INTERNATIONALCOMMERCIALTERMS(INCOTERMS)
INCO terms are a series of international sales terms, published by International Chamber Of Commerce (ICC) and widely used in
international commercial transactions. These are accepted by governments, legal authorities and practitioners worldwide for the
interpretation of most commonly used terms in international trade. This reduces or removes altogether, uncertainties arising from
different interpretation of such terms in different countries. They closely correspond to the U.N. Convention on contracts for the
international sale of goods. The first version of INCO terms was
introduced in 1936. INCO terms 2010 (8th edition) were published on Sept 27, 2010 and these came into effect wef Jan 1, 2011.
Main changes in INCOTERMS 2010
I. Removal of 4 terms (DAF, DES, DEQ and DDU) and introduction of 2 new terms (DAP - Delivered at Place and DM - Delivered at
Terminal). As a result, there will be a total of 11 terms instead of 13 (2 additions, DAP and DAT and 4 deletions, DAF, DDU, DEQ
and DES).
2. Creation of 2 classes of INCOTERMS - (1) rules for any mode or modes of transport and (2) rules for sea and inland waterway
[INCOTERMS 2000 had 4 categories namely E (covering departure), F (covering main carriage unpaid), C (covering main carriage
paid) and D (covering arrival)].
Class-1 terms
1. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the
date agreed upon. The buyer pays transportation costs and bears the risks for bringing the goods to their final destination.
This term places the greatest responsibility on the buyer and minimum obligations on the seller.
2. FCA— Free Carrier (named places) : The seller hands over the goods, cleared for export, into the custody of the first carrier
(named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and
containerized / multi-modal sea transport.
3. CPT—Carriage Paid To (named place of destination): (The general/containerized/ multimodal equivalent of CFR) The seller
pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.
4. CIP — Carriage and Insurance Paid (To) (named place of destination): The containerized transport/multimodal
equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods
are handed over to the first carrier.
5. DAP : delivered at place
6. DAT : delivered at terminal
7. DDP — Delivered Duty Paid (named destination place): This term means that the seller pays for all transportation
costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term
"Free Domicile". It is the most comprehensive term for the buyer. In most of the importing countries, taxes such as (but
not limited to) VAT and excises should not be considered prepaid being handled as a "refundable" tax. Therefore VAT and
excise usually are not representing a direct cost for the importer since they will be recovered against the sales on the
local (domestic) market.
Class-2 terms
8. FAS — Free Alongside Ship (named loading port): The seller must place the goods alongside the ship at the named
port. The seller must clear the goods for export. Suitable for maritime transport only but NOT for multimodal sea transport
in containers. This term is typically used for heavy-lift or bulk cargo.
9. FOB — Free on board (named loading port): The seller must themselves load the goods on board the ship nominated by the
buyer, cost and risk being divided at ship's rail. The buyer must instruct the seller the details of the vessel and port where the
goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder.
10. CFR or CNF — Cost and Freight (named destination port): Seller must pay the costs and freight to bring the goods to
the port of destination. The risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport
only and Insurance for the goods is NOT included. Insurance is at the Cost of the Buyer.
11. CIF — Cost, Insurance and Freight (named destination port): Exactly the same as CFR except that the seller must in addition
procure and pay for insurance for the buyer (Maritime transport only).
Operational aspects of Negotiation and payment
1. Crystallisation of foreign currency liability : On receipt of documents from nominated bank, the issuing bank is required to
make payment immediately for sight LCs and on due date in case of usance LC. If there is delay, the bank converts foreign
currency liability into rupee liability maximum within ro days from due date, at bills selling rate or at forward rate, if booked.
2. Evidence of import : The importer in India is required to submit Bill of Entry or other documents of evidence of
import of goods. If there is delay beyond 6 months from date of payment, in submission of the document of evidence,
the bank is required to report the matter to RBI by submitting a half-yearly return on Form BEF within 15 days.
Standby Let ter of Credi t (Guarantee)
In certain countries like USA, the bank guarantees are not used. To cover trade transactions, standby LC is used as a substitute
for bank guarantee. In such LC there are minimum documents such as proof of delivery or proof of non-performance or simple
claim form. In India, this LC has been allowed by RBI after adoption of International Standby Practices (ISP-98), which is a set of
rules, relating to standby LC and formulated by International Chamber of Commerce.
Issue of Standby LC by ADs in India : As per RBI guidelines, such LC can be issued as a document of promise in respect of nonperformance
situation especially as a substitution to the guarantee which ADs are allowed to issue under FEMA. Such a LC can be
in respect of debt or obligation or other liability incurred by
(1) an exporter on account of exports into India
(2) owned to a person resident in India by a person resident outside India for a bona fide trade transaction duly covered by a
counter guarantee of a bank of international repute
(3) exporters may also opt to receive standby LC in respect of exports from India. The facility of issuing standby LC can be
extended on selective basis to following category of importers:
1. Independent power producers / importers of crude oil and petroleum products.
2. Special category of importers (Export houses, trading houses, star trading houses, 100% EOUs
3. Public sector undertakings or Public limited companies with good track record.
Invocation. : Beneficiary should claim payment by submitting proper documents which may include copy of invoice, nonnegotiable
set of documents, copy of inspection certificate etc.
While opening standby LCs, the banks should also observe International Standby Practices-1998.
INCO terms are a series of international sales terms, published by International Chamber Of Commerce (ICC) and widely used in
international commercial transactions. These are accepted by governments, legal authorities and practitioners worldwide for the
interpretation of most commonly used terms in international trade. This reduces or removes altogether, uncertainties arising from
different interpretation of such terms in different countries. They closely correspond to the U.N. Convention on contracts for the
international sale of goods. The first version of INCO terms was
introduced in 1936. INCO terms 2010 (8th edition) were published on Sept 27, 2010 and these came into effect wef Jan 1, 2011.
Main changes in INCOTERMS 2010
I. Removal of 4 terms (DAF, DES, DEQ and DDU) and introduction of 2 new terms (DAP - Delivered at Place and DM - Delivered at
Terminal). As a result, there will be a total of 11 terms instead of 13 (2 additions, DAP and DAT and 4 deletions, DAF, DDU, DEQ
and DES).
2. Creation of 2 classes of INCOTERMS - (1) rules for any mode or modes of transport and (2) rules for sea and inland waterway
[INCOTERMS 2000 had 4 categories namely E (covering departure), F (covering main carriage unpaid), C (covering main carriage
paid) and D (covering arrival)].
Class-1 terms
1. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the
date agreed upon. The buyer pays transportation costs and bears the risks for bringing the goods to their final destination.
This term places the greatest responsibility on the buyer and minimum obligations on the seller.
2. FCA— Free Carrier (named places) : The seller hands over the goods, cleared for export, into the custody of the first carrier
(named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and
containerized / multi-modal sea transport.
3. CPT—Carriage Paid To (named place of destination): (The general/containerized/ multimodal equivalent of CFR) The seller
pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.
4. CIP — Carriage and Insurance Paid (To) (named place of destination): The containerized transport/multimodal
equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods
are handed over to the first carrier.
5. DAP : delivered at place
6. DAT : delivered at terminal
7. DDP — Delivered Duty Paid (named destination place): This term means that the seller pays for all transportation
costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term
"Free Domicile". It is the most comprehensive term for the buyer. In most of the importing countries, taxes such as (but
not limited to) VAT and excises should not be considered prepaid being handled as a "refundable" tax. Therefore VAT and
excise usually are not representing a direct cost for the importer since they will be recovered against the sales on the
local (domestic) market.
Class-2 terms
8. FAS — Free Alongside Ship (named loading port): The seller must place the goods alongside the ship at the named
port. The seller must clear the goods for export. Suitable for maritime transport only but NOT for multimodal sea transport
in containers. This term is typically used for heavy-lift or bulk cargo.
9. FOB — Free on board (named loading port): The seller must themselves load the goods on board the ship nominated by the
buyer, cost and risk being divided at ship's rail. The buyer must instruct the seller the details of the vessel and port where the
goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or forwarder.
10. CFR or CNF — Cost and Freight (named destination port): Seller must pay the costs and freight to bring the goods to
the port of destination. The risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport
only and Insurance for the goods is NOT included. Insurance is at the Cost of the Buyer.
11. CIF — Cost, Insurance and Freight (named destination port): Exactly the same as CFR except that the seller must in addition
procure and pay for insurance for the buyer (Maritime transport only).
Operational aspects of Negotiation and payment
1. Crystallisation of foreign currency liability : On receipt of documents from nominated bank, the issuing bank is required to
make payment immediately for sight LCs and on due date in case of usance LC. If there is delay, the bank converts foreign
currency liability into rupee liability maximum within ro days from due date, at bills selling rate or at forward rate, if booked.
2. Evidence of import : The importer in India is required to submit Bill of Entry or other documents of evidence of
import of goods. If there is delay beyond 6 months from date of payment, in submission of the document of evidence,
the bank is required to report the matter to RBI by submitting a half-yearly return on Form BEF within 15 days.
Standby Let ter of Credi t (Guarantee)
In certain countries like USA, the bank guarantees are not used. To cover trade transactions, standby LC is used as a substitute
for bank guarantee. In such LC there are minimum documents such as proof of delivery or proof of non-performance or simple
claim form. In India, this LC has been allowed by RBI after adoption of International Standby Practices (ISP-98), which is a set of
rules, relating to standby LC and formulated by International Chamber of Commerce.
Issue of Standby LC by ADs in India : As per RBI guidelines, such LC can be issued as a document of promise in respect of nonperformance
situation especially as a substitution to the guarantee which ADs are allowed to issue under FEMA. Such a LC can be
in respect of debt or obligation or other liability incurred by
(1) an exporter on account of exports into India
(2) owned to a person resident in India by a person resident outside India for a bona fide trade transaction duly covered by a
counter guarantee of a bank of international repute
(3) exporters may also opt to receive standby LC in respect of exports from India. The facility of issuing standby LC can be
extended on selective basis to following category of importers:
1. Independent power producers / importers of crude oil and petroleum products.
2. Special category of importers (Export houses, trading houses, star trading houses, 100% EOUs
3. Public sector undertakings or Public limited companies with good track record.
Invocation. : Beneficiary should claim payment by submitting proper documents which may include copy of invoice, nonnegotiable
set of documents, copy of inspection certificate etc.
While opening standby LCs, the banks should also observe International Standby Practices-1998.
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