I tried specifying the file path directly but did not work.
It seems the MerInstaller is internally using wget and I could not figure out an option for wget to get from a local path.

Now I just got a workaround, not perfect but it works..
I started a apache server on my desktop and from MerInstaller I now give the URL for the image on my desktop.

But even now there needs to be a copy happening from my desktop to N810..but it is still much faster than the download from internet.