September 5, 2023

“One-to-one Matching” principle under Merchant Trading Transactions

“Merchant Trading Transactions” are those transactions wherein goods neither enters into India nor Moves out of India. However, shipment moves from one country outside India to another country outside India with an Indian acting as intermediary in such a transaction.

With the expansion of online trading platforms, Merchant Trading Transactions has become quite common as it is easy for a person to procure goods from an outside country and then find a customer in the international market. In case of MMT, goods neither enters into India nor moves outside India, however, these transactions are still regulated by Reserve Bank of India as it involves inflow and outflow of foreign currency.

In this article a detailed discussion has been carried out of “One-to-One Matching” principle of Merchant Trading Transaction:

1. What is the “One to One Matching” Principle

A Merchant Trading Transaction involves two legs of transaction, i.e., Import Leg and Export Leg.
Import Leg is when intermediaries based out In India procure goods from outside India and Export leg is when such goods are sold out of India.
As per guidelines issued by Reserve Bank of India with respect to MTT vide circular No. RBI/2019-20/152 A.P. (DIR Series) Circular No.20 dated 23rd January, 2020, an MTT commences with date of shipment and ends which such shipment reaches to the destination of ultimate customer.
Entire MTT transaction should be completed within 9 months and the outlay of Foreign Currency should not go beyond 4 months.
In order to show compliance with RBI Guidelines, Indian Intermediary may show import leg of one MTT transaction and export leg of another MTT transaction to AD Bank.
E.g. An Indian Intermediary has entered into following 2 MTT Transaction:

Merchant Trade Transaction-1	Merchant Trade Transaction-2
Supplier: XYZ Limited	Supplier: XYZ Limited
Goods: Product A	Goods: Product B
Customer: ABC Limited	Customer: ABC Limited
Date of Commencement of MTT: 1st January, 2020	Date of Commencement of MTT: 1st March, 2020
Date of end of MTT: 31st October, 2020	Date of end of MTT: 30th September, 2020

First MTT transaction has not been completed within 9 months, time stipulated by RBI. Therefore, while giving documents for verification to AD Bank, Indian Intermediary may disclose Import Leg of 1st Transaction and Export Leg of 2nd transaction to disclose that MTT-1 has been completed within permitted time.
Therefore, RBI has directed AD bank shall ensure “One-to-One” matching of each Merchant Trading transaction, i.e., import transaction and export transaction should pertain to one MTT.
If AD Bank discovers any default in any leg by the trader then such default shall be reported to the concerned regional office of RBI.

2. What are documents an AD Bank should consider for “One-to-One” Matching

An AD Bank should consider following 8 documents:

Import Invoice: This is the invoice raised by the supplier, based outside India, on the Intermediary for supply of goods. Supplier enter address of Intermediary under ‘Bill to” column and address of ultimate customer, i.e., to whom goods to be delivered, under “Ship to” Column.
Export Invoice: This is the invoice raised by Indian Intermediary on customers based outside India. Name and address of Customer appears under “Bill to” Column.
Packing List: Packing list contains information about Goods to be exported including Details of Exporter/Consignor, Importer/Consignee, Invoice Number, country of origin, country of destination, description of goods etc. Therefore, information in packing list should match with the corresponding invoice prepared by the supplier.
Bill of Lading: A bill of lading is a legal document issued by the carrier to the shipper that contains details of goods being carried in the cargo. It contains information about Type, Quantity and destination of goods being carried. This document must be signed by an authorised representative from the carrier, shipper, and receiver and must accompany the transported items.
Airway Bill: An air waybill (AWB) is a document that accompanies goods shipped by an international air courier. Air waybill is a type of Bill of Lading, but an AWB is issued in non-negotiable form, meaning there’s less protection with an AWB versus bills of lading.
Import General Manifest (IGM): IGM is a legal document filed by the carrier with the custom authority of the designation country before the arrival of goods at the customs station. IGM contains details about Importer’s Name and address, description of goods, country of origin etc.
Swift Message: SWIFT is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes about funds transfer.

3. Information to be matched by AD Bank

RBI does not issue any check list of information to be checked by AD Bank to ensure that one to one matching of Merchant Trade Transaction. However, a bank should match 18 standard points to check all documents shared by Merchant Trader are pertaining to one MTT.

3.1 18 Match Points that are to be considered

In the table given below you can find the 18 match points that are to be considered as full proof evidence under the one-to-one principle in a merchant trade.

Doc-1	Doc-2	Doc-3	Doc-4	Doc-5	Match Point	Remarks
Import Invoice	Export Invoice	Packing List	Import Manifest		Quantity	Quantity in all four documents should match except in special cases.
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 the same Purchase Order No.
Airway Bill	Import Manifest				Origin and Destination	Port of Loading and Port of Discharge should be the 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	Bil to and Ship to	“Bill to” in the export invoice should be in line with “Ship to” in Import Invoice. Further “Bill to” in export invoice should be the 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 the Import Manifest.
Airway Bill	Import Manifest				Weight or Volume	Same weight should be shown in both documents.
Airway Bill	Import Manifest				Date of Dispatch	The date of despatch shown in the 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 the same in all five documents.
Export Invoice	Swift Message	Collection Order			Amount Remitted	The total amount received should match with the Export invoice and Collection Order.
Swift Message					Payment Reference	The 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 a 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 the 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 the date of all three documents.

3.2 Mismatch of Certain information

Although about mentioned information should be matched in corresponding documents. However, there can be genuine cases where following information may differentiate:

3.2.1 Different of Weight/Volume:

The issue of a discrepancy between the weight of the consignment and the weight shown on the commercial invoice always arises, but there are a few things to examine before reaching a conclusion about the material truth.

Whether shipment is full container load (FCL) or Less than container load (LCL)
- Full container Load is an ocean shipping term wherein supplier has enough cargo to fill a container. Therefore, the shipper books an entire container for him and all goods in the container belong to a shipper only.
- However, in case of Less than Container Load (LCL), a shipper does not have enough goods to fill a full container, he will book cargo with a consolidator who will combine his commodities with the goods of other shippers.
- Therefore, in case of LCL, weight of the consignment differs from weight shown in commercial invoice.

Whether shipment by the shipper is made by consolidating goods of multiple suppliers
- Sometimes international buyers place orders with various suppliers and prefer to have the shipment handled through their own means.
- In that situation, the buyer instructs merchant traders to inform their suppliers, and products are delivered from the warehouse to the shipper’s warehouse. The shipper ships items after receiving goods from several sources and merging all supplies into a single cargo.
- As a result, the weight shown on the supplier’s commercial invoice differs from the weight shown on the import manifest.

Maximum allowable weight of the consignment
- The maximum permissible weight for marine shipping is 67,200 pounds (30240 kg), while the maximum allowable weight for air transport is 350 pounds (158 kg.). The maximum permissible weight varies by container size, with a 20′ container weighing 62,150 pounds (28,000 kg) and a 40′ container weighing 59,200 pounds (26640 kg). Maintaining ship stability while loading containers is critical to the safety of all cargo aboard a cargo ship.
- The weight on the commercial invoice is taken from the supplier’s warehouse, but customs has its own warehouse management system (WMS). Weight and measurements are automatically captured and entered in the WMS as the cargo passes down the conveyor.
- As a result, the weight specified in the import manifest and airway bill is the ultimate weight to be considered. If there is a mismatch , that point needs to be addressed.

3.2.2 Mismatch of Buyer Name and Remitter’s Name

The buyer’s name should be the same on the export invoice under “Bill to,” on the import invoice under “Ship to,” on the import manifest and airway bill under “consignee,” and finally on the swift message.
Any discrepancy on any document should be considered a “Buyer-Remitter” mismatch.
During the transition phase, companies may merge or change their names, which is not reflected in transport papers, commercial invoices, or export invoices, and is not reported to customs.

To arrive at a final resolution or accept the name change, the following documents must be supplied to authenticate the name change.

CIN: Number assigned to a business. The CIN number should be the same before and after the products are shipped. As a result, together with the application to the ROC, a copy of the CIN must be produced as evidence.
Letterhead: A copy of the letterhead with the CIN must also be distributed.
Court Order: A copy of the court order must also be presented as proof.
Address proof: A copy of the utility bills will be generated as a supporting document in order to authenticate the same entity.
PAN: For validating the subject m, both a copy of the PAN from before the merger/change in business stage and a copy of the new PAN appropriate for the new company are necessary.

4. Reporting to RBI in case of Non-compliance

As per RBI guideline names of defaulting merchant traders 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 :

The export proceeds exceed the time limit of 270 days from the date of dispatch.
Foreign exchange outlay occurs after 4 months from the date of receipt of funds in the case of advance payment.
Merchant traders fail to provide unambiguous proof of shipment, such as transport paperwork, as required.
According to FTP Policy, merchant traders completed transactions for banned commodities on the import negative list.
After subtracting import payments and related expenses from export earnings for the specific MTT, the merchant trader fails to reach margin on merchant trade or has a reduced margin.
Import duties on merchant trade (excluding other import duties such as direct import and presumed import) account for 5% of yearly merchant export earnings (excluding regular exports).
Merchant trade announces export proceeds as conventional exports rather than declaring them as merchant trade proceeds, and takes advantage of the direct credit facility without earmarking the cash.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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