INCOTERMS 2020

LEARNING OBJECTIVES:
• To define and explain the scope and need of INCOTERMS in international trade.
• To explain the application of Incoterms in export import operations.
• To explain the risks and responsibilities associated with each term and their meaning.
• To understand the difference between incoterms 2010 and incoterms 2020
LEARNING MATERIAL:
INTRODUCTION:
As trade is dynamic and evolving across the globe, the factors related to it have also similar
characteristics. Negotiation in international trade is of immense importance and leads to
formation of contracts. In order to benefit from contracts, the terms related to product, price,
delivery, quality and dispute settlement are well negotiated before a transaction commences.
However, one of the most important terms in a contract are the International Commercial Terms
(INCOTERMS) also referred as delivery terms. These delivery terms indicate the distribution
of risk & responsibility between two trading parties. Risk and responsibility here refer to
transfer of cost in monetary terms as well as cost of risk. Though referred to as delivery terms,
these incoterms do not theoretically indicate the place of physical delivery or transfer of
ownership. Incoterms are given by the International Chambers of Commerce and were given
for the first time in 1936. These terms are rules or guidelines and not laws but become legally
binding once incorporated in a contract. The latest revision of INCOTERMS is Incoterms 2020.

Incoterms in international trade bifurcate the entire transportation chain into three parts i.e. pre
carriage- which is within the exporter’s country, main carriage- which is from the exporter’s
country to importer’s country and on carriage which is within the importer’s country. Incoterms
are most important for the main carriage stage as the goods in transit are out of bounds of
exporter and importer but with a third party. Incoterms also indicate the mode of transport
which is used. There are 11 incoterms as per the latest revision of INCOTERMS 2020 by ICC.
Out of these 11, 7 are omni modal incoterms i.e. can be used across all modes of transport and
marine restricted incoterms, to be used only when goods go by sea.

2. VARIOUS TYPES OF INCOTERMS:

As per Incoterms 2020, there are eleven types of Incoterms and these Incoterms are divided
into four distinct groups. Group E of Incoterms indicates that the goods shall be made available
to the importer at the exporter premises; for example, at the factory gate or warehouse of an
exporter. Group F indicates that the exporter must deliver the goods to a carrier which has been
appointed by the importer for carrying the goods to destination. Group C indicates that the
exporter is liable for losses and damages only up to the port of shipment and all losses and
damages subsequent to exporter delivery of cargo to shipping company and any additional cost
or charges etc shall be borne by importer. Exporter takes the obligation of all risks of losses or
damages to the cargo only before the start of journey of cargo. The Incoterms under Group D
indicate that the exporter will be having obligations and responsibility to incur all the costs,
charges and other risks which may be associated in course of journey from Exporter County to
importer country. Incoterms may not be generalised in terms of being beneficial to the exporter
or importer. The benefit of adopting an Incoterm for a contract is dependent on a number of
factors like nature of the product, export destination, source of export, infrastructure etc. In
simple terms, higher the risk, higher will be the cost charged by the exporter. Table 1 depicts
the summary of risks and responsibilities of costs and risks shared between an exporter and
importer in international trade operations.
Table-1: Risks and Costs borne by the Seller an Buyer in International Business as per
various Incoterms 2020
Responsibility & Charges EXW FCA F FO CF CIF CPT CIP DP DA DD
Service A B R U P P
S

Exporter Warehouse/ Factory / E E E E E E E E E E E

Works Place or Storage at Cargo
Origin Point

Manufacturing and Export E E E E E E E E E E E

Packing of cargo (Cargo Origin
Point)

Stuffing of Cargo in Boxes & I E E E E E E E E E E

Loading of Cargo on Carrier
(Cargo Origin Point)

Pre Carriage or Inland Freight I I E E E E E E E E E

Charges (In Exporter Country)

Terminal Handling along with I I E E E E E E E E E

other charges relating to Port
(Port of Departure)

Duties at Departing Port I E E E E E E E E E E

Loading on Carrier (Departing I I I E E E E E E E E

Port)

Ocean and Air Freight I I I I E E E E E E E

Unloading on Carrier (Arriving I I I I * * * * E I E

Port)

Port Charges (Arrival Port) I I I I I I E E E E E

Custom Duties and Taxes I I I I I I I I I I E

Delivery Charges at Final I I I I I I I I I I E

Destination

E= Exporter and I= Importer , * to be decided as per the contract between exporter and importer

3. INCOTERMS AS PER DIFFERENT MODES OF TRANSPORTATION

Depending upon the mode of transport applied for main carriage stage, the choice of incoterms
also differs. The omnimodal incoterms are used across all modes of transport, like Sea, Air,
Road or Rail. While the marine restricted incoterms can be used only when the main carriage
is by Sea. In international trade, there are two prime contracts namely, Sales contract between
the importer and exporter and a contract of carriage between the shipper and the carrier. The
shipper may be the exporter or importer depending upon the incoterm in use as per the contract.
Though the incoterms are rules, they should be selected with utmost care as marine restricted
incoterms if applied to transportation by road or air may not serve the purpose. Figure-1,
indicates the incoterms applicable as per modes of transport used for main carriage.
Figure-1: Applicable Incoterms in Different Modes of Transportation
 Sea Air Road Rail Multi Modal

EXW EXW EXW EXW EXW

FCA
FAS FCA FCA FCA FCA
FOB
CPT CPT CPT CPT
CPT
CIP CIP CIP CIP CIP
CFR
DAP DAP DAP DAP
CIF
DAP DPU DPU DPU DPU
DPU
DDP DDP DDP DDP DDP

Source: Incoterms 2020, ICC Publication

4. SUMMARY OF INCOTERMS AND TRANSFER OF RISK

Transfer of risk and cost from the exporter to the importer as per the contract is clearly specified
in each incoterm. Incoterms are self explanatory and are same across the globe. Incoterms help
in deciding the place where transfer will take place. This point can be anywhere in the
exporter’s or importer’s country as the incoterm in use. A summary of all Incoterms with the
point where transfer of risk and cost takes place is enumerated in Table-2.

Table-2 Summary of INCOTERMS 2020

INCOTERM Definition and Transfer of Risk
2020
EXW Exporter is responsible to bear the risk and cost of manufacturing and
packaging the goods and placing them at the disposal of the importer.
Importer is responsible to bear the risk and cost of the goods right from
the time the goods are taken over including all loading, unloading
charges as well as cost of transportation.
FCA Exporter is responsible to bear the risk and cost of manufacturing and
packaging the goods and placing them at the disposal of the importer.
Exporter is also responsible for delivering the goods at a place within
the exporter’s country. Importer is responsible to bear the risk and cost
of the goods right from the time the goods are taken over including all
loading, unloading charges as well as cost of transportation till the
goods reach the importer’s country.
FAS The transfer of risk and cost from the exporter to the importer when
the goods are placed alongside the ship at named port by exporter.
Importer is responsible for the goods thereafter.
 FOB The transfer of risk and cost from the exporter to the importer when
the goods are placed on board the ship at named port by exporter.
Importer is responsible for the goods thereafter.
CPT The transfer of cost from the exporter to the importer when the goods
are reach the named port in the importer’s country. While transfer of
risk takes place when the goods reach the port in the exporter’s
country. Export clearance has to be done by the exporter while import
clearance by the importer.
CIP The transfer of cost from the exporter to the importer when the goods
are reach the named port in the importer’s country. While transfer of
risk takes place when the goods reach the port in the exporter’s
country. Export clearance has to be done by the exporter while import
clearance by the importer. In addition to the freight and handling cost,
the exporter also pays for insurance.
CFR The transfer of cost from the exporter to the importer when the goods
are reach the named place in the importer’s country. While transfer of
risk takes place when the goods are placed on board the vessel in the
exporter’s country. Export clearance has to be done by the exporter
while import clearance by the importer.
CIF The transfer of cost from the exporter to the importer when the goods
are reach the named place in the importer’s country. While transfer of
risk takes place when the goods are placed on board the vessel in the
exporter’s country. Export clearance has to be done by the exporter
while import clearance by the importer. In addition to the freight and
handling cost, the exporter also pays for insurance.
DAP Risks shift from exporter to importer once carrier reaches at named
place of destination in importer’s country. Buyer is responsible for
unloading of cargo and the costs and risks thereafter.
DPU Risks shift from exporter to importer once carrier reaches at named
place of destination in importer’s country and also unloaded. Buyer is
responsible for bearing the costs and risks thereafter.
DDP Exporter is responsible for all risks till the carrier reaches the named
place of destination i.e. doorsteps of an importer.
Source: Incoterms 2020, ICC Publication
Suggested Reading:

International Chambers of Commerce, https://iccwbo.org/resources-for-business/incoterms-

rules/incoterms-2020/

Learning Outcomes: Application of Knowledge

Case-Let 1: Ms. Sumita is an exporter of bedsheets from Panipat, Haryana and her customer
buyer is located in London, United Kingdom and desires delivery in his country. cargo will be
despatched from Panipat via Delhi Airport to London. Draw a comparative analysis of the
Incoterms which can be negotiated between the two parties.

Case- Let 2: A public-sector enterprise in India exports fertilizers to Australia through Vizag
port or Kolkata port and through a chartered vessel. Enumerate the incoterms which can be
negotiated between the two parties.

Case Let- 3:
Mr. Natraj imports machinery from Japan and is comparatively new. He would not like to
undertake risks and thus aims at a safe shipment. Explain the advantages and disadvantages
which can be used by him for the transaction.
Review of Learning Outcomes:
1. The reader is able to understand the various incoterms used in export import operations.
2. The reader is able to interpret which terms to be chosen considering mode of transport,
location of business, business relations-ship, risk-cost matrix etc.
3. The reader is able to choose which terms can be used in water transport and multimodal
transport.