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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:
- 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.
- To specify who is going to subscribe the contract of carriage that
is to say the seller (exporter) or the buyer (importer).
- To distribute between the seller and the buyer the logistic and
administrative expenses at the various stages of the process.
- 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
- Terms beginning with F refer to shipments where the primary cost of
shipping is not paid for by the seller.
- Terms beginning with C deal with shipments where the seller pays for
shipping.
- E-terms occur when a seller's responsibilities are fulfilled when
goods are ready to depart from their facilities.
- 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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