Merchant Trade Transactions (MTT) – Statutory Compliance Aspects

A Merchant Trade Transaction is a transaction where:

• The Indian intermediary (merchant trader) does not physically import the goods into India, and
• The goods move directly from a foreign supplier to a foreign buyer, while payments flow through India.

India acts as a middleman, earning a margin.

1. RBI (Reserve Bank of India) – Compliance Aspects

RBI guidelines are issued under FEMA (Foreign Exchange Management Act).

Key Conditions (as per RBI Master Direction on Export of Goods & Services)

1. Both legs must be genuine trade transactions (with firm orders).
2. No physical movement through India (goods must move directly from supplier to buyer).
3. Shipment timeline:
   • Import leg must precede export leg or be on back-to-back basis.
   • The entire MTT must be completed within the same financial year (latest rule).
4. Receipt and payment must be routed through same AD Bank.
5. Payment for import can be made only after export proceeds are realized (to avoid forex risk).
6. No advance payment to the supplier unless:
   • Export advance is received first, and
   • Bank is satisfied about risk mitigation.
7. KYC & AML checks on supplier and buyer are compulsory.
8. Third-party payments need prior bank approval.
9. Netting off is allowed if bank is satisfied that both legs are linked.

Documentation Required by Bank

• Purchase order from foreign supplier
• Sales order to foreign buyer
• Invoice copies
• Transport documents (BL/AWB) directly from Supplier  Buyer
• Proof of payment/receipt

2. DGFT (Directorate General of Foreign Trade) – Compliance

Even though no physical export/import occurs in India, MTT is treated as:

• Deemed export & deemed import for DGFT recordkeeping.

Key DGFT Aspects

1. IEC (Import Export Code) is mandatory.
2. MTT must be reported under Non-EDI shipping bill category for statistical purposes.
3. No FTP benefits (MEIS/RODTEP/Advance Authorization) are available because goods do not enter or exit India.
4. For restricted items, specific DGFT permission is required.

3. Customs – Compliance Aspects

Since goods do not cross Indian borders, Customs involvement is minimal.

Key Points

1. No Bill of Entry (import) and No Shipping Bill (export) are filed in India.
2. Customs duty is not applicable in India.
3. Indian trader must ensure:
   • Supplier issues foreign Bill of Lading/Airway Bill directly to the foreign buyer.
   • Indian entity appears as “notify party” or “shipper on paper” as per agreement.

Only in special cases (like High Seas Sale) customs involvement arises, not in MTT.

4. GST – Compliance Aspects

GST law mainly considers whether the supply is intra-state, inter-state, or outside taxable territory.

Key GST Interpretations

1. Supply of goods is not taxable because goods:
   • Are never imported into India, and
   • Never physically supplied from India.
2. MTT is treated as:
   • Neither supply of goods nor supply of services
     (as per CBIC Circulars & several AAR rulings)
3. No GST on:
   • Margin earned
   • Sales invoice issued to foreign buyer
4. Place of supply is outside India, so GST does not apply.

GST Compliance Requirements

• Issue a commercial invoice without GST.
• Record transactions under “No Supply” category in returns.
• Show turnover in Annual Return (GSTR-9) under exempt/non-taxable supplies.

5. FEMA (Foreign Exchange Management Act) – Compliance

FEMA governs foreign exchange transactions involved in MTT.

Key FEMA Aspects

1. All foreign exchange must be routed through the same AD bank.
2. Realization of export proceeds must happen before payment for import is made.
3. Time limits:
   • Export realization: 9 months (or as per RBI rules)
   • Import payment: Within 6 months, subject to export proceeds being realized
4. Pricing must make business sense; banks examine:
   • Profit margin
   • Arms-length nature
   • No over-invoicing/under-invoicing
5. Transactions involving sanctioned countries require special approval.

Compliance Summary Table

In Short

A Merchant Trade Transaction involves goods moving directly between two foreign countries via an Indian entity. Statutory compliance involves following RBI/FEMA guidelines on forex flow and timelines, DGFT rules on IEC and reporting, GST rules treating MTT as “no supply,” and ensuring no customs procedures apply since goods do not touch Indian territory.