INCOTERMS 2011, AN INTRODUCTION

Inco terms or international commercial terms are an indispensable factor as

far as international trade is concerned. INCOTERMS may be referred to as
the ABC; S for understanding the whole subject of International trade. It is
not possible to further step into the world of international trade without
understanding the concept of international commercial terms i.e. INCO
TERMS.

Brief history of Inco terms:

An example of daily practices would enable to make the concept clear. For
example we go to buy a television from a store selling home appliances.
We often observe the notion such as ‘ delivery free ‘ or no shipping
charges. A simple look at the matter would reveal that the store would
deliver it to our premises at their own cost or at no additional cost from the
customer. This would be the apparent meaning of the notion ‘ delivery free ‘
or ‘ no shipping charges’ which the store uses as a proposition to boost up
its sales.

If we proceed to look at the whole concept in a little deeper way we can

analyze the concept that the delivery of the said product i.e. a television to
the buyers premises / home had a certain cost which the store offered to
bear on his own. In other words the price of the television is actually the
price at which the store offers to sell the same at their own premises and
the cost of carrying the same from the store to the buyers premises is
actually borne by the seller themselves.
It’s a matter of fact that price of every product i.e. the consideration of sale
or offer to sell is the price at which the seller sells of offers to sell the
particular product at a particular place and at a particular time. Hence price
of any product refers to a price accompanied by a place and time even
though not always mentioned in every event of our daily transactions.

In international trade there are different stages of the price at which the
seller (referred to as the exporter) sells or offers to sell the goods in
consideration to the buyer (referred to as the importer). There are several
stages of cost factors that are involved in the process of International trade
starting from the exporters premises and ending at the importers premises.
These stages of cost are more specifically dealt and described in the form
of INCOTERMS or INTERNATIONAL COMMERCIAL TERMS.

INCO TERMS are a set of pre defined commercial terms published by the
international chamber of commerce which defines the nature of the contract
to which the seller (exporter) and the buyer (importer) have entered to, or is
willing to enter into. It defines the contractual terms and the scope of
responsibility sharing between them as far as different elements of costs,
risk and responsibility which exists between origination of the goods at the
exporters premises and the destination of the goods at the importers
premises which are essentially located in two different countries in an
incident of international trade.

Different researches in the world of international trade have been able to

trace the genesis of INCOTERMS back to 1921. The first set of
INCOTERMS was published in 1936 by the international chamber of
commerce (ICC), which remained in use consistently for a period of two
decades before the second publication in 1953. The INCOTERMS however
have undergone several amendments since then in 1967, 1976,1980,1990
and 2000. The eighth and current version of incoterms rules (INCOTERMS
2010) was first published on 1st of January 2011.

With the nature and characteristics of world trade, which have undergone
mountains of changes over the last five decades, the INCOTERMS and its
necessary applications have also undergone changes, which necessitated
the ICC to initiate necessary changes in it over the decades. The Incoterms
2000 had a set of thirteen incoterms rules categorized in four sets based on
the place of delivery.

An understanding of some basic concepts would facilitate the

understanding of the concepts of INCOTERMS.

*Seller/Exporter/shipper /Consignor

*Buyer/Importer/Consignee

*Goods/Cargo – The said goods for exportation

*Carrier –A person / company / organization who undertakes to perform an

act of transportation i.e. carriage of the said goods from one place to the
other, which can be a shipping company, an airlines operator, a road
transport operator, or a multimodal transport operator (MTO).

*Port of Loading / port of origin

*Port of discharge /port of destination

*Exporters premises/warehouse/factory
*Importers premises /warehouse/ factory

*Clearance – Subject goods needs to be cleared by clearance authority

(usually customs).

*Insurance – All goods subject for carriage needs to be insured.

It is to be understood that any incident of International trade generally

involve three legs of transportation if the said carriage is needed to be
executed by sea or air, unless and otherwise. These are as below:

1) Carriage from Shippers premises to the port /airport of origin.

2) Carriage by sea or air from the port / airport of origin to the
port/airport of destination.
3) Carriage from the port/airport of destination to the importers
premises.

Owing to the fact that international trade and its nature have undergone
mountains of changes over the last few decades which made it necessary
for the ICC to make necessary amendments in the International
commercial terms (INCO terms) i.e. the terms of contract to suite the needs
of the parties involved to the process. The first and foremost reason of such
changes is the significant changes in the transport systems that, the advent
of containerized transportation and its rapid influx in the world of shipping
over the last five decades made it necessary for the ICC to initiate
necessary changes in the INCO terms and its applications.

The advent of containerized transportation not only revolutionized the world

of sea carriage of goods but also initiated the growth and development of
concepts of intermodal and multimodal transport systems, dry ports, ICD’s
& CFS’s which also demanded the necessary changes to be incorporated
in the INCO terms to meet and re define the terms of contract between the
parties involved in the process, the sharing of risks and liabilities between
them.

Note: concepts of intermodal, multimodal, dry ports, cfs & icd are dealt in
details in later chapters of this book.

Along with changes in the transportation systems the INCO terms have
also been changed owing to growing complexities in the arena of
international trade, to comply to security thereto. The advent, introduction
and a very rapid growth of electronic communication systems across the
globe, introduction of free trade zones and special economic zones
(concepts dealt in details in later chapters) have all contributed grossly to
the ICC for establishing the changes in INCO terms over the decades.

One of the principal reasons for the ICC to initiating the changes in Inco
terms was that the parties involved in the trade often used to use the wrong
Inco term. Inco term 2010 was focused upon the choice on Inco term based
on the mode of transport used. It clearly classified incoterms into two
categories. With amendments to all prior versions, the incoterms 2010
published for the first time by the ICC on 1st of January 2011 contained 11
predefined Inco terms divided into two categories based on the mode
transportation used. The bigger set of seven incoterms can be used
regardless the mode of transportation used with the smaller set of the rest
four which can be solely used for marine transportation.
FOUR INCOTERMS RULES WHICH CAN BE EXCLUSIVELY USED FOR
SEA AND INLAND WATERWAYS TRANSPORTATION OF GOODS

FAS –FREE ALONGSIDE SHIP (Named port of origin). Under this nature
of contract the exporter places or undertakes to place the goods alongside
the ship at the port of origin. All expenditures thereafter are borne by the
importer. As per the modified INCOTERMS of 2000 the exporter is required
to offer a price at which he clear s the goods for exportation and makes it
available for the carrier to lift the goods for carriage on the said vessel. This
type of contract is typically used for heavy lift or bulk cargo to be carried by
ocean going vessel.

FOB –FREE ON BOARD (NAMED PORT OF ORIGIN) This is the most

commonly used term of contract in case of marine trade. The price offered
by the seller for the said goods under this contractual term indicates the
price at which the exporter undertakes to make the goods available for the
carrier to take the same on board his vessel. This means all such
expenditures for carrying the goods from the shippers premises, getting it
cleared for exportation, any taxes or statutory charges, port charges etc.--
payable prior to loading of the goods on board the vessel is borne by the
exporter and the price which he offers to the importer is the price which
includes these cost’s. The significant character of this contractual term is
that buyer chooses or nominates the carrier and instructs the same to the
exporter.

CFR – COST & FREIGHT (Named port of destination)- The next cost
component after FOB is the ocean freight or the cost of carriage by the
ocean carrier, which is to be borne to make the said goods available at the
port of destination. Under CFR contract the exporter offers a price at which
he makes the goods available at the port of destination i.e. including the
ocean freight. Marine insurance cost is not included in the CFR price.

CIF- COST INSURRANCE FREIGHT (Named port of destination) –

Inclusion of the insurance cost to CFR makes a CIF contract. Under a
contract of CIF the seller quotes a price at which the goods are made
available to the port of destination insurance covered.

SEVEN INCO TERMS RULES WHICH CAN BE USED FOR ANY MODE
OF TRANSPORTATION.

EXW - EX WORKS (NAMED PLACE OF ORIGIN)— This specifies that the

price the seller offers to the buyer is the price at which the seller makes the
goods available for the buyer at his (sellers’/exporters) own place /
premises and thereafter loading of the goods from there and all
transportation and other jobs required to be performed to make the goods
available at the buyers (importers) premise are to be undertaken by the
buyer himself. This nature of contract makes the minimum obligation on the
seller and the maximum obligation on the buyer. This term of contract
means that the seller offers a price to sell the goods to the buyer at which
he makes the goods available at his own premises (works, factory,
warehouse, etc.) on a particular date as agreed upon. The buyer arranges,
pays and bears all risks for all transportation, insurance, clearance, loading
and unloading etc. charges as and when required for carriage of the goods
from the sellers premises until it reaches the buyers premises.
FCA –FREE CARRIER (NAMED PLACE OF DELIVERY) the seller hands
over the goods, cleared for export into the disposal of the first carrier
(named by the buyer) at the named place. The seller is acting at the risk
and cost of the buyer. The buyer pays for carriage to the named point of
delivery, and risk passes when the goods are handed over to the first
carrier. This contractual term is quite similar to FOB and also suitable for all
modes of transport including carriage by sea, air, rail, road and
*multimodal transportation *.

*Concepts of multimodal transportation have been dealt in later chapters.

CPT –CARRIGE PAID TO (Named place of destination)- Under this

contractual term the price offered by the seller is the price, which includes
the cost of carriage paid to the point destination. This is somewhat similar
to that of CFR but more applicable to all modes of transportation. Risk is
transferred to buyer upon handing over goods to carrier at the place of
import.

CIP –CARRIGE AND INSURRANCE PAID TO (Named place of

destination)-This contractual term is quite similar to that of CIF. Under this
the seller sells or undertakes to sell at a price, which includes the cost of
carriage as well as insurance to the named point of destination, but risk is
transferred when the goods are handed over to the first carrier at the point
of import.

DAT – DELEVERY AT TERMINAL (Named terminal at port or place of

destination). Under this contractual term the price offered includes the
cost of carriage to the terminal except for cost related for import clearance
any customs duty or tax payable at the country of importation and assumes
all risks up to the point the goods are unloaded at the terminal.

DAP – DELIVERY AT PLACE (Named place of destination) Under this

contractual term the price offered includes the cost of carriage to the point
of discharge except for cost related for import clearance any customs duty
or tax payable at the country of importation and assumes all risks unto the
point the goods are ready for unloading at the buyers premises/factory /
warehouse.

DDP –DELIVERY DUTY PAID (Named place of destination) Under this

contractual term the price offered includes the cost of carriage to the point
of discharge including all costs related for import clearance any customs
duty or tax payable at the country of importation and assumes all risks up
to the point the goods are unloaded at the buyers premises/factory /
warehouse. The transfer of risk takes place when the goods have finally
reached the buyers premises and have been unloaded thereof.

Different cost components involved:

A) Ex works price
B) Cost of carriage ex shipper’s factory to port of loading, clearance,
terminal charges, loading charges etc.----.
C) Ocean freight: sea freight from port of origin to port of destination
D) Cost of Insurance.
 E) Cost of carriage ex port of discharge to importers premises, terminal
charges, unloading charges etc.---
F) Customs duty /tax at destination country.

We take an illustrative example to explain the application of Incoterms. The

figures and names of ports shown are just for illustrative purpose.

Goods in consideration: 10000 pieces of leather gloves.

Exporters premises /Origin: Pune

Nearest seaport: Mumbai

Buyers Location: Germany

Destination port: Hamburg (Port in Germany)

A) The price of the commodity at the warehouse of the exporter: USD 10

per piece.

B) Cost involved carrying the goods from Pune to Mumbai port along with
clearance and loading expenses: USD 1000

C) Ocean freight (port tot port) ex Mumbai to Hamburg: USD 2000

D) Cost of marine insurance: USD 500

E) Cost of carriage from Hamburg port to Importers premises: USD 1000

F) Import duty / tax applicable at Germany: USD 10000

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The pricing would change with the change of incoterm as follows:

EX WORKS (PUNE): 10000 PCS X USD 10 / PIECE = USD 100000

FOB (MUMBAI): USD100000 + USD 1000= USD 101000

CFR (HAMBURG): USD 101000 + USD 2000 = USD 103000

CIF (HAMBURG): USD 103000 + USD 500 = USD 103500

DAP (GERMANY): USD 103500 + USD 1000 = USD 104500

DDU (GERMANY): USD 104500 + USD 10000= USD 114500

It is to be understood that the purpose of the incoterms is to define the
nature of the contract between the exporter and the importer. In all cases
it’s a matter of fact that all expenses are actually to be borne by the
importer i.e. the buyer, as he is the actual receiver of the goods in concern.
Incoterms specify whether 1) the importer takes responsibility to pick up the
goods from the premises of the exporter by paying the ex works price to
him and performs responsibility of carriage from the first leg of
transportation by himself and thereby paying the separate vendors of
transportation, insurance, sea carriage, etc. directly OR 2) the exporter
includes the respective cost factors in the price and offers the price under
FOB, CFR or even DDU terms where he makes the goods available at the
doorsteps of the importer.

Starting from EX WORKS to DDP incoterms signify at what stage of

transportation the seller’s responsibility and risks are transferred to the
buyers. It is this this choice of incoterms where the world of logistics
solutions originates. Keeping the basic price (ex works price) constant, the
difference in transportation and handling costs available to the seller and
the buyer respectively leads to the choice of INCOTERM used for contract
between the them.

Inco terms 2010 not only define a set of Incoterms rules , but also re define
the nature of contract between the parties involved thereto. As discussed
earlier that the arena of International trade have undergone mountains of
changes over the last few decades and hence initiated the ICC to
emphasize changes to be incorporated in the Inco terms . Further to the
above discussion a few other factors can also be stated for the same .

Multiple contracts of sales:

Commodities are often sold several times over during transit through a
string of sale contracts. There will therefore be more than one seller and
only the first seller will have been responsible for shipping the goods. The
new Rules have been amended to reflect this. For example, CIF and CFR
now refer to an obligation to “contract or procure a contract for the carriage
of the goods...”

Overlapping of Statutory charges:

Under certain Incoterms 2000 Rules (e.g. CIF/CFR), the buyer ended up
paying for the same service twice. The seller was including freight costs as
part of the sale price, yet the buyer was sometimes expected by the carrier
or terminal operator to pay the costs of handling and moving the goods
within the port or container terminal facilities. Incoterms 2010 was also
focused upon the fact that the buyer was spared of such incidents of paying
up double by clearly allocating the charges.

ILLUSTRATION: DIFERENCE IN HANDLING AND TRANSPORTATION

COSTS AVAILABLE AT THE DISCRESION OF THE BUYER AND THE
SELLER LEADS TO THE CHOCE OF INCOTERM USED: