guideline
Is there any specific document required which will prove transformation is done
without violating the norms

Let us discuss each and every point with clarity but before that we need to understand
why transformation is required. Transformation is required in those cases where the
merchant trader doesn’t want to disclose the source of supply. But transformation won’t
allow following amendments:

Place and date of shipment as changing this could affect the terms of delivery
based on the sales contract
Details of cargo including the number of packages, dimensions, weight and
measurement
Freight and delivery terms and condition
Port of loading (POL), port of discharge (POD)
The issuing date in both bills of lading
Conditions in confirmed Purchase Order as well as in Letter of Credit

Do we need to keep goods in Customs Bonded warehouse for transformation

Central Board of Indirect Taxes and Customs (CBIC) has launched a revamped and
streamlined program to attract investments into India and strengthen Make in India as
per Section 65 of the Customs Act, 1962, which enables conduct of manufacture and
other operations in a Customs bonded warehouse. The program has been introduced
vide the Manufacture and Other Operations in Warehouse (MOOWR, 2019).

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Under this program a unit can import goods including inputs under customs duty
deferment with no interest liability. There is no investment threshold or export obligation.
The duties are fully remitted if the goods resulting from such operations are
exported. Import duty is payable only if the resulting goods or imported goods are
cleared in the domestic market (ex-bonding). All these activities should be carried out
in Licensed Bonded warehouse not in Public Bonded warehouse and Bill of entry is
required for warehousing.

So whereas Merchant trade is concerned following activities are not allowed:

Should not be “Make in India” concept.

No duty to be paid even if for duty payable goods because it is not allowed for home
consumption
There should not be any GST impact as goods are not allowed to enter in Custom
territory
There should not be any Bill of Entry for importing goods and Shipping bill for re-
exporting to buyer.

Is this allowed to change the point of origin in case of transformation

The point of origin , the port of loading cannot be changed :

Merchanting Trade transaction is a transaction which involves shipment of goods
from one foreign country to another foreign country involving an Indian Trader.
Such transactions are basically procurement and/or supply under “Bill to-Ship-to”
arrangement.
A ‘person/ consignor’ in India, without physically importing the goods into India,
procures goods from a supplier outside India and supplies the same goods to
another ‘person/consignee’ outside India.
The supplier of goods will be resident in one foreign country and the buyer of goods
will be resident in another foreign country. The merchant or the intermediary will be
resident in India
Goods do not actually enter or leave the host country i.e. Merchant Trader
Is Transhipment is the solution to adhere the guideline
Transhipment means the unloading of goods from one ship and its loading into
another to complete a journey to a further destination.
As per the Customs Act, duty becomes payable immediately after imported goods
are landed at a port or airport. To avoid payment of duty at the port of landing in
cases where goods are to be carried to another port/airport or ICD/CFS or to a
port/airport abroad, the Customs Act provides a facility of transhipment of cargo
without payment of duty.
The carriers have to obtain the landing certificates of containers from the
Customs at the destination port/ICD/CFS and submit the same to the Customs at
the originating port.
After safe landing of containers at the destination port/ICD/CFS, the importers or
their authorised agents are required to follow all Customs formalities such as filing
of bill of entry, assessment, examination of goods etc., for clearance of the
goods.

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 Similarly for re-export of goods shipping bill is required to be filed.

Is there any specific document required which will prove transformation is done without
violating the norms

Packing list

a. The name of the exporter needs to be disclosed. But the purpose of transformation
would be defeated if the name of the original exporter is disclosed. The name of the
exporter should display the name of the Merchant trader.

b. The invoice number and date should be the exporter’s invoice particulars

c. Buyer’s order number and date should be the order received by the Merchant trader
from buyer.

d. Port of loading and discharge should be the same.

e. Description of goods should remain same.

Commercial Invoice

The carrier should carry the commercial invoice raised by the Merchant Trader

Import Manifest

Consignor name , port of shipment , port of discharge, place of delivery, qty, weight,
description of

Goods should remain same as disclosed in packing list. So after despatch of goods from
original supplier how the declaration can be changed in transport documents without
disclosing the source of supply.

Yes this is possible if we opt for Switch Bill of lading BUT lot of restrictions to be followed
that would be clarified in upcoming slide.

A switch Bill of Lading refers to a second set of Bill of Lading issued by the carrier (or its
agent) to substitute the original bills of lading issued at the time of shipment.

Just like the original, the switch B/L serves as:

A receipt for goods (for the destination agent)

Evidence of contract of carriage (contract between shipper and the carrier)
Document of title to the goods (consignee will need at least one original to receive
the goods)

The reasons for requiring a switch B/L include:

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 The seller (who could be a trading agent) wants to hide the name of the actual
exporter from the consignee to prevent the consignee from striking a deal with the
exporter directly.
The original B/L may be held up in the country of shipment, or the ship may arrive at
the discharge port prior to the original B/Ls.
The Switch B/L can only be officially requested by the cargo owner or principal. only
the carrier or freight forwarder is allowed to sign a Bill of Lading.
Once the switch B/L has been approved for issuance, the carrier and/or freight
forwarder must make sure that the original set of B/Ls is taken out of circulation and
cancelled before the switch B/L can be released.
This is important as it ensures that there is only one set of documents in force to
prevent problems. Switch bills of Lading do not contain any information that
indicates that they are not the initial and original B/Ls
When a switch bill is issued, a new invoice and packing list must also be issued to
reflect the new changes accordingly and accurately.

Example:

Company A based in the UK sells gardening tools worldwide which are supplied by
company B based in China. Company C in the US places an order to purchase
some of company A’s products. As usual, company A contacts its freight forwarder
to assist with the shipment from China to the US.
Once all necessary customs clearance procedures at the loading port are
completed, the freight forwarder issues a bill of lading and sends it to company A.
Up to here, all normal.
The shipper and the consignee under this bill of lading are company B and
company A, respectively. However, company A does not wish the ultimate buyer in
the US (company C) to know the name of the supplier in order to avoid any
commercial deals between them. By switching bills of lading, company A can hide
the name of its supplier so that, for the new set of bills, company A becomes the
shipper and company C the consignee.

Restrictions:

If a Split Bills of Lading is issued while the Original 3 sets of Bills of Lading are still
in circulation, there will be two conflicting documents of title and two conflicting
contracts of carriage. This is why if a Split Bills of Lading is requested, all copies of
the original Bills of Lading must be surrendered to the shipping agent/Vessel
Operator before the new Bills of Lading can be issued.
This is not recommended when Letter of Credit is opened or supposed to be
opened. In Letter of Credit, they may explicitly state that the bills of lading have to
be original and be issued by the original Shipper.
The reason for Letters of Credit to not allow for a Switch Bills of Lading is to prevent
multiple parties claiming ownership of the cargo.
The carrier may request a Letter of Indemnity to indemnify themselves from any
fraudulent claims or legal action against them when issuing a Switch Bills of Lading.

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CONTROL POINTS FOR ONE TO ONE MATCHING

In addition to control points mentioned in earlier slides “ONE TO ONE MATCHING

PRINCIPLES” following additional points to be looked into to prove it as bonafide
transaction

No letter of Credit exist while transformation takes place. If Letter of Credit is

opened then the Beneficiary/Remitter has to produce original copy of Bill of lading
prior to issuance of Switch Bill of Lading.
Copy of the original bill of lading needs to be produced to verify port of loading, port
of discharge and description of goods.
Original copy of Switch Bill of lading duly signed by the carrier has to be produced
as an evidence of transformation.
Copy of the letter instructed by the Merchant trader to carrier for Switch Bill of
lading.
The shipping line or freight forwarder must be an office in the country where the
switch bill of lading is being issued.
The copy of confirmed purchase order and Proforma Invoice as a supporting are
suggested to be produced as an evidence of agreement.

Tags: Government Policy

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Author Bio

Name: ALOK KUMAR GHOSH

Qualification: Graduate

Company: Oxford University Press India

Location: Indirapuram, Uttar Pradesh, IN

Member Since: 30 Dec 2020 | Total Posts: 4

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