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HomeProcurement/Supply Chain ManagementIncoterms: Commercial Terms for International Transaction

Incoterms: Commercial Terms for International Transaction

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Incoterms are commercial terms for international transitions. Every supply chain manager, procurement expert, exporter and importer should be aware of these common terms. We will learn about incoterms in this article.

What are Incoterms?

Incoterms are international commercial terms which define who is responsible for what during the international transactions. These are standard terms of transaction used internationally in commercial contracts and provide a common understanding of the obligations and responsibilities of each player involved in the transaction. Since the incoterms are internationally accepted terms, therefore they greatly reduce the risk of misunderstanding the tasks & responsibilities of seller and buyer during transactions.

Incoterms were first published in 1936 by the International Chamber of Commerce as an industry standard to facilitate international trade and to interpret the trade terms that the parties of a contract of sale could agree to apply. These rules form an essential part of the day-to-day international trade as well as domestic trade and they form an integral part of many sales contracts worldwide.

There are 11 incoterms which are classified into four groups: E, F, C & D.

Category E (Departure)- This category has only one incoterm, i.e. EXW (Ex Works).

Category F (Main Carriage Unpaid)- It has three incoterms:

  • FCA (Free Carrier)
  • FAS (Free Alongside Ship)
  • FOB (Free on Board)

Category C (Main Carriage Paid)- It contains four incoterms:

  • CPT (Carriage paid to)
  • CIP (Carriage and Insurance paid to)
  • CFR (Cost and Freight)
  • CIF (Cost, Insurance and Freight)

Category D (Arrival)- This category has three incoterms:

  • DAP (Delivered at Place)
  • DPU (Delivered at Place Unloaded)
  • DDP (Delivered Duty Paid)

The four above-mentioned categories can also be classified as per the mode of transportation:

  • Incoterms for any mode of transport: EXW, FCA, CPT, CIP, DPU, DAP and DDP;
  • Incoterms only for sea and inland waterway transport: FAS, FOB, CFR and CIF.

Each Incoterm contains a set of obligations for both the seller and the buyer covering the following issues:

  • Delivery,
  • Transfer of risks,
  • Carriage,
  • Insurance,
  • Delivery/transport document,
  • Export/import clearance,
  • Allocation of costs.
  • The description of all the incoterms is given below:

Terms used for all modes of Transport

EXW- Ex- Works

The Ex- Works incoterm means that the seller is required to deliver goods to buyer at seller’s place of business. In this term the seller’s risk is minimum and at the point, seller has delivered the goods to buyer, whole risk and obligations like safety, insurance, transportation, etc. transfers to buyer. The seller can deliver goods at his choice of place like workshop, plant, office, etc. and after that the buyer is required to load the foods in a vehicle and carry them to their destination. Until the delivery of goods all risks and costs of goods are borne by the seller.

An example of this type of transport is courier shipment where the courier agent pics the goods from seller at seller’s place and then afterward all the risks and responsibilities are borne by the courier company.

FCA- Free Career

In this type of incoterm, the delivery of goods takes place in two ways:

(a) If the named place is seller’s premises, then the goods are deemed to be delivered when they are loaded at the seller’s vehicle.

(b) If the named place is somewhere else like a sea port or an inland container port in the destination country, then the goods are loaded in the seller’s vehicle, carried by seller to that place and handed to the buyer where the buyer unloads the goods and carry with him. Then afterwards, the risks and responsibilities of the goods get transferred to the buyer.

 Seller’s obligations under FCA

  • Do all the export formalities and take care of all the documents required for export of goods.
  • Carriage of goods up to the agreed point of destination and handover to buyer
  • Take care of all the risks up to the agreed point of destination

Buyer’s obligations under FCA

  • Unload the goods from the seller’s vehicle at agreed point to destination and carry them forward
  • Import clearance and all import formalities
  • Take all the risks of goods form the agreed point of destination

CPT- Carriage Paid To

‘CPT- Carriage Paid To’ means the seller has to deliver the goods to the carrier or the other person nominated by the seller at an agreed place and the seller must pay the cost of transporting goods at that place.

The risks related to the goods transfers to the buyer once the seller hands over the goods to the road carrier, but the cost of carrying the goods to the agreed place are borne by the seller.

Seller’s obligations under CPT are as follows:

  • Take care of all export formalities
  • Enter into contract with carriers and pay for carriage of goods up to agreed place of destination
  • Take care of all export permits, quotas and other documentation.

Under CPT, the buyer has following obligations:

  • Any transport movement from the agreed place of destination.
  • The risks after the seller transfers goods to the first carrier.
  • Full cargo insurance from origin to destination.
  • All import permits, quotas, documentation, etc. related to cargo.
  • Import custom clearance.

CIP- Carriage & Insurance Paid To

This incoterm is similar to CPT- Carriage paid to and the seller has same obligations, i.e., in addition to hand over the goods to the carrier contracted by the seller and to clear the goods for export except the seller has also to arrange for insurance to cover the buyer’s risk of loss or damage to the goods during carriage.

The seller has following obligations under this incoterm:

  • Export clearance
  • Pay for the carriage of goods to the name place of destination and enter into the relevant contract of carriage with the various carriers
  • Arrange and pay for the insurance to cover the buyer’s risk
  • Take care of all export permits, quotas and other documentation.

It is important to note that under this incoterm, that once the seller hands over the goods to the first carrier, the risks transfers from seller to buyer, whereas the costs to carry the goods to the named place of destination shall be paid by the seller.

The buyer’s obligation under CIP:

  • Carriage of goods from agreed place of destination
  • Bearing the risk of goods from the point seller transfers the goods to first carrier
  • All import permits, quotas and other documentation
  • Import custom clearance

DPU- Delivered at Place (Unloaded)

also called DAT- Delivered at Terminal

This incoterm was introduced in 2020 as a replacement of DAT- Delivered at Terminal incoterm.

As per the DPU- incoterm, the delivery of goods is deemed to occur when the seller delivers the goods, unload them and puts at the disposal of buyer at the place of destination. It is the only incoterm requiring unloading from the seller. The seller bears risk of goods until the goods are unloaded at the place of destination.

The seller has to arrange for suitable carrier and enter into agreement with the carrier on its own expense for carriage of goods. The seller also has obligation to clear the goods for export and not for import.

The seller’s obligations under DPU

  • Take care of export clearance of goods
  • Enter into contract with appropriate carrier and pay for transportation of goods up to the agreed terminal
  • Take care of all the export permits, quotas and other documentation required for export
  • Unload the goods at the destination terminal
  • Bear all the risks until the goods are unloaded and put on disposal of the buyer at the agreed terminal

The buyer’s obligations under DPU

  • Carriage of goods from agreed place of destination
  • Bear all the risks after they are unloaded the agreed port of destination
  • Take care of all import permits, quotas and other documentation required for import of goods
  • Get the goods cleared for import

DAP- Delivered at Place

Under Delivered at place (DAP) incoterm, the goods are deemed to be delivered by the seller to the buyer when the seller handover the goods to buyer ready for unloading at the named place of destination. All risk to bring the goods to named place of destination is borne by the seller. The difference between CPT/ CIP and DAP incoterm is that in DAP incoterm, the place of delivery and place of destination are same while in CPT/ CIP incoterm, they may be different.

Seller’s obligations under DAP are as follows:

  • Export clearance
  • Pay for carriage of goods to the named place of destination.
  • Inter into contract with appropriate carrier/ carriers to deliver the goods to the named place of destination.
  • Take care of all export permits, quotas, documentation, etc.
  • To bear all risks up to agreed place of destination.

Buyer’s obligations under DAP are as follows:

  • Carriage of goods from the agreed place of destination
  • All risks after agreed place of destination
  • All import permits, quotas, documentation, etc.

DDP- Delivered Duty Paid

Under DDP Incoterm the goods are deemed to be delivered when the seller delivers the goods to the buyer at the named place of destination cleared for import on the arriving means of transport for unloading. The seller bears all costs and risks involved in bringing the goods after getting them cleared from export and import, to pay export and import duties and carry out all the custom formalities. It is the incoterm imposing maximum obligation on the seller and only incoterm requiring custom clearance by the seller.

Seller’s obligations under DDP incoterm:

  • Export clearance
  • Pay for carriage of goods to the agreed destination
  • Take care of all the exports, quotas and other documentation.
  • Carrying all the risks to the agreed point of destination
  • Take care of custom clearance at the destination port, pay the duty and other charges as applicable.

Buyer’s obligations are as follows:

  • Carriage of goods from the agreed place of destination
  • All the risks and insurances after the agreed point of destination.

 Terms used for Sea and Inland Waterway

Transport

FAS- Free Alongside Ship

As per the FAS incoterms, the seller delivers the goods alongside the ship/ vessel nominated by the buyer at the named port of shipment. The risk of goods is transferred from the seller to the buyer when the goods are delivered alongside the ship. The seller clears the goods for export and not for import. Under this incoterm, the buyer bears all the expenses for carriage of goods from the named port of shipment.

Seller’s obligations under FAS:

  • Handle all the export formalities
  • Pay for carriage of goods to the agreed port of ship
  • Enter into contract of carriage with various carriers up to the agreed port, terminal or ship.
  • Take care of export permits, quotas and other documents.
  • Cover all risks to the agreed point of delivery

Buyer’s obligations under FAS:

  • Loading of foods on the ship.
  • All cargo handling charges at the agreed port.

FOB- Free on Board

In this incoterm, the seller delivers the goods on board the ship nominated by the buyer at the named port of shipment. Once the seller delivers the goods on board the ship, all the risks associated to the goods are transferred to the buyer. The seller is also required to clear the goods for export and not for import under this incoterm. The seller has no obligation to enter into contract of carriage. No insurance is required under this incoterm by the buyer of the seller.

Seller’s obligations under FOB:

  • Take care of all the export formalities for goods.
  • Pay for the carriage of goods till they are loaded on board in a ship.
  • Enter into carriage contract with various carriers till the agreed point to delivery.
  • Take care of all export permits, quotas and other documents.
  • Cover all risks up to agreed point of delivery.

Buyer’s obligations under FOB:

  • Arrange for ship for loading the goods from the agreed point of delivery.
  • Enter into contract with the suitable carrier for carriage of goods from the agreed point of delivery.
  • Cover all risks form the agreed point of delivery till they arrived to final destination.

As with all Incoterms® (with the exception of CIP & CIF terms), neither the buyer nor the seller is obliged to insure the goods, and this insurance requirement is not specifically covered in the Incoterms® rules. This crucial issue must be discussed and agreed upon as part of the sales contract and terms of sale.

CFR- Cost & Freight

Under this incoterm, the seller has to deliver the goods by placing them onboard on a ship. The risk of goods transfers to the buyer once the goods are placed on board of vessel at the port of delivery. The seller has to enter into contract with various carriers for carriage of goods until the port of destination. The seller has to pay for unloading of goods at the port of destination and the seller also has an obligation to clear the goods for export and not import. No insurance contract is required from the seller or the buyer.

Under CFR incoterm, the seller has following obligations:

  • Take care of all the export clearance formalities.
  • Pay for carriage of goods to the agreed point of destination and enter into contract with the appropriate carrier for transportation of goods.
  • Take care of all the export permits, quotas, etc.
  • Pay for loading and unloading of goods for the cargo to and from the ships.

Under CFR incoterm, the buyer has following obligations:

  • Carriage of goods from the agreed port of destination.
  • To bear the risk of goods after seller delivers the goods on board the ship.
  • All import permits, quotas, etc.
  • Import custom clearance.

CIF- Cost, Insurance and Freight

The obligations of seller and buyer are very much similar to the CFR incoterm. The seller places the goods on board the ship. Transfer of risks take place at the port of delivery but the seller has an obligation to enter into contract with carriers for carriage of goods to the port of destination. The seller must pay for unloading at the port of destination and the seller has to clear the goods for export and not for import.

The main difference between CFR and CIF incoterms is that under the CIF incoterm, the seller has to arrange for insurance coverage against the buyer’s risk from the port of shipment to at least the port of destination.

  Under CIF incoterm, the seller has following obligations:

  • Take care of all the export clearance formalities.
  • Pay for carriage of goods to the agreed point of destination and enter into contract with the appropriate carrier for transportation of goods.
  • Take care of all the export permits, quotas, etc.
  • Pay for loading and unloading of goods for the cargo to and from the ships.
  • Arrange and pay for insurance of goods.

Under CIF incoterm, the buyer has following obligations:

  • Carriage of goods from the agreed port of destination.
  • To bear the risk of goods after seller delivers the goods on board the ship.
  • All import permits, quotas, etc.
  • Import custom clearance.

Key Takeaway

1. Incoterms are international commercial terms which define who is responsible for what during the international transactions.

2. EXW, FCA, CPT, CIP, DPU, DAP and DDP are the incoterms used for any mode of transport.

3. FAS, FOB, CFR and CIF are the incoterms used for only sea and inland waterway transport.

4. DDP is the incoterm imposing maximum obligation on the seller and only incoterm requiring custom clearance by the seller.  

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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