The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in International commercial transactions or procurement processes. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.
Important Incoterms are given below:
1) EXW – Ex-works:
This rule places minimum responsibility on the seller, who merely has to make the goods available at the seller’s premises.
The buyer is responsible for loading the goods onto a vehicle (even though the seller may be better placed to do this); for all export procedures; for onward transport and for all costs arising after collection of the goods.
All costs, taxes, etc., both at the exporter’s country and importer’s country have to be borne by the buyer.
2) FAS – Free Alongside Ship:
Seller delivers goods, cleared for export, alongside the vessel at the port, at which point risk transfers to the buyer. The buyer has to bear all the cost and risks of loss of or damage to the goods from that moment. The buyers or importer has to notify the seller in advance about the port of shipment, the name of the ship or vessel, date of arrival and berth number.
3) FOB – Free On Board
Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board the vessel. The seller must also arrange for export clearance. The buyer pays the cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination. The importer should arrange for the space in the vessel and intimate the exporter. Once the goods are on board, any loss or damage to the goods after this stage should be borne by the buyer. The buyer or importer has to pay freight at the destination and arrange for insurance covering the journey. e.g. FOB Mumbai
4) C & F – Cost & Freight:
The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to the buyer when the goods have been loaded on board the ship in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. The shipper is not responsible for delivery to the final destination from the port. The buyer or importer arranges for insurance of the goods during the transportation.
5) CIF – Cost, Insurance & Freight:
This term is broadly similar to the above C&F term, with the exception that the seller is required to obtain insurance for the goods while in transit to the named port of destination. The buyer is responsible for risks when the goods are loaded onto the ship.
6) DES – Delivery Ex-ship:
Where goods are delivered ex-ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement. The costs for unloading the goods and any duties, taxes, etc. are for the buyer.
7) DDP – Delivery Duty Paid:
Seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading.
This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.
The most important consideration for DDP terms is that the seller is responsible for clearing the goods through customs in the buyer’s country, including both paying the duties and taxes, and obtaining the necessary authorizations and registrations from the authorities in that country. Unless the rules and regulations in the buyer’s country are very well understood, DDP terms can be a very big risk both in terms of delays and in unforeseen extra costs, and should be used with caution.