Merchant Trade – Intermediary Trade

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
• 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 given under 21 (twenty one heads) in next slide to differentiate the nature of transactions involved and how all these are categorized.

EXPORTS	IMPORTS	MERCHANT TRADE
When a trader from home country sells goods to a trader in another country.	When a trader in home country purchases goods from a trader in another country.	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 exporter and buyer.	The link is between importer and seller.	The link is between trader, supplier and buyer.
The end user is buyer.	The end user is buyer.	The end user is buyer.
The originator is seller.	The originator is seller.	The originator is seller.
No intermediator.	No intermediator.	Trader is an intermediator.
Direct relationship between buyer and seller.	Direct relationship between buyer and seller.	Indirect relationship between buyer and seller.
No fund is earmarked.	No fund is earmarked.	Fund is earmarked.
Duty drawback schemes are applicable for customs duty paid goods.	Goods attract customs duty and no incentive scheme is available.	No customs duty and no duty drawback.
Incoterm exists.	Incoterm exists.	No Incoterm.
Transport documents, shipping bill as an evidence of exports.	Transport documents, Bill of entry as an evidence of imports.	Transport documents as an evidence of merchant trade.
Transport risk, quality risk, delivery risk and exchange risk.	Transport risk, quality risk, delivery risk and exchange risk.	Transport risk, quality risk, delivery risk, exchange risk and higher risk of fraud and money laundering.
Third party exports (except Deemed Export) as defined in Chapter 9 shall be allowed under FTP.	Third party exports (except Deemed Export) as defined in Chapter 9 shall be allowed under FTP.	No third party payments are allowed either in the import leg or in the export leg of the Merchanting Trade Transaction.
Purpose code P0108 is required to be furnished for goods sold under exports.	Purpose code S0108 is required to be furnished for goods sold under exports.	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 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 .	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.	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.	The due date of settlement of import bill is 180 days from the date of shipment of goods.	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.	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.	No such extension of beyond permissible period 270 days or 9 months from the date of shipment.
Export declaration to be made in SDF or EDF.	Import declaration is required to be provided under DECLARATION-CUM-UNDERTAKING.	Merchant trade transaction is required to be given in Merchant Trade Declaration.
Export transactions are recorded in EDPMS.	Import transactions are recorded in IDPMS.	No such platforms are available to record Merchant Trade Transaction.
AD can consider closure of shipping bill in EDPMS that involves write off to the extent of 5% of invoice value.	AD can consider closure of BoE in IDPMS that involves write off to the extent of 5% of invoice value.	AD can consider closure to the extent of 5% of invoice value.
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 is credited to seller.	No margin and entire fund is debited to buyer.	Only merchanting margin 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

• 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.
• 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
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 Point	Remarks
Import Invoice	Export Invoice	Packing list	Import Manifest		Qty	Qty in all four documents should match except in special case.
Import Invoice	Export Invoice	Packing list			Description of goods	Description of goods in all three documents should match.
Import Invoice	Export Invoice		Import Manifest		Invoice Reference	Export Invoice and Import Manifest should contain Import Invoice No.
Import Invoice		Packing list	Import Manifest		Purchase Order No.	All three documents should carry same Purchase Order No.
Airway Bill	Import Manifest				Origin & Destination	Port of Loading and Port of Discharge should be same.
Import Invoice	Export Invoice	Packing list	Import Manifest	Airway Bill	Consignee Name	Same Consignee name should be reflected in all five documents.
Import Invoice	Export Invoice	Packing list	Import Manifest	Airway Bill	Bill to & Ship to	“Bill to” in 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 Bill	Import Manifest				Airway Bill No.	Same House Airway Bill Number should appear in Import Manifest.
Airway Bill	Import Manifest				Weight or Volume	Same weight should be shown in both documents.
Airway Bill	Import Manifest				Date of Despatch	The date of despatch shown in Import Manifest should be prior to actual date of despatch .
Airway Bill	Import Manifest				Shipper Name	Same shipper name should be in line with both documents.
Export Invoice	Swift Message	Import Manifest	Airway Bill	Import Invoice	Buyer-Remitter	The Buyer and remitter should be same in all five documents.
Export Invoice	Swift Message	Collection Order			Amount Remitted	The total amount received should match with Export invoice and Collection Order.
Swift Message					Payment Reference	he swift message should contain either proforma invoice no/Import Invoice No/Export Invoice No.
Swift Message					ACU Mechanism if it pertains to Asian Countries	The Swift message should contain message confirming ACU mechanism followed or Name of the Banker of India Origin.
Export Invoice	Import Invoice	Despatch Particulars	Inward Remittance		Purpose Template	Purpose template should mention purpose code PI008 under merchant trade and request for ear mark of fund should be mentioned.
Airway Bill					Due date of Shipment	Permissible settlement 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 Bill	Import Manifest	Import Invoice			Export Invoice	Export 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.

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.
• 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.
• 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.
• 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.

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).

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.
• 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:

• 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.

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.