Understanding INCOTERMS: A Complete Guide for Indian Traders

If you are entering the international trading world, it would be best to clearly understand the International Commercial Terms (INCOTERMS). Whether you are planning to be a seasoned exporter or a buddy importer, you should learn to navigate the international trading rules to ensure smooth transportation and prevent legal issues. 

The International Chamber of Commerce (ICC) released INCOTERMS in 1936. From that time, it was continuously updated to highlight the change in the Global Trade Environment. The INCOTERMS 2020 is the most recent version of this set of rules. Understanding this version is a little complicated. 

Today, we will give you an in-depth guide about the INCOTERMS 2020.  We will explore types of Incoterms. On top of that, we will explore how this set of rules will simplify international trading. 

In this article, we will equip you with the right knowledge about INCOTERMS 2020 to help you navigate the complex landscape of international trading. 

INCOTERMS are the selling terms for buyers and sellers that must be followed during the international transaction. These trading terms clearly state which tasks, costs, risks, and delivery of items are linked to buyers and sellers in the sales contract. 

The prime aim of these terms is to prevent any kind of confusion by clarifying the obligations of buyers and sellers. 

These terms outline the situations in which the transfer of costs and risks from sellers to buyers occurs. Remember, all rules under these terms don’t apply to all cases.

You will find 11 terms within the latest version of INCOTERMS called Incoterms 2020. Four of these terms are developed for ocean freight because they are applied to sea and territorial water transport. The remaining seven terms apply to cargo delivered via any mode of transport, including water.  

FCA, CIP, DAP, DPU, and more are covered by all modes of transport. On the other hand, FAS, FOB, CFR, and CIF are covered by sea and inland waterway transport. 

International trade contracts rely on INCOTERMS rules for clear definitions and interpretations of commercial terms. 

International purchases will utilize a pre-determined Incoterm to establish the legal liabilities of each party in terms of costs and risks. Incoterm® will be explicitly mentioned on all appropriate shipping documentation.

As mentioned before, the Incoterms 2020 includes 11 terms that apply to different modes or all modes of transport. Let’s understand all types of incoterms:

EXW, also known as the ex-work, is the only term where the sellers or exporters make the goods available at their premises to the buyers or importers. 

It means that the sellers (exporters) deliver the items at the disposal of the buyers (importers) at the seller’s place or other named places, like warehouses, factories, and more. There is no requirement for sellers to load the goods on any collecting vehicle. Moreover, you also do not need it to clear them for exports. 

Under FCA, the sellers have the responsibility to deliver items to the carrier or designated people at their premises or a particular location. 

Free Alongside Ship (FAS) means that the items are considered delivered when they are delivered to the destination port specified by the FCA. Here, the buyers must take all costs and damage to the goods at that moment. 

Free Of Board (FOB) in the import and export incoterms specifies whether the buyer or seller is responsible for the goods that become damaged during the shipping process. 

Here, the buyers’ responsibility ends when the products are loaded onto the ship at the specified port. It means that the buyers must take all the costs and risks of the product’s loss at this point.  

In a CFR arrangement, the seller is responsible for delivering goods to the port chosen by the buyer. It also bears the transportation costs of the items to the destination port. 

Under the Cost, Insurance, and Freight (CIF), the seller must deliver the goods at the port or procure them that have already been delivered. They must sign for insurance coverage against the buyer’s risk of the product’s damage during the transportation. 

This crucial trade document specifies the quantity, destination, and type of goods being shipped. It also serves as a receipt for the shipment upon its arrival at the destination.

Similar to CIP, sellers or exporters are responsible for transporting products to the agreed destination. However, they must pay for the trading and clear the items in the CPT. In addition, these people must arrange and pay for carriage. 

Delivered At Place (DAP) means that the seller becomes liable for all costs and risks linked with the delivery of goods at the desired location of the buyer. In addition to that, the sellers must assume all the risks associated with unloading.   

Delivered at the place unloaded (DPU) occurs when the seller unloads the goods and places them at the buyer’s disposal at a named location within the buyer’s desired destination. Here, the seller must take all responsibility for all risks from delivering the goods to unload them.   

Delivered Duty Paid (DDP) is used where the seller is not only responsible for delivering and unloading the products at the agreed destination. They become liable for taking import clearance and all shipping expenses. 

Incoterms 2020 are a set of many terms that aim to clear the confusion about the responsibility of buyers (importers) and sellers (exporters) in international trade. However, it was originally introduced in  1936, but it has been modified several times to meet the evolving trading environment’s needs.