INCOTERMS

INCOTERMS

• INTRODUCTION

In their sales contract buyer and seller agree on the conditions of sale : payment on the one hand and delivery on the other. These terms determine at what precise location the ownership of the goods is transferred from seller to buyer and when/how payment will be done. In international trade a universal set of rules on delivery has been developed over the years. It is called INCOTEMRS.

INCOTERMS

• The Incoterms divide costs and risksThe Incoterms of trade have been designed to clarify obligations of both parties, the buyer and the seller. Principally, these are:

The seller must: The buyer must:Provide the goods according to the contract

Pay the price as agreed upon

Contd….

INCOTERMSIn order to finalise the transaction, both parties will have to perform certain tasks, like:

Arrange for licences, Arrange for licences,Authorisation and formalities

Authorisation and formalities

Arrange for shipment Arrange for shipment Arrange for delivery Accept deliveryBear the risks for his activities

Bear the risks involved in his contractual activities.

Source: Guide to Incoterms, ICC Paris

INCOTERMS • EXW = EX WORKS

Cost of Goods plus cost of Export packing and markingIn this term the seller delivers the goods by keeping it ready in deliverable state at the seller's place or another named place. This named place can be factory/godown or manufacturing unit. In this term seller does not clear the goods for exports nor goods are loaded on vehicle.

• FCA = FREE CARRIER Cost of Goods plus cost of Getting goods to railway station or truck for transportation to portThis term refers to seller's responsibility to deliver the goods, cleared for export, to the carrier appointed by the buyer at the named place. In this term the place of delivery is very important. If the delivery is at sellers place's then he is responsible for loading. If the delivery occurred at any other place, the seller is not responsible for unloading. This term can be used for all modes of transport as well as multimodal.

INCOTERMS • FAS = FREE ALONGSIDE • Cost of Goods plus cost of Transport to port

and getting goods alongside ship In this term when the goods are placed alongside the vessel at the named port of shipment it will be considered that the seller has completed the delivery. The buyer has to bear all risks of loss or damage to the goods and all costs from this point of time. However the seller must clear the goods for the purpose of export. This term can be used only for inland waterway transport or shipment by sea. It is not used when it is air shipment.

INCOTERMS • FOB = FREE ON BOARD

Cost of Goods plus cost of Getting goods on board and preparing shipping documents This is the most popular term and is widely in use. FOB means that the seller delivers when the goods pass the ship's rail at the named port of shipment. Under this term the buyer has to bear all costs and risk of loss of damage to the goods from that point. This term requires the seller to clear the goods for exports. This term is used only for sea or inland waterway transport. It is not suitable for shipment by air.

INCOTERMS

• CFR = COST AND FREIGHTCost of Goods plus cost of Freight cost (port to port) Earlier this term was popularly known as C&F or CNF. CFR means the seller must pay the cost and the freight necessary for the goods to reach at the named destination. The seller is required to clear the goods for exports. This term can be used only for sea and inland waterway transport.

INCOTERMS • CIF = COST INSURANCE AND FREIGHT Cost of Goods plus cost of Marine Insurance

“Cost, Insurance and Freight” means that the seller, delivers when the goods pass the ship’s rail in the port of shipment. The CIF price refers that it covers the cost of the goods, freight necessary to bring the goods to the named port of destination and also marine insurance. Compared to the previous term, CFR the seller contracts for the insurance and pay the insurance premium. It will be essential for the buyer to know that under the CIF term the seller is required to obtain the insurance only on minimum cover. If the buyer wishes to have more protection then he should make his own insurance arrangement extra or should specify to the seller at the time of contract.In this term the seller must clear the goods for exports and the buyer must arrange necessary clearance for import. This term can be used only for sea and inland water transport.

INCOTERMS • CPT = CARRIAGE PAID TO

“Carriage Paid To” means the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This refers to the fact that all the risks and any other cost occurring after the goods have been delivered will be on buyer’s account. This term is used for all modes of transport including multimodal transport.

• CIP = CARRIAGE AND INSURANCE PAID TO “Carriage and Insurance Paid To” means that the seller delivers the goods to the carrier nominated by him, but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss of or damage to the goods during the carriage.

INCOTERMS • DAF = DELIVERD AT FRONTIER

This term is used when goods are to be delivered at land frontier, irrespective of the mode of transport. "Delivered At Frontier" means the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for exports but not cleared for import at the named point and place at the frontier, but before the customs border of the adjoining country.

• DES = DELIVERD EX SHIPCost of Goods plus cost of Putting goods at disposal of customer on board vessel at port of destination under this mode, the exporter makes the goods available to the importer on the ship at the named port of destination at this cost.

INCOTERMS • DEQ = DELIVERED EX QUAY

Cost of Goods plus cost of Unloading charges at port of destination The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import & to make the goods available to the importer into Quay (after crossing the custom boarder)

INCOTERMS • DDU = DELIVERED DUTY UNPAID

“Delivered Duty Unpaid” means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. Such duty has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time.

INCOTERMS • DDP = DELIVERED DUTY PAID

Cost of Goods plus cost of Payment of duties and transport to customer “Delivered Duty Paid" means that the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear all the costs and risks involved in bringing the goods thereto including, where applicable, any duty for import in the country of destination.

INCOTERMS • Incoterms – an example

A customer in Hanover, Germany, asks for a quotation for 3000 pairs of shoes, to be delivered DDP at his warehouse. You have decided on a unit selling price of $2, giving a total nominal price of $ 6000 for the goods when sold domestically. For export you will have to calculate with an additional set of costs which are involved in making them physically available to your customer.

What are the additional costs of getting the goods from your factory in (e.g.) Agra, India, to the customer? How (*) is your quotation affected by the terms of delivery?

(*) In this calculation example, all costs are hypothetical.


If you quote:

Your price should include:

Additional costs:

Your total price is:

EXW Ex-works AgraExport packing, marking crates with shipping marks

300 6300

FCA Free on Carrier at Agra station. Carriage and insurance for delivery to railway station by road transport including insurance

100 6400


FAS Free alongside ship at JNPT port. Rail transport to port (including insurance) and getting goods on the quay alongside ship.

310 6710

FOB Free on board JNPT Port. Dock dues, loading goods on board ship. Preparing shipping documents

100 6810


CFR Cost and Freight.Sea Freight to Hamburg (nearest port to Hanover)

875 7685

CIF Cost, insurance, freight. Sea freight + marine insurance (port to port)

100 7785

DES Delivered ex ship at Hamburg. Landing charges at Hamburg port.

90 7875


DDP Delivery duty Paid at customer’s warehouse in Hanover. Import duties for 3000 pairs of shoes

1200 9075

Transport by rail Hamburg to Hanover

150 9225

The buyer actually pays **

1350 9225

(**) = ‘availability price’.

•

IncotermsGroup E Departure

EXW

Ex Works

Group F Main carriage unpaid

FCAFASFOB

Free Carrier Free alongside shipFree on board

Group C Main carriage paid

CFRCIFCPTCIP

Cost and FreightCost, Insurance, FreightCarriage Paid toCarriage and Insurance Paid to

Group DArrival

DAFDESDEQDDUDDP

Delivered at FrontierDelivered Ex ShipDelivered Ex QuayDelivered Duty UnpaidDelivered Duty Paid

(Note, that when the Incoterms indicate a certain Point or “…..,” the point of destination or origin must be mentioned)

INCOTERMS

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