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Your Quick Guide to Incoterms

Incoterms, also referred to as International Commercial Terms are a set of 11 rules which govern the terms of international transactions between the buyers and the sellers as well as importers and exporters. This finite set of Incoterms is released by the International Chamber of Commerce (ICC) and accepted by legal entities and governments all over the world.

The stated terms play a very important role in any international transaction due to the primary reason that they make any transfer of goods smoother and reliable. Both the buyers and the sellers must agree to these terms before finalizing the trade agreement. These terms clarify the costs, risks, and responsibility of the goods at each step of the trade. Before any trade is processed, the Incoterms are decided and then they’re defined on the shipping documents as well.

However, the #Incoterms don’t cover every single condition regarding the sale including the goods being sold or the price at which they’re sold. They also don’t include the method of payment or the time to release the payment. This means that Incoterms can cover a lot of ground but not everything can be made foolproof by using these terms. In case of a dispute, Incoterms are as good as nothing, and the buyer/seller will have to figure out some other mechanism to do so.

The rules released by the ICC in 2020 have been updated and classified into 2 separate categories. The first seven are put under any mode of transport and the remaining four are put under the sea/ inland waterway mode of transport.

The seven Incoterms that can be used for any mode of transport are:

  • EXW - Ex-Works / Ex-Warehouse

Wherever this clearance is acceptable, the seller doesn’t need to clear the goods for export or load them on a collecting vehicle. The seller can just transfer the goods to the buyer at their own premises or at another designated spot.

  • FCA - Free Carrier

In this case, the seller delivers the goods to a designated carrier or person who is selected by the buyer. The seller can make this transfer either at their own location or at any other designated spot. As soon as the seller makes the transfer, the risk is passed on to the buyer, which is why the point of delivery should be clearly stated by both parties to avoid any confusion.

  • CPT - Carriage Paid To

As per this Incoterm, the seller delivers the requested goods to the carrier or any other party nominated by the buyer at the place that they agree upon. However, unlike the previous cases, within CPT the seller is responsible for paying the costs of transportation until the agreed-upon location.

  • CIP - Carriage and Insurance Paid To

This clearance is very similar to the CPT with only one major difference. In a CIP, the seller is also responsible for covering the insurance of the goods for the buyer. The seller is not bound to choose any premium insurance cover. The only requirement is to obtain an insurance cover with minimum coverage. If the buyer wants the seller to arrange a costlier insurance cover, then it’ll have to be explicitly stated beforehand.

  • DAP - Delivered at Place

In this case, the seller is responsible for arranging the carrier and bringing the goods to the buyer’s pre-decided location. The risks involved in bringing the goods to the destination are all borne by the seller. As soon as the goods are available for unloading, the risk transfers from the seller to the buyer, and the unloading marks the risk transfer to the buyer.

  • DPU - Delivered at Place Unloaded

DPU has replaced what was earlier known as DAT (Delivered at Terminal) and is very similar to the DAP. The only difference between DPU and DAP is that in DPU, the seller is responsible for arranging carriage, transporting the goods to the decided location, and unloading the goods at the destination. All the risks are borne by the seller till the goods are unloaded.

  • DDP - Delivered Duty Paid

In this clearance, the seller is responsible for bearing all the costs and the risks involved in transporting the goods to the destination. The products must be cleared for import as well as export and the seller will also have to pay the import and export duties as applicable.

The four Incoterms that are applicable in the case of sea/inland waterway transport are:

  • FAS - Free Alongside Ship

The delivery is assumed when the seller places the goods alongside the vessel that’s supposed to transport the goods. The vessel is nominated by the buyer and the risks are all transferred to the buyer as soon as the goods are alongside the vessel, and from that point onwards, all the costs must be borne by the buyer.

  • FOB - Free On Board

In this clearance, the seller must deliver the goods on board the vessel at the port specified by the buyer. The risks and costs associated with the goods are passed down to the buyer the moment these goods are on board and from this point onwards, the buyer bears all the costs associated with transportation.

  • CFR - Cost and Freight

This one is a little more complicated than all the others as it’s a combination of a few different clearances. In this case, the risks are passed down to the buyer as soon as the seller gets the goods on board the vessel. However, the seller is still responsible for paying the costs of freight that’ll be charged for transporting the goods to the destined port decided by the buyer.

  • CIF - Cost, Insurance, and Freight

In this case, there’s only one more condition added to the above-mentioned CFR. In a CIF clearance, the seller is responsible for getting the goods on board the vessel. As soon as the goods are on board, the risks are transferred from the seller to the buyer. As mentioned in CFR, the expenditure on freight will be borne by the seller but there’s an additional clause here. The seller must also pay for the insurance cover of the goods during the carriage to the buyer’s destination. However, the seller isn’t bound to acquire an insurance cover of the buyer’s choice and the minimum insurance cover is acceptable.

So these are basic Incoterms that you need to know in order to conduct your transactions smoothly and without any hiccups. You can always refer to this article if you ever get confused between the different commercially agreeable terms before you finalize any contract of sale. It might be confusing at first, but it gets easier the more you use it. Just remember to stay updated on the latest additions and omissions as ICC makes sporadic changes to bring in more clarity, security, and differentiation. With Xport-Pro, you will always find the most updated set of INCO terms applicable for any export of goods, which is a piece of key information for any #customs documentation process. It is very important to agree upon the most appropriate commercial term for a seamless #export process and thereby maintaining absolute efficiency.

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