IMPORTS PROVISIONS MERCHANTING TRADE

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1 IMPORTS PROVISIONS MERCHANTING TRADE

2 Merchanting Trade Merchanting Trade transactions are those transactions where the trader in one country A, purchases goods from country B and supply the goods to a buyer in country C. Thus the goods never touch the boundary of the country of trader. In India such trade transactions are regulated and certain restrictions are placed on them. The gist of RBI guidelines on such transactions is as under: For a trade to be classified as Merchanting Trade following conditions should be satisfied: Goods acquired should not enter the Domestic Tariff Area and b. The state of the goods should not undergo any transformation. AD bank may handle bonafide Merchanting Trade Transactions and ensure that: (a) Goods involved in the transactions are permitted for export / import under the prevailing Foreign Trade Policy (FTP) of India as on the date of shipment and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively, (b) Both the legs of a Merchanting Trade Transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents (if originals are not available, non-negotiable copies duly authenticated by the bank handling documents may be taken) and satisfy itself about the genuineness of the trade. (c) The entire Merchanting Trade Transactions should be completed within an overall period of nine months and there should not be any outlay of foreign exchange beyond four months.

3 (d) 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; (e) Short-term credit either by way of suppliers' credit or buyers' credit will be available for Merchanting Trade Transactions, to the extent not backed by advance remittance for the export leg, including the discounting of export leg LC by an AD bank, as in the case of import transactions ; (f) In case advance against the export leg is received by the Merchanting Trader, AD bank should ensure that the same is earmarked for making payment for the respective import leg. However, AD bank may allow short-term deployment of such funds for the intervening period in an interest bearing account; (g) Merchanting Traders may be allowed to make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, AD bank may handle such transactions by providing facility based on commercial judgement. It may, however, be ensured that any such advance payment for the import leg beyond USD 200,000/- per transaction, should be made against Bank Guarantee / LC from an international bank of repute, except in cases and to the extent where payment for export leg has been received in advance; (h) 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; (i) Payment for import leg may also be allowed to be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the Merchant Trader. (j) AD bank should ensure one-to-one matching in case of each Merchanting Trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis in the format as given in Annex 1, within 15 days from the close of each half year, i.e. June and December. (k) Defaulting Merchanting Traders, whose outstandings reach 5% of their annual export earnings, would be caution-listed. (l) The KYC and AML guidelines should be observed by the AD bank while handling such transactions.

4 Merchanting Traders have to be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. AD banks should satisfy themselves about the capabilities of the Merchanting Trader to perform the obligations under the order. The overall Merchanting Trade should result in reasonable profits to the Merchanting Trader. Merchanting trade to Nepal and Bhutan As Nepal and Bhutan are landlocked countries, there is a facility of transit trade whereby goods are imported from third countries by Nepal and Bhutan through India under the cover of Customs Transit Declarations in terms of the Government of India Treaty of Transit with these two countries. In consultation with Government of India, it is clarified herein that goods consigned to the importers of Nepal and Bhutan from third countries under merchanting trade from India would qualify as traffic-in-transit, if the goods are otherwise compliant with the provisions of the India-Nepal Treaty of Transit and Indo- Bhutan Treaty of Transit respectively.

5 Many inquiries are received showing confusion in understanding a merchanting trade transaction and high seas sale transaction. To understand high seas sale transaction please go through the following paragraphs. High seas sale: If a buyer wants to sell his consignment to a third party before arrival of goods but after sailing vessel from load port, such sale is known as high sea sale. In simple words, the ownership of goods is transferred, when goods are on transit. As defined in Central Sales Tax Act Section 5 (2), A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. As per above definition, for a transaction to be consider as high seas sale, it have to satisfy three conditions: 1. A sale or purchase shall be deemed to take place in the course of import of the goods into the territory of India only if : A. the sale or purchase either occasions such import, or B. it is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontier of India. 2. Section 2(4) of the Sales of Goods Act,1930 defines document of title to goods, document of title to goods include a bill of lading, dock warrant, warehouse-keeper s certificate, wharfinger s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof to the possession or control of goods, or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented ;

6 The bill of lading is considered to be document of title to goods and the sale can be made by endorsement delivery or by mere delivery of a blank bill of lading before the goods cross the customs frontier. It may be noted that airway bill is not a document of title to goods. However, delivery order issued by banker is recognised as a negotiable document. 3. Section 2(ab) of the Central Sales Tax Act, 1956 defines Crossing the customs frontiers of India. It is defined as under: Crossing the customs frontiers of India means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by custom authorities. Process flow of High Sea Sales Transaction: The following is the procedure that is followed in case of High Sea Sales:- 1. High Sea Seller places order with supplier for import of goods. 2. Supplier ships the goods to High Sea Seller and submits the documents to his bank counter. (Assumption in this case: Payment mode is Documents Against Payment) 3. High Sea Seller sells the goods to High Sea Buyer while the goods are still on High Sea by entering into an agreement of sale to effect the sale on high sea of specific goods. 4. Documents arrives at banks counter of High Sea Seller s bank. High Sea Seller makes payment and gets documents released. 5. The document of title i.e. Bill of Lading is endorsed by the High Sea Seller in favour of High Sea Buyer and provides him with local invoice (in INR) and other documents required to file Bill of Entry. 6. High Sea Seller retains a copy of the endorsed Bill of Lading and hands over original Bill of Lading to High Sea Buyer under covering letter. 7. High Sea Buyer shall file Bill of Entry and pay customs duty, clearing charges etc. and gets the goods released. 8. High Sea Buyer hands over a Copy of Bill of Entry to High Sea Seller for further submission to his Bank.

7 Documents Provided By High Sea Seller to High Sea Buyer 1. High Sea Sale Agreement 2. Sale Invoice in INR 3. Consignee Copy of B/L Duly Endorsed in favour of Buyer 4. Import Invoice, Packing List, Certificate of Origin & Insurance Certificate-Duly Endorsed in favour the High Sea Buyer

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