Import and export are common activity for any country. Through import a country can get the goods which it is unable to produce or find non-economical to produce. Through Export a country can send surplus of its production and earn foreign exchange. Maintaining a proper balance between import and export is of paramount importance for a country to maintain it’s balance of payment (BoP).
While importing or exporting goods various trade terms are negotiated i.e whether it will be a delivered supply or EXMI supply, who will bear cost of freight and insurance, who will handle loading and unloading charges along with custom formalities at the port of disport and import etc.
In order to make a set of trade terms, different Incoterms (International Commercial Terms) has been developed by International Chamber of Commerce (ICC).
They are short abbreviation which is used to describe the responsibility of buyer and seller wrt different activities (like Loading, unloading, carriage , export duty, import duty etc) involved in international trade.
They are not mandatory rules and does not have any legal effect. For having legality they must be explicitly incorporated by the parties into their contract.
They are mentioned on Bill of Lading, Bill of Entry and other important documents involved in international trade.
They cover various terms of trade such as who is responsible for paying freight costs, insuring goods in transit , covering any import/export duties, etc. They are invaluable as, once importer and exporter have agreed on an INCOTERM, they can trade without discussing responsibilities for the costs and risks covered by the term.
Categories of Incoterms
Incoterms are divided into 4 principle categories E (Departure), F (Main Carriage Unpaid), C (Main Carriage Paid) and D (Arrival)
International Chamber of Commerce has developed following 11 Incoterms which are tabulated below:
| S.N | Incoterm | Description | Transfer of Risk |
| 1 | EXW | Ex Works (Place) | At Buyer’s Disposal |
| 2 | FCA | Free Carrier (Place) | On Buyer’s transport |
| 3 | FAS | Free Alongside Ship (Port) | Alongside Ship |
| 4 | FOB | Free on Board (Port) | On Board vessel |
| 5 | CFR | Cost and Freight (Port) | On Board vessel |
| 6 | CIF | Cost Insurance & Freight (Port) | On Board vessel |
| 7 | CPT | Carriage paid To (Place) | At carrier |
| 8 | CIP | Carriage and Insurance Paid to (Place) | At carrier |
| 9 | DAP | Delivered at Place | At Named Place |
| 10 | DPU | Delivered at Place Unloaded (Place) | At Named Place Unloaded |
| 11 | DDP | Delivered Duty paid (Place) | At Named Place |
It is interesting to note that Incoterms are updated every 10 years to reflect the changes in global trade practices and regulations. . It was updated last in the year 2020 and prior to that it was updated in year 2010.
In the year 2010 and 2020 following Incoterms has been amended:
| S.N | Incoterm | Description | Remark |
| 1 | DES | Delivered Ex Ship | Expired effective year 2010 |
| 2 | DAF | Delivered at frontier | Expired effective year 2010 |
| 3 | DEQ | Delivered ex quay | Expired effective year 2010 |
| 4 | DDU | Delivered Duty Unpaid | Expired effective year 2010 |
| 5 | DAT | Delivered at Terminal | Renamed to DPU effective year 2020 |
The various obligation and liabilities of buyer and seller under different Incoterms can be shown with the help of below table.
Freight Collect Terms |
Freight Prepaid Terms |
||||||||||
Groups |
Any mode or modes of Transport |
Sea and Inland Waterways Transport |
Any mode or modes of Transport |
||||||||
Incoterm (Intern-ational Com-mercial Terms) |
EXW |
FCA |
FAS |
FOB |
CFR |
CIF |
CPT |
CIP |
DAP |
DPU |
DDP |
Ex Works (Place) |
Free Carrier (Place) |
Free Along-side Ship (Port) |
Free on Board (Port) |
Cost and Freight (Port) |
Cost Insur-ance & Freight (Port) |
Carriage paid To (Place) |
Carriage and Insur-ance Paid to (Place) |
Deliv-ered at Place |
Delive-red at Place Unl-oaded (Place) |
Deliv-ered Duty paid (Place) |
|
Transfer of Risk |
At Buyer’s Disp-osal |
On Buyer’s trans-port |
Alongside Ship |
On Board vessel |
On Board vessel |
On Board vessel |
At carrier |
At carrier |
At Named Place |
At Named Place Unlo-aded |
At Named Place |
Obligation and Charges |
|||||||||||
Export Packaging |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Loading Charges |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Delivery to port / Place |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Export Duty, Taxes & Custom clearance |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Origin Terminal Charges |
Buyer |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Loading on carriage |
Buyer |
Buyer |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Carriage charges |
Buyer |
Buyer |
Buyer |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Seller |
Insurance |
Nego-tiable |
Nego-tiable |
Nego-tiable |
Nego-tiable |
Negot-iable |
Seller |
Negot-iable |
Seller |
Nego-tiable |
Negot-iable |
Nego-tiable |
Desti-nation terminal charges |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Seller |
Seller |
Seller |
Seller |
Seller |
Delivery to Desti-nation |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Seller |
Seller |
Seller |
Unlo-ading at Destin-ation |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Seller |
Buyer |
Import Duty, Taxes and Custom clearance |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Buyer |
Seller |
These INCOTERMS can be described as below:.
Page Contents
- 1) EXW – Ex Works
- 2) FCA – Free Carrier
- 3) FAS- Free Alongside Ship (Port)
- 4) FOB- Free on Board (Port)
- 5) CFR- Cost and Freight (Port)
- 6) CIF- Cost Insurance & Freight (Port)
- 7) CPT- Carriage Paid To
- 8) CIP – Carriage and Insurance Paid
- 9) DAP – Delivered At Place
- 10) DPU Incoterm (Delivered at Place Unloaded)
- 11) DDP – Delivered Duty Paid
1) EXW – Ex Works
It imposes only minimum obligation on seller i.e to make the goods available at his or her premises after packing.
Rest of the activities such as uploading, carriage, compliance of export rules from the country of export, compliance of Import rules at the country of import etc are all done by the buyer.
In case of EXW Incoterm delivery of goods occurs when the goods are made available at the named place of delivery which is usually the seller’s place of business
This Incoterm is not convenient for international transaction and should be limited to domestic transactions as the exporter is required to provide assistance to buyer in obtaining any export licence, or other official authorisation.
In international transaction this is commonly used in courier shipments when the courier picks up the shipment from client’s premises and loads courier’s own truck.
2) FCA – Free Carrier
In case of FCA Incoterm delivery of goods occurs when the goods are loaded on the transportation vehicle arranged by the buyer.
This Incoterm contains a wider scope of work for the seller in comparison to “EXW”.
Under this term the seller is required to pack the goods for export, deliver at the port of export or to a carrier nominated by buyer and is also required to make custom export clearance.
After that loadport terminal charges, loading of goods in carriage, payment of carriage charges, unloading of goods at disport etc are done by the buyer.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
3) FAS- Free Alongside Ship (Port)
This Incoterm is applicable only when mode of transport is sea and Inland Waterways.
Under FAS Incoterm the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the products are alongside the ship. The buyer bears all costs from that moment onwards.
Seller has responsibility of packing the goods for export, delivering goods at port of export, compliance of export custom duties and to pay loadport terminal charges.
Buyer is responsible for loading of goods at carriage, paying carriage charges, disport of goods and complying import custom formalities.
FAS Incoterm is not suited for cases when the goods are only to be handed over to the carrier, e.g., at a container terminal, before they are placed alongside the ship.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
4) FOB- Free on Board (Port)
This Incoterm is applicable only when mode of transport is sea and Inland Waterways.
Under this Incoterm the goods are deemed to be delivered by the seller to the buyer when the goods are delivered on board the ship nominated by the buyer at the named port of shipment .
Seller has responsibility of packing the goods for export, delivering goods at port of export, compliance of export custom duties, to pay loadport terminal charges and also to load the product on carriage.
Buyer is responsible for paying carriage charges, disport charges of goods , complying import custom formalities, unloading the goods at port of disport etc.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
5) CFR- Cost and Freight (Port)
This Incoterm is applicable only when mode of transport is sea and Inland Waterways.
Under this Incoterm the goods are deemed to be delivered by the seller to the buyer when the goods are delivered on board the ship nominated by the buyer at the named port of shipment .
Seller has responsibility of packing the goods for export, delivering goods at port of export, compliance of export custom duties, to pay loadport terminal charges, load the product on carriage and also to pay carriage charges.
Buyer is responsible for paying disport charges of goods and complying import custom formalities, unloading the goods at port of disport etc.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
6) CIF- Cost Insurance & Freight (Port)
This Incoterm is applicable only when mode of transport is sea and Inland Waterways.
Under this Incoterm the goods are deemed to be delivered by the seller to the buyer when the goods are delivered on board the ship nominated by the buyer at the named port of shipment .
Seller has responsibility of packing the goods for export, delivering goods at port of export, compliance of export custom duties, to pay loadport terminal charges, load the product on carriage, to pay carriage charges and also to bear Insurance charges.
Buyer is responsible for paying disport charges of goods and complying import custom formalities, unloading the goods at port of disport etc.
7) CPT- Carriage Paid To
In case of CPT Incoterm delivery of goods occurs when the goods are delivered by the seller to the carrier at the agreed place.
This Incoterm is applicable for all modes of transport (i.e sea, air and road). Under this term seller has got responsibility to perform all the task starting from packing of goods for export, clearance of export custom formalities at the country of export, paying for carriage till terminal charges at disport.
Buyer is responsible for unloading of goods at destination and taking delivery at destination. He also need to comply with import custom formalities.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
8) CIP – Carriage and Insurance Paid
This is very similar to CPT (Carriage paid To) Incoterm with the only variation that Insurance obligation is placed on seller.
9) DAP – Delivered At Place
In case of DAP Incoterm delivery of goods occur when the seller put the goods at the disposal of the buyer on the transportation vehicle ready for unloading at the place of destination
This is appropriate to both domestic and international sales.
The seller delivers when ‘the goods are placed at the disposal of the buyer ready for unloading by the buyer … at the named place’. All import Customs formalities and costs are the responsibility of the buyer.
Under this Incoterm no insurance obligation is placed either on seller or buyer and hence the same can be done either by the seller or buyer based on mutual understanding.
10) DPU Incoterm (Delivered at Place Unloaded)
The DPU Incoterm represents a new feature of the 2020 Incoterms which has replaced the DAT Incoterm (Delivered at Terminal) established under the 2010 Incoterms which, in turn, had replaced DEQ Incoterm (Delivered ex Quay) established under the 2000 Incoterms.
According to the DPU Incoterm, the delivery of the goods by the seller to the buyer occurs when the goods are unloaded from the transportation vehicle and put at the disposal of the buyer at the place of destination.
It is the only Incoterm “that requires the seller to unload goods at destination.” Again, the place of delivery and the place of destination are the same under the DPU Incoterm. Therefore, the seller bears the risk until it has unloaded the goods at the place of destination.
Buyer is responsible for all import Customs formalities.
11) DDP – Delivered Duty Paid
In case of DDP Incoterm delivery of goods occur when the seller put the goods at the disposal of the buyer on the transportation vehicle ready for unloading at the place of destination post clearance of import custom duties by the seller.
The buyer is only required to unload the good at place of delivery.
It is the only Incoterm in which import custom duties are paid by the seller.
Conclusion
From the above we have seen that responsibilities of seller and buyer varies with each Incoterm to a large extent.
Responsibility of Export custom duty compliance is placed on seller in all the cases except EXW Incoterm.
Again responsibility of Import custom duty compliance has been put on buyer in all cases except in case of DDP Incoterm.
So suitable Incoterms may be agreed upon by buyer and seller based on the prevalent market conditions and capabilities and risk appetite of each parties.
Author Bio
It is really one useful articles and it can be used as ready to hand solution to understand terms and conditions to draft invoice and very much useful for negotiating with buyers.