@Prashant777 

In your scenario at update section, you are trying to update primary keys aswell, which Delta Table can't differentiate when you re-run the same batch/file and throws error as all duplicates, to run without error/fail, remove (Target.Distributor_ID = Source.Distributor_ID, Target.Customer_ID = Source.Customer_ID) columns from UPDATE clause. Updated code below.

MERGE INTO slvr_masterdata.Customer_Master as Target

USING preprocessed_source AS Source

ON Source.Key_ID = Target.Key_ID

WHEN MATCHED THEN

UPDATE SET

       Target.Customer_Name = Source.Customer_Name,

       Target.Channel = Source.Channel,

       Target.Time_Stamp = current_timestamp()

WHEN NOT MATCHED

  THEN INSERT

  (

        Distributor_ID,

         Customer_ID,

         Customer_Name,

        Channel,

        Time_Stamp

  )

  VALUES (

       Source.Distributor_ID,

      Source.Customer_ID,

      Source.Customer_Name,

      Source.Channel,

      current_timestamp()

)