What is INCO Terms? Classification, 11 ICC Incoterms

What is INCO Terms?

The Incoterms (International Commercial Terms) are pre-defined commercial terms, which are standardized and meant for use in international and domestic trade transactions. They are published by the International Chamber of Commerce (ICC).

When commercial trade transactions happen between different countries, there is a need for using terminologies that are understood by both parties and can be interpreted in a similar manner.

The usage of standard terms (Incoterms) published by ICC helps to eliminate the barriers caused by distance, language, domestic customs, and interpretations. It helps reduce risks involved in international trade transactions and time wasted in disputes and litigations.

When a domestic buyer procures goods from an international supplier, there are several questions that impact the price.

The buyer and seller must be clear regarding these questions in their contractual terms.

• What are the overall responsibilities of the supplier with regard to shipping/ transporting the goods?
  
  
• Should the supplier deliver the goods at his/her factory or warehouse from where the buyer will arrange for transportation? Or should the supplier deliver at the buyer’s location?
  
  
• What will be the mode of transportation?
  
  
• Who is going to be the consignor and who would be responsible for arranging for the transportation?
  
  
• Who will pay the freight charges?
  
  
• When will the title to goods get transferred?
  
  
• Who will bear the risk of loss or damages to goods during transit?
  
  
• Who will take insurance for the transit?
  
  
• Who will bear the costs of freight and insurance?
  
  
• Does the price already include freight and insurance?
  
  
• Who will pay the required taxes, duties, and customs fees associated with the sale?

Since these questions are applicable to every purchase in the industry, some standard terms have emerged. These are abbreviated delivery terms that indicate the proposed allocation of risks associated with the trade transaction between a buyer and a seller.

These abbreviations, which may be only three letters in length, can conclusively define when, where, and how a buyer takes delivery and all the other related questions listed above.

When an invoice is generated, several questions arise because of differing trade practices between countries. Some of the questions are as follows:

• What is the mode of delivery of goods?
  
  
• What constitutes ‘delivery’?
  
  
• How is the invoice price calculated?
  
  
• What are various incidental charges that are included in the invoice amount?
  
  
• Does the invoice price contain freight charges?
  
  
• Is the consignment insured, if so, who bears the insurance premium?
  
  
• Is the contract governed by the laws of exporting or importing country?
  
  
• How to resolve differences in interpretation or in case of inadequate information?

In order to provide a standard terminology that addresses all the above questions and remove trade friction due to misunderstandings and disputes, ICC came up with the first set of international trade terminologies in 1936.

By stating that the terms of the contract would abide by the Incoterms of ICC, both parties can be assured of a common interpretation of commercial terms used in the trade transaction.

Some important points with regard to Incoterms are as follows:

• Incoterms provide only trade terms and are only a part of the contract of sale. The payment terms are part of the PO/Invoice.
  
  
• Incoterms deal with questions of division of risk of loss or damage to the goods during the transit period. They do not deal with property rights. They do not legally determine the transfer of title to the goods.
  
  
• Incoterms do not deal with the breach of contract. The terms related to the breach of contract are part of the contract of sale.
  
  
• International trade deals can involve up to four contracts: the contract of carriage, contract of sale, insurance contract, and contract
  
  
• of finance. Incoterms pertain only to the contract of sale.

As per the latest ICC publication (2010), there are 11 Incoterms defined by ICC that can be used in the context of all different types of cross-border transactions.

These 11 Incoterms have been classified into two categories, namely: classification based on delivery and carriage and classification based on the mode of transport. Let us study these terms in the next sections.

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Classification Based on Delivery and Carriage

• The Incoterms can be classified on the basis of the first letter of the three-letter code assigned to the Inco term. Before proceeding any further, you must understand the following concepts: What constitutes delivery?
  
  In the context of the freight industry, delivery does not mean the physical arrival of goods at the buyer’s destination. Rather, it means the point at which the seller completes his contractual obligation.
  
  Departure (“E”, “F” and “C” Categories) or Arrival (“D” Category)
  
  
• Whether payment of carriage is done?
  
  Main Carriage is Paid (“C” and “D” Category) or Unpaid (“E”, “F” Category)
  
  The significance of the first letter of the Incoterms is described as follows:
  
  C: The main carriage is paid for by the seller
  
  D: Arrival, the responsibility of the seller ends when the goods are delivered at a specified point
  
  E: Departure, the responsibility of the seller ends when the goods leave his premises
  
  F: The main carriage is not paid by the seller
  
  Four categories and the Incoterms belonging to each category are described as follows:

• A. Category ‘e’ (EXW (Named Place of Delivery))
  
• B. Category ‘F’ (FOB, FCA, and FAS)
  
• C. Category ‘C’ (CFR, CPT, CIF, and CIP)
  
• D. Category ‘D’ (DAT, DAP, and DDP)

A. Category ‘e’ (EXW (Named Place of Delivery))

In Incoterms pertaining to this category, the seller only makes goods available to the buyer at his/her own premises. Here, the delivery constitutes making the goods available at the seller’s named site. EXW is the only Inco term in this category.

When using this Inco term, the invoice price is mentioned. For example, “Ex-works Mumbai” means that the invoice price includes costs till the goods are shifted to the stated delivery place, i.e. Mumbai.

It is the responsibility of the buyer to bear any further charges and shipment. In this case, the buyer assumes all responsibility for transportation, cost, and risk beyond the supplier’s site.

B. Category ‘F’ (FOB, FCA, and FAS)

This category is applicable when the carriage is not paid by the seller and delivery constitutes placing the goods at the specified carrier location at the named port of shipment as requested by the buyer. Note that, here, the named port of shipment is not the destination. The buyer appoints a carrier and the seller is required to deliver goods to the carrier.

The relevant Incoterms are FOB, FCA, and FAS. FOB-named port of shipment means that the buyer will bear the risk while the goods are shipped.

Free Carrier FCA (named place of delivery) means that the seller hands over the goods that have been cleared for export to the first carrier (that might be chosen by either seller or buyer). The buyer pays for carriage, import, and insurance.

Free Alongside Ship or FAS (named port of shipment) means that the seller or his forwarder gets the goods cleared for export and puts the goods alongside the ship and at this point, the point delivery is made. It is the responsibility of the buyer or his forwarder to now transport the goods to the buyer. The buyer has to bear the transport cost, risk, and insurance.

C. Category ‘C’ (CFR, CPT, CIF, and CIP)

This category is applicable when the freight is paid by the seller – he has to contract for carriage and assume all costs of sending the shipment to the destination country without assuming the risk of loss or damage to the goods.

The freight and carriage charges are part of the invoice; the applicable Incoterms are CFR, CPT, CIF and CIP.

Cost and Freight CFR (named port of destination) means that the seller pays the cost and freight charges for delivery to the destination port. However, customs clearance is not part of the seller’s responsibility.

Carriage Paid To or CPT (named place of destination) means that the seller pays for carriage and the associated risks pass to the buyer only when the goods are handed to the first carrier at the place of importation. Insurance cost is also borne by the seller.

Cost, Insurance, and Freight or CIF (named port of destination) is similar to CFR except that the insurance is also paid by the seller.

Carriage and Insurance Paid to or CIP (named place of destination) is similar to CIF except that the risk passes to the freight forwarder when the goods are handed over to him/her.

D. Category ‘D’ (DAT, DAP, and DDP)

In this category, delivery constitutes the arrival of goods at the named destination. A supplier assumes all risks and costs to the specified location.

The seller has to bear all costs and risks needed to send goods to the destination/arrival place. There are three Incoterms under this category viz., DAT, DAP, and DDP.

Delivered at Terminal or DAT (named terminal at port or place of destination) means that the seller pays for the carriage of goods to the arrival terminal. However, the seller does not bear the cost of import clearance. The risk remains with the seller till the goods are unloaded at the terminal.

Delivered at Place or DAP (named place of destination) is similar to DAT except that the seller retains the cost and risk till the goods are unloaded by the buyer at his chosen destination.

DDP (named place of destination) means that the seller bears all costs, risks, and obligations, including import duties, taxes, clearance fees, etc., involved in bringing goods to the named place of destination. The buyer is responsible for unloading the shipment at the named place of destination.

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Classification Based on Mode of Transport

Another way of classifying 11 Incoterms is by the transport method for which they are applicable.

• Incoterms applicable for any mode(s) of transport
• Incoterms applicable for sea and inland waterway transport

There are a total of 11 Incoterms as follows:

• EXW – EX WORKS
• FCA – FREE CARRIER
• CPT – CARRIAGE PAID TO
• CIP – CARRIAGE AND INSURANCE PAID TO
• DAT – DELIVERED AT TERMINAL
• DAP – DELIVERED AT THE PLACE
• DDP – DELIVERED DUTY PAID
• FAS-FREE ALONGSIDE THE SHIP
• FOB – FREE ON BOARD
• CFR – COST AND FREIGHT
• CIF – COST INSURANCE AND FREIGHT

The first seven can be applied to any form of transportation whereas the last four are specifically for inland, waterway, and sea freight.

FAS and FOB terms are meant for maritime and inland waterway transport only and not for multimodal sea transport in containers.

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11 ICC Incoterms

The classification and definitions of the 11 Inco-terms as described by ICC are as follows:

• Rules for Any Mode or Modes of Transport
  
• Rules for Sea and Inland Water Way Transport

Rules for Any Mode or Modes of Transport

EXW (Ex Works)

“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., workshop, factory, warehouse, etc.). The seller does not need to load goods on any collecting vehicle, nor does it need to clear goods for export, where such clearance is applicable.

FCA (Free Carrier)

“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well-advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

CPT (Carriage Paid to)

“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP (Carriage and Insurance Paid to)

“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring goods to the named place of destination.

The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that, under CIP, the seller is required to obtain insurance only on minimum cover.

Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

DAT (Delivered At Terminal)

“Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination.

“Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail, or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

DAP (Delivered At Place)

“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

DDP (Delivered Duty Paid)

“Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.

The seller bears all costs and risks involved in bringing goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import, and to carry out all customs formalities.

Rules for Sea and Inland Water Way Transport

FAS (Free Alongside Ship)

“Free Alongside Ship” means that 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 goods are alongside the ship, and the buyer bears all costs from that moment onwards.

FOB (Free On Board)

“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already delivered. The risk of loss of or damage to the goods passes when the goods are onboard the vessel, and the buyer bears all costs from that moment onwards.

CFR (Cost and Freight)

“Cost and Freight” means that the seller delivers goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay costs and freight necessary to bring goods to the named port of destination.

CIF (Cost, Insurance, and Freight)

“Cost, Insurance, and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that, under CIF, the seller is required to obtain insurance only on minimum cover.

Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”