Incoterms

When an Indian company buys machine parts from Germany, someone has to pay for trucking to the port, export clearance, the ocean freight, insurance, import duty and the last delivery, and someone carries the risk if the cargo is damaged on the way. Incoterms, published by the International Chamber of Commerce, are standard three-letter rules that settle exactly this. The current version is Incoterms 2020, with 11 rules:

Rule	Seller delivers when…	Notes
EXW Ex Works	goods are ready at the seller’s premises	Buyer does almost everything
FCA Free Carrier	goods are handed to the buyer’s carrier	Works for any mode, including containers
FAS Free Alongside Ship	goods are alongside the vessel	Sea only, bulk cargo
FOB Free on Board	goods are on board the vessel	Sea only; risk passes on loading
CFR Cost and Freight	goods are on board; seller pays freight	Risk passes on loading, cost later
CIF Cost, Insurance and Freight	as CFR, plus basic insurance	Sea only
CPT Carriage Paid To	goods go to the first carrier; seller pays carriage	Any mode
CIP Carriage and Insurance Paid To	as CPT, plus higher insurance	Any mode
DAP Delivered at Place	goods arrive, ready for unloading	Buyer pays import duty
DPU Delivered at Place Unloaded	goods are unloaded at destination	Replaced DAT in 2020
DDP Delivered Duty Paid	goods arrive, import duty paid	Seller does almost everything

The trap in the “C” terms: the seller pays freight to the destination, but risk passes at origin. Under CIF, if the ship sinks, the loss belongs to the buyer, who claims on the insurance.

Incoterms don’t cover everything. They don’t say when ownership passes, how payment works, or what happens if the contract is broken; the sales contract covers those.

Who does what

Under CIF, the seller pays freight and insurance to the destination port, but risk passes when the goods are loaded at origin. Cost and risk split at different points; that is the defining feature of all four C terms.

Costing the options

The supplier quotes under four terms. The buyer’s own costs for the legs it must arrange: export clearance and pre-carriage ₹25,000 (under EXW), ocean freight ₹80,000 through its forwarder, insurance ₹5,000, destination port charges ₹15,000, and the truck to the plant ₹30,000.

Term	Supplier’s price	Buyer’s other costs	Total before import duty
EXW	₹10,00,000	₹1,55,000	₹11,55,000
FCA	₹10,20,000	₹1,30,000	₹11,50,000
CIF Nhava Sheva	₹11,10,000	₹45,000	₹11,55,000
DAP buyer’s plant	₹12,00,000	₹5,000 (customs agent)	₹12,05,000

FCA is cheapest here, because the buyer’s forwarder has a better ocean rate than the seller charges for, while the seller handles German export formalities. DAP costs ₹55,000 more for the convenience of a delivered price.

Import duty is calculated on the customs value, which in India includes freight and insurance to the port, so it is broadly the same whichever term is used.

Use container-friendly terms for containers

FOB, CFR and CIF were designed for goods loaded over a ship’s side. Containers are handed over at a terminal days before loading, so under FOB the seller still carries risk while the box sits in a yard it no longer controls. The ICC recommends FCA, CPT and CIP for containerized cargo and for air, road and rail; the four sea terms (FAS, FOB, CFR, CIF) are meant for bulk and conventional cargo loaded directly onto ships.

What changed in Incoterms 2020

• DAT became DPU (delivered at place unloaded), making clear that delivery can be at any place where goods are unloaded, not only a terminal.
• FCA and bills of lading: buyer and seller can agree that the buyer’s carrier issues an on-board bill of lading to the seller, which banks often require under letters of credit.
• Insurance levels: CIP now requires broad (all-risks) cover, while CIF still requires only minimum cover.
• Own transport: the rules recognize that a party may use its own vehicles instead of a third-party carrier.

Terms and payment

Incoterms decide delivery, costs and risk, not payment or ownership. Those come from the sales contract and the payment method. Under a letter of credit, the bank pays the seller against specified documents (often an on-board bill of lading), so the Incoterm, the transport documents and the credit’s conditions must be consistent, or payment is delayed.

Customs valuation in India

Indian customs values imports on a CIF basis: cost plus freight and insurance to the place of import. If a contract is on FOB or FCA terms, freight and insurance must be added; the customs valuation rules set default percentages when actual costs can’t be established. The chosen term therefore affects the paperwork and the calculation, not whether freight is included.

Controlling your own freight

Buying on F terms (FCA, FOB) gives the buyer control of the main carriage: choice of carrier, consolidation with other shipments, visibility and negotiating power. Buying on C or D terms is simpler but leaves freight costs inside the supplier’s price and transport decisions in the supplier’s hands. Large importers usually prefer F terms for regular flows and C or D terms for small or irregular ones.