Incoterms

[Submitted by CA. Vibhuti Gupta,
New Delhi]

July 29, 2008

Click here for "Incoterms Matrix"

Language is one of the most complex and important tools of International Trade. As in any complex and sophisticated business, small changes in wording can have a major impact on all aspects of a business agreement.

Word definitions often differ from industry to industry. This is especially true of global trade. Where such fundamental phrases as "delivery" can have a far different meaning in the business than in the rest of the world.

For business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created "INCOTERMS" in 1936. INCOTERMS are designed to create a bridge between different members of the industry by acting as a uniform language they can use.

Incoterms are used in union with a sales agreement or other methods of sales transactions and define the responsibilities and obligations of both, the exporter and importer in Foreign Trade Transactions.

The main objectives of Incoterms 2000 revolve around the contract of Foreign Trade concerned with the loading, transport, insurance and delivery transactions. Its main function is the distribution of goods and regulation of transport charges.

Another significant role played by Incoterms is to identify and define the place of transfer and the transport risks involved in order to justify the ownership for support and damage of goods by shipments sent by the seller or the buyer in an event of execution of transport.

Incoterms make international trade easier and help traders in different countries to understand one another. These International Commercial Terms are the most widely used international contracts protected by the ICC copyright.

Incoterms safeguard the following issues in the Foreign Trade contract or International Trade Contract:

1. To determine the critical point of the transfer of the risks of the seller to the buyer in the process forwarding of the goods (risks of loss, deterioration, robbery of the goods) allow the person who supports these risks to make arrangements in particular in term of insurance.
    
2. To specify who is going to subscribe the contract of carriage that is to say the seller (exporter) or the buyer (importer).
    
3. To distribute between the seller and the buyer the logistic and administrative expenses at the various stages of the process.
    
4. It is important to define who is responsible for packaging, marking, operations of handling, loading and unloading, inspection of the goods.

INCOTERMS are most frequently listed by category

1. Terms beginning with F refer to shipments where the primary cost of shipping is not paid for by the seller.
    
2. Terms beginning with C deal with shipments where the seller pays for shipping.
    
3. E-terms occur when a seller's responsibilities are fulfilled when goods are ready to depart from their facilities.
    
4. D terms cover shipments where the shipper/seller's responsibility ends when the goods arrive at some specific point. Because shipments are moving into a country, D terms usually involve the services of a customs broker and a freight forwarder. In addition, D terms also deal with the pier or docking charges found at virtually all ports and determining who is responsible for each charge.

In dealing Foreign Trade there are 13 Incoterms globally adopted by the International Chamber of Commerce

1. "EXW"- Ex Works

Title and risk pass to buyer including payment of all transportation and insurance cost from the seller's door. Used for any mode of transportation.

Seller: In EXW shipment terms the Seller (Exporter) provides the goods for collection by the Buyer (Importer) on the seller or exporter's promise. Responsibility for the seller is to put the goods, in a good package which is adaptable and disposable by the transport.

Buyer: The buyer or Importer arranges insurance for damage transit goods. The Buyer or importer has to bear all costs and risks involved in shipment transactions.

(However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all the costs of such loading, this should be made clear by adding explicit wording to this effect in the contract of sale. )

2. "FCA"- Free Carrier named point

Title and risk pass to buyer including transportation and insurance cost when the seller delivers goods cleared for export to the carrier. Seller is obligated to load the goods on the Buyer's collecting vehicle; it is the Buyer's obligation to receive the Seller's arriving vehicle unloaded.

Seller: The Seller's responsibility is to deliver the goods into the custody of the transporters at defined points. It is important for the chosen place of delivery to have an impact on the obligations of loading and unloading the goods.

Buyer: The Buyer nominates the means of transport or shipping mode and pays the shipment charges.

The seller and the buyer agree upon the place for delivery of goods. If the buyer nominates a person other than a carrier or transporter to receive the goods, the seller is deemed to fulfill his obligation to deliver the goods when they are delivered to that person.

3. "FAS"- Free Alongside Ship

Title and risk pass to buyer including payment of all transportation and insurance cost once delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export clearance obligation rests with the seller. In FAS, price includes all the costs incurred in delivering the goods alongside the vessel at the port or nominated place of the buyer but there is not applicable charges to the seller for loading the goods on board of vessel and no ocean freight charges and marine insurance.

Seller: The responsibility of the seller is fulfilled when the goods are placed cleared along the ship.

Buyer: Buyer or Importer bears all the expenses and risks of loss or damage of transit goods which are delivered along the ship.

4. "FOB" - Free On Board

The FOB (Free on Board) price is inclusive of Ex-Works price, packing charges, transportation charges up to the place of shipment. Seller also responsible for o clear customs dues, quality inspection charges, weight measurement charges and other export related dues. It is important that the shipment term in the Bill of Lading must carry the wording "Shipped on Board' it must bear with signature of transporter or carrier or his authorized representative with the date on which goods were "Boarded".

Seller: The seller is responsible for clear customs dues, quality inspection charges, weight measurement charges and other export related dues. It is important that the shipment term in the Bill of Lading must carry the wording "Shipped on Board' it must bear with signature of transporter or carrier or his authorized representative with the date on which goods were "Boarded".

Buyer: The buyer indicates the ship and pays freight, transfer expenses and risks is done when the goods passes or forwarding to the buyers warehouse by rail or ship.

5. "CFR"- Cost And Freight

In this term the exporter bears the cost of carriage or transport to the selected destination port, in this term the risk transferable to the buyers at the port of shipment.

Seller: He chooses the carrier, concludes and bears the expenses by paying freight to the agreed port of destination, unloading not included. The loading of the duty-paid goods on the ship falls on him as well as the formalities of forwarding. On the other hand, the transfer of risks is the same one as in FOB.

Buyer: The buyers supports all the risk of transport, when the goods are delivered aboard by ship at the loading port, buyer receives it from the carrier and takes delivery of the goods from nominated destination port.

6. "CIF"- Cost, Insurance And Freight

Title and risk pass to buyer when delivered on board the ship by seller who pays transportation and insurance cost to destination port. Used for sea or inland waterway transportation. This Term involves insurance with FOB price and ocean freight. The marine insurance is obtained by the exporter at his cost against the risk of loss or damage to the goods during the carriage.

Seller: The CFR extends additional obligation to the seller for providing a maritime So insurance against the risk of loss or damage to the goods. The seller pays the insurance premium.

Buyer: He supports the risk of transportation, when the goods have been delivered aboard the ship at the loading port. He takes delivery of the goods from the carrier to the appointed port or destination.

7. "CPT"- Carriage Paid To

Title, risk and insurance cost pass to buyer when delivered to carrier by seller who pays transportation cost to destination. Used for any mode of transportation. This term uses land transport by rail, road and inland waterways. The seller and exporter are responsible for the carriage of goods to the nominated destination and have to pay freight up the first carrier.

Seller: The seller or exporter controls the supply chain after paying customs clearance for export. Seller or Exporter select the carrier and pay the expenses up to the destination.

Buyer: The risks of goods damages or loss are supported by the buyer as goods are given by the first carrier. The buyer or importer has to pay importation customs clearance and the unloading costs.

8. "CIP"- Carriage And Insurance Paid To

Title and risk pass to buyer when delivered to carrier by seller who pays transportation and insurance cost to destination. Used for any mode of transportation. This term is similar to Carriage Paid To but the seller has to arrange and pay for the insurance against the risk or loss or damage of the goods during the shipment.

Seller: The seller or buyer has to provide insurance and seller pays the freight and insurance premium.

Buyer: The buyer or importer supports the risks of damages or loss, as goods are given to the first carrier. The buyer has to pay customs clearance and unloading charges.

9. "DAF"- Delivered At Frontier

Title, risk and responsibility for import clearance pass to buyer when delivered to named border point by seller. Used for any mode of transportation. This term is used when the goods are to be carried by rail or road.

Seller: The seller is responsible to make the goods available to the buyer by the carrier till the customs border as defined in sales contract.

Buyer: The buyer takes delivery of the goods at the contract agreed point border and he is responsible for bearing all customs formalities.

10. DES"- Delivered Ex-Ship

Title, risk, responsibility for vessel discharge and import clearance pass to buyer when seller delivers goods on board the ship to destination port. Used for sea or inland waterway transportation.

Seller: The seller is responsible to make the goods available to the buyer up to the named quay or after crossing the customs border.

Buyer: The buyer takes delivery of the goods from ship at destination port and pays the expenses of unloading.

11. DEQ"- Delivered Ex-Quay

Title and risk pass to buyer when delivered on board the ship at the destination point by the seller who delivers goods on dock at destination point cleared for import. Used for sea or inland waterway transportation.

12. "DDU"- Delivered Duty Unpaid

Seller fulfills his obligation when goods have been made available at the named place in the country of importation.

Seller: The seller is responsible for all transportation cost and accepts the customs duty and taxes as per defined in customs procedures.

Buyer: The buyer is responsible of the importation customs formalities.

13. "DDP"- Delivered Duty Paid

Title and risk pass to buyer when seller delivers goods to the named destination point cleared for import. Used for any mode of transportation.

Seller: The seller is responsible to make the goods available to the buyer at his risk and cost as promised by the buyer. All the Taxes and duty on importation is promised by the buyer to the seller.

Buyer: The buyer is responsible to take delivery at a nominated place and pays the expenses for unloading of goods.

  

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