During our daily work in purchasing and procurement, you are the word incoterm several times. But what is the actual meaning of Incoterm? how it works? why there is a need of Incoterm? what is the use of this word in supply chain?
In this article, we are going to discuss all this question..
What is the meaning of Incoterm:
Incoterm is basically an acronym of international commercial terms. It is the essential terms of trade for the sale of goods and services.This incoterm provide specific guidance to individuals participating party in the import and export of global trade on a daily basis.It is guided by the international Chamber of Commerce and initiated in 1936. Incoterms hold universal meaning for buyers and sellers around the world so that everybody understand the same thing & there is no ambiguity.These are widely used in international business transactions and procurement processes.
What is the need of Incoterm:
Due to different trading practices and legal interpretations between the businesses of different countries generated a need for a common set of rules & regulations to make the business process simple. These rules needed to be understood by all of the participants in order to avoid any misunderstandings & further problems.Therefore, the International Chamber of Commerce introduced the Incoterm to make the process universal.
Incoterm 2020:
Incoterms 2020, came in to picture from January 1, 2020, and consists of 11 Incoterms.
There are the below major changes:
The term Delivered at Terminal (DAT) has been renameded to Delivered at Place Unloaded (DPU).
As per the new Free Carrier (FCA) term, the buyer can now instruct the carrier to issue a bill of lading with an on-board notation to the seller so that they can satisfy the terms of a letter of credit.
As per the new CIP term, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods. The insurance requirement hasn't changed for CIF.
The new Incoterms 2020 rules recognizes sellers who may use their own transport to deliver the goods.
EXW – Ex Works
The seller makes the goods available at their own premises, or at another named place and it is the obligation of the buyer to arrange the transport & pickup of goods from the seller’s end. The term EXW places the maximum obligation on the buyer and minimum on the seller.
EXW means that a buyer have the risks of bringing the goods to their final destination from the seller’s point. In this case, the seller does not load the goods on collecting vehicles and does not clear them for export. Or if the seller does load the goods, they do so at buyer's risk and cost. In this case, this must be made clear by adding explicit wording to this effect in the contract of sale.
As a common practice the buyer arranges the collection of the freight from the designated location, and is responsible for clearing the goods through Customs, wherever it is required. The buyer is also responsible for completing all the export documentation, although the seller does have responsibility to obtain information and documents at the buyer's request and cost.
FCA – Free Carrier
The seller delivers the goods,at a named place (possibly including the seller's own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
In some cases, FCA has replaced FOB in modern usage, although the important point at which the risk passes moves from loading aboard the vessel to the named place. If the delivery has to be done at the seller's premises, or at any other location that is under the seller's control, the seller is responsible to load the goods on to the buyer's carrier.
CPT – Carriage Paid To
The seller is responsible to deliver the goods up to the named place of destination. However,it has been considered to be delivered when the goods have been handed over to the first or main carrier. Here t the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.
CIP – Carriage and Insurance Paid to
It is similar to above CPT term, but there is an exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters (which is a change from Incoterms 2010 where the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, unless specifically agreed by both parties.
CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-containerized sea-freight.
DPU – Delivered At Place Unloaded
As per this incoterm, the seller delivers the goods and unload at the agreed place of destination. The seller covers all the costs of transport .The seller bears all the risk until the arrival at the destination port or terminal.
The terminal can be a Port, Airport, or inland freight interchange. If the seller is unable to organize unloading, they should consider DAP incoterm instead.
All charges after unloading should be borne by the buyer. However, the important note is that any delay or demurrage charges at the terminal will generally go to the seller's account.
DAP – Delivered At Place
The seller delivers when the goods are placed at the disposal of the buyer on transport, ready for unloading at the agreed place of destination. The risk passes from seller to buyer from the point of destination mentioned in the contract of delivery.
Once goods are ready to ship,the packaging is at the seller's own cost, so that the goods reach their final destination safely.
On arrival in the country of destination, the customs clearance in the importing country, is the buyer’s responsibility, e.g. import documents required by customs, etc., including all customs duties and taxes.
Under DAP terms, all carriage expenses with any terminal expenses are paid by the seller up to the agreed destination point. Whereas, the unloading cost at final destination has to be borne by the buyer.
DDP – Delivered Duty Paid
In this incoterm, the seller is responsible for delivering the goods to the agreed place in the country of the buyer, and pays all the costs to deliver the goods to the destination including import duties and taxes. The notable point is the seller is not responsible for unloading. In this term,the maximum obligation is on the seller and minimum obligation is 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 the customs clearance of the goods 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.
Incoterm used for sea and inland waterway transport
FAS – Free Alongside Ship
The seller delivers the goods at place alongside the buyer's vessel at the agreed port of shipment. This means that the buyer is responsible for all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export. However, in case,, this should be made clear by adding explicit wording to this effect in the contract of sale. This term should be used only for non-containerized seafreight and inland waterway transport.
FOB – Free on Board
Under FOB terms the seller takes all the risk & costs up to the point the goods are loaded on board the vessel. The seller's responsibility continues till the goods are "appropriated to the contract" that is, they are "clearly set aside or otherwise identified as the contract goods".Therefore, FOB contract requires a seller to deliver goods on board a vessel that is to be defined by the buyer till the destined port. Here the seller must also arrange for export clearance. On the other hand, the buyer pays all the costs of sea freight transportation, bill of lading fees, insurance charges, unloading and transportation cost from the arrival port to the destination port.
CFR – Cost and Freight
Here the seller is responsible for the carriage of the goods till the agreed port of destination. Risk transfers to 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 the named port. The seller is not responsible for delivery to the final destination from the port. If the buyer requires the seller to obtain insurance, they should go for CIF incoterm.. CFR should only be used for non-containerized seafreight and inland waterway transport. For all other modes of transport it should be replaced with CPT.
CIF – Cost, Insurance & Freight
This term is similar to CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIF requires the seller to insure the goods for 110% of the contract value. The policy should be in the same currency as in the contract. The documents include the invoice, the insurance policy, and the Bill of Lading. These are the main three documents which represent the cost, insurance, and freight of CIF. The seller's obligation comes to an end when the documents are handed over to the buyer and the buyer has to pay at the agreed price. Another point to consider is that CIF should only be used for non-containerized sea freight and for all other modes of transport, this should be replaced with CIP.
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