Counsel

1. The transaction referred to in the Query is called a Merchanting Trade or Intermediary Trade.

2. Merchanting trade signifies trading of goods in the international market whereby the subject goods are neither imported into nor exported out of India.

In other words, for a trade to qualify as merchanting trade, two conditions are to be met: (i) goods acquired should not enter the domestic tariff area of a country; and (ii) the state of the goods should not undergo any transformation during their movement. Simply, there is inflow and outflow of foreign currency which requires monitoring and reporting.

3. All licenses required to be taken for a usual import-export transaction under the prevailing Foreign Trade Policy of India (‘FTP'), as on the date of shipment and all the rules and regulations applicable are to be complied with for the export leg and import leg respectively for mrechanting trade (except the requirement of filing of shipping bill/export declaration form in case of exports and filing of bill of entry in case of imports);

The Authorized Dealer Bank of the trader (‘ADB') should be satisfied that the underlying transactions are bona fide While handling such transactions, the ADB should observe the Know Your Customer and Anti-Money Laundering guidelines prescribed by the RBI.

4. Typically, in India an export transaction or a transaction which earns foreign exchange for the country is given a zero-rated treatment i.e. no tax burden is cast on the transaction (no tax on the output side and refunds/set-off of tax paid on the input side). Such transactions may additionally be incentivized (by granting ‘duty credit scrip') under the Foreign Trade Policy.

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