1. EXCISE DUTY & SALES TAX : Extra at actuals prevailing at the time of dispatch.

Present
rates are ED: @8% + Edu.CESS : 3% and CST : @12.5% or @2% against Form ‘C’

2. guaranty to a lender that a loan will be repaid, guaranteed by a company other than the
one who took the loan. Typically, a larger company (often a parent company, or another
related company) will make the guarantee on behalf of a smaller company who may not
be well known or have developed a relationship with the lender.

VAT

Definition
Value Added Tax. A consumption tax which is levied at each stage of production based on the
value added to the product at that stage.

Letter Of Credit

What Does Letter Of Credit Mean?

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and
for the correct amount. In the event that the buyer is unable to make payment on the purchase,
the bank will be required to cover the full or remaining amount of the purchase.

Investopedia explains Letter Of Credit

Letters of credit are often used in international transactions to ensure that payment will be
received. Due to the nature of international dealings including factors such as distance, differing
laws in each country and difficulty in knowing each party personally, the use of letters of credit
has become a very important aspect of international trade. The bank also acts on behalf of the
buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank
receives a confirmation that the goods have been shipped.

THESE DOCUMENTS ARE WRITTEN AND PERIODICALLY UPDATED BY U.S. GOVERNMENT ATTORNEYS, AS TIME
AND RESOURCES PERMIT. PLEASE NOTE THE DATE MARKED ON THE DOCUMENT YOU RETRIEVE AND BE ADVISED
THAT THE INFORMATION CONTAINED THEREIN IS CURRENT UP TO THAT DATE.

Letters of Credit
If you are exporting, or thinking of exporting, one of the issues that you will need to
consider is how to collect payment from your buyer. Several options exist. One is to ask
the buyer to pre-pay for the goods. This option provides you with a relatively high
degree of assurance that you will actually receive payment. However, you may find it
difficult to find a buyer who will agree to these terms.
Another option is to sell on open account (i.e. to send an invoice to the buyer along with
the goods which requests payment of the purchase price). This approach will certainly be
agreeable to any buyer. However, given the difficulties involved in collecting debts in
foreign jurisdictions, you may be ill-advised to agree to this method of payment,
especially with a buyer with whom you have not done business previously.

Between these extremes of pre-payment and open account sales is a commercial letter of
credit (a commercial credit). A commercial credit is a document issued by a bank in
which the bank agrees to pay money upon the presentation of specified documents.
Using this device, a bank will essentially "step into the shoes" of the buyer for the
purpose of guaranteeing payment to you. It costs money (an increasing amount as the
purchase price of the goods increases), but it may significantly reduce your risk of non-
payment. The extent to which it reduces your risk is related to your ability to present
documents to the bank that mirror the requirements in the credit, the creditworthiness of
the bank, the terms and conditions in the credit, and other factors.

This paper explains the basics of how a commercial credit operates. It also introduces a
related tool of commerce known as a standby letter of credit (a standby credit). The
structure of a standby credit is similar to a commercial credit, but the function is
different. A commercial credit guarantees payment for performance of a contract,
whereas a standby credit guarantees payment in the event of non-performance. Finally,
this paper describes the potential for the development of a commercial credit that utilizes
electronic messages, rather than paper documents.

Please note this is not a complete guide to commercial and standby credits. Credits are
highly sophisticated tools of commerce. If structured correctly, they can substantially
reduce some of the risks associated with international transactions. If structured
incorrectly, they can lead to unfortunate results that differ significantly from one or more
of the parties’ expectations. We strongly encourage you to seek the advice of competent
legal counsel before engaging in any transaction involving credits.

I. THE COMMERCIAL CREDIT TRANSACTION -- A BASIC MODEL

Commercial credits come in all shapes and sizes. Some involve multiple banks,
numerous documents, and specialized terms that perform such functions as providing
financing for the buyer or the seller. O ther credits involve only one bank and a few
documents. In general, the terms and conditions (as well as the cost) of a commercial
credit vary depending on the value of the underlying transaction, the political and
economic risks associated with the transaction, the relative bargaining power of the buyer
and the seller, and other factors.

The following outlines the relationships between the three primary parties to a
commercial credit transaction -- the Account Party or Applicant (the buyer in the
underlying transaction), the Beneficiary (the seller in the underlying transaction), and the
Issuing Bank (typically the buyer's bank).
A. Account Party - Beneficiary

The commercial credit functions as the method of payment in a sales contract between
the Account Party (the buyer) and the Beneficiary (the seller). In the course of
negotiating this sales contract, the Account Party and the Beneficiary agree to the terms
and conditions under which the commercial credit will be issued. The following are
basic issues which should be resolved in these negotiations.

(1) What is the maximum amount of drawings available under the credit?

All credits must include a maximum amount of liability, which usually is the purchase
price of the goods.

(2) What is the expiration date for the credit?

All credits must be of limited duration, although "evergreen clauses" may be used to
automatically renew credits.

(3) Is the credit revocable or irrevocable?

A revocable credit can be modified or rescinded by the Account Party at any time.
Therefore, a Beneficiary should insist that the credit be irrevocable (i.e. that the credit
cannot be modified or rescinded after issuance without the Beneficiary's approval.)

(4) What documents must the Beneficiary present in order to receive payment under the
credit?

This is a critical issue. The Beneficiary will not be paid unless she produces each of
these documents. Thus, a Beneficiary should make every effort to keep the documents as
simple as possible. None of the documents should require the signature or approval of
the Account Party or the Account Party's agent. Further, to the extent possible, the
Beneficiary should not agree to the inclusion of foreign government documents because
they may be difficult to obtain in a timely fashion.

The following is a short description of documents frequently required in commercial

credits.

(a) A Bill of Lading is a receipt that a common carrier gives to the seller for the goods
that the carrier will transport. It frequently serves as a document of title, giving the
person who possesses it ownership of the goods.

(b) A Commercial Invoice is a bill prepared by the seller for submission to the buyer
which details all items bought, together with amounts owed.

(c) A Draft or Bill of Exchange is a negotiable instrument that is payable to the seller and
drawn on the issuing bank and/or the buyer. This document is prepared by the seller, but
is analogous to a check written from the buyer to the seller. Drafts can be either "sight
drafts" where the bank pays the full amount of the draft upon the seller's presentation, or
"time drafts" where the bank's obligation at the time of presentation is merely to accept
the draft for payment at a later date (e.g. 90 days after the seller's presentation). Time
drafts provide the buyer with short-term financing. Often, banks will purchase their
accepted time drafts at a discounted rate.

(d) A Consular Document shows that the goods satisfy the relevant regulatory
requirements of the importing country.

(e) An Insurance Certificate shows that the Beneficiary obtained insurance for
transportation of the goods. (Appropriate only if the seller agrees to be responsible for
the insurance.)

(f) An Inspection Certificate shows that the goods have passed a quality inspection prior
to shipping. Either an independent third party or an agent of the buyer can perform the
inspection. However, if it is an agent of the buyer, the seller should recognize that the
buyer may block payment under the Credit until any dispute regarding the conformity of
the goods is resolved.

(5) Where must the Beneficiary present the documents required under the credit?

The Beneficiary may find it difficult to make a document presentation in a foreign

country. Therefore, the appropriate place for presentation may be the Issuing Bank's
office in the Beneficiary's country. If none exists, the credit may designate another bank
(the Nominated Bank) to serve as the place for presentation. I t is important to note that
while the Nominated Bank is authorized to act on behalf of the Issuing Bank to honor the
credit obligation, the Nominated Bank itself has no obligation that runs directly to the
Beneficiary.

(6) Should the credit be confirmed by another bank?

A commercial credit is only as good as the bank that issued it. A Beneficiary that is
uncertain of the creditworthiness of the Issuing Bank, or uncertain of the political risks
associated with the country in which the Issuing Bank is located, should consider
requesting that the credit be confirmed by another bank (the Confirming Bank). The
Confirming Bank adds its obligation to that of the Issuing Bank to honor the credit. A
confirmation from a strong bank in the Beneficiary's country affords the Beneficiary a
high degree of protection from the risk of non-payment.

(7) Does the credit incorporate the Uniform Customs and Practices for Documentary
Credits ("UCP"), International Chamber of Commerce Publication 500?

Banks routinely incorporate the UCP into credits. The UCP is a set of rules that outlines
the customs and standards of performance for credit transactions. Domestically, credit
transactions are also governed by Article 5 of the Uniform Commercial Code ("UCC")
and provisions in several other UCC articles.

B. Account Party -- Issuing Bank

The Account Party applies with the Issuing Bank (typically the Account Party's own
bank) for a commercial credit that satisfies the specifications in the sales contract. The
Issuing Bank examines the Account Party's credit in the same manner as it would for any
loan application, and decides whether to issue the credit. Assuming the bank decides to
issue the credit in the form requested, the Account Party enters into a reimbursement
agreement with the Issuing Bank.

If and when the Issuing Bank ultimately pays money under the credit, it will seek
reimbursement from the Account Party. n exchange, the Issuing Bank will forward the
bill of lading and other relevant documents to the Account Party. This will enable the
Account Party to claim the goods from the independent carrier.

C. Issuing Bank - Beneficiary

(1) Issuing Bank Advises Beneficiary that the Credit is open. The Issuing Bank advises
the Beneficiary that the credit is open in its favor. The letter in which the Issuing Bank
provides this advice is literally the "letter of credit." It specifies the terms and conditions
under which the credit operates.

As soon as the Beneficiary receives the credit, she should review it to ensure that it is
consistent with the terms and conditions in the underlying sales contract (or any
amendments to the sales contract). The Beneficiary should promptly contact the Issuing
Bank and the Account Party if there are any errors in the credit.

(2) Beneficiary Performs in Accordance with the Terms in the Credit. The Beneficiary
will only be paid under the credit if she makes a documentary presentation that conforms
to the time, place and manner requirements in the commercial credit.

(a) Time: The Beneficiary must meet at least two deadlines.

(i) Date of Expiry: The documents must be presented on or before the date of expiry
specified in the credit. The Beneficiary, however, should make her presentation well
ahead of this date of expiration. Banks have a reasonable period of time (not to exceed 7
days) to examine a presentation, and decide whether the documents conform to the
credit. A Beneficiary who has made her presentation less than 7 days before the date of
expiry may not have an opportunity to cure any defects.

(ii) Expiration of Transport Documents: Unless the credit specifies otherwise, banks will
not accept bills of lading and other transport documents which are not presented within
21 days after the date of shipment.
(b) Manner: It is critical that the Beneficiary present all the documents specified in the
credit in a form that complies with the requirements in the credit. Banks traditionally
apply a high standard, known as the strict compliance rule, for determining whether
documents comply with the credit. If the documents (especially the commercial invoice)
vary in any respect, the bank may reject the presentation.

In one case, the credit described the goods in the underlying contract as "100% Acrylic
Yarn." The bank denied payment because the Beneficiary's invoice described the goods
as "Imported Acrylic Yarn." The Beneficiary sued, but the court ultimately held in favor
of the bank, stating that the invoice did not "strictly comply" with the requirements of the
credit. Courtaulds North America, Inc. v. North Carolina National Bank, 528 F. 2d 802
(4th Cir. 1975).

At its discretion, the Issuing Bank may ask the Account Party to waive any discrepancies
between the document presentation and the credit. However, a Beneficiary should not
rely on the generosity of the Issuing Bank and Account Party to accept non-conforming
presentations.

(c) Place: The Beneficiary must make her document presentation at the place specified
in the credit. Note that if the credit identifies a Nominated Bank as the place of
presentation, and the Nominated Bank refuses to honor, the Beneficiary may be required
to make its presentation directly to the Issuing Bank.

(3) Issuing Bank's Duty to Honor if Presentation Conforms to Credit: n determining

whether to honor drafts under the credit, the Issuing Bank does not examine the good, or
otherwise consider whether the Beneficiary has complied with the underlying contract.
The Issuing Bank focuses on the documents. If the documents comply with the credit,
and are not fraudulent, the Issuing Bank must honor the Beneficiary's drafts. This
separation between the commercial credit and the
underlying contract is called the independence principle.

"Honor" means different actions depending on the Issuing Bank's obligations under the
credit. If the credit calls for a sight draft, the Issuing Bank will honor by paying the draft
promptly. If the credit calls for a time draft, the Issuing Bank will honor by accepting
(i.e. signing) the draft promptly, and paying it upon maturity. Beneficiaries often sell
accepted time drafts to Issuing Banks at a discounted rate immediately after acceptance.

D. Functions of a Commercial Credit

A commercial credit has several basic functions. It is important to note, however, that the
parties can modify or change these basic functions to tailor the credit to their own needs.

(1) Prompt Payment: The Beneficiary is paid promptly after shipping her goods.
Without the credit, the Beneficiary would have to require pre-payment for the goods or
would have to wait until after the Account Party received the goods.
(2) Substituting Credit: The Beneficiary may be reluctant to sell on open account if it
does not know enough about the credit worthiness of the Account Party. The credit helps
to overcome the Beneficiary's reluctance to do business with the Account Party.

(3) Shifting Litigation Costs: Every sales contract carries a risk of a dispute concerning
whether the goods conform to the contract. If the method of payment is an open account,
the seller most likely will bear the cost of litigating that dispute without the purchase
price. A commercial credit re-allocates this cost to the buyer, because the seller receives
the purchase price promptly when he presents conforming documents to the Issuing
Bank.

(4) Shifting the Forum: The holder of the purchase money has little incentive to initiate
litigation. Since the commercial credit places the purchase money in the hands of the
seller, the buyer will likely need to pursue the purchase money by entering the forum of
the seller.

II. STANDBY LETTERS OF CREDIT

A. Purpose

The purpose of a standby credit is to reduce the risk associated with nonperformance in a
contract that calls for performance. In this sense, standby credits are comparable to
performance bonds. For example, a standby credit can be used when a city hires a
contractor to build a structure. The city may require the contractor to open a standby
credit with a local bank, and name the city as the beneficiary. If the contractor ultimately
fails to perform under the terms of the construction contract, the city can collect money
under the standby credit. The city can use this money to hire another contractor, or
otherwise complete the project.

B. Structure

The structure of a standby credit transaction is similar to a commercial credit transaction.

A bank issues the credit at the request of the Account Party (e.g. a contractor) and in
favor of the Beneficiary (e.g. a city). The credit is independent from the underlying
contract between the Account Party and the Beneficiary, and payment is contingent upon
the Beneficiary's presentation of documents that conform to the credit's time, manner, and
place requirements. Typically, the documentary requirements under a standby are: (1) a
draft or bill of exchange, and (2) a certificate from the Beneficiary stating that the
Account Party has failed to perform its obligations under the contract.

C. Difference Between Standby and Commercial Credits

A fundamental difference between a standby credit and a commercial credit is that the
standby credit is payable against documents that show the Account Party has failed to
perform its obligations in the underlying contract. In contrast, the commercial credit is
payable against documents showing that the Beneficiary has completed performance of
its obligations in the underlying contract. Thus, the presentation of documents under a
standby credit is an indication that something has gone wrong in the underlying
transaction, whereas the presentation of documents in a commercial credit is a sign that
the transaction is generally proceeding according to schedule. Not surprisingly, Issuing
Banks and Account Parties are less likely to waive documentary discrepancies in standby
credits.

III. ELECTRONIC LETTERS OF CREDIT

As demonstrated above, a letter of credit transaction is awash in paper documentation --

the letter of credit itself, the draft or bill of exchange, the bill of lading, insurance
certificates, and other accompanying documents. The ordering, drafting, sending, and
processing of each of these paper documents requires time and money.

A. Effects of the Internet and Electronic Commerce

Electronic Data Interchange ("EDI") is often used to permit computer to computer

communication of the information contained in commercial transactions. Even parties
using different computer systems can reliably perform an entire transaction without
creating a single paper document. Today, the Internet is revolutionizing how companies
do business. The ability of the different parties to quickly transfer information around the
world has made possible the conclusion of a letter of credit transaction that is not
dependent on paper documents. Instead, the necessary information can be transmitted
over the Internet without any delay. The latest revision of Article 5 of the Uniform
Commercial Code (UCC), which governs letters of credit, provides the basis for the use
of electronic letters of credit. Some definitions in the UCC still have not evolved to
address explicitly electronic transactions, but for the most part, these transactions are
contemplated by the legal regime.

Two other statutes–one federal, the other a uniform statute adopted in most states–
address electronic signatures and contracting. Both the Electronic Signatures in Global
and National Commerce Act (E-SIGN) and the National Conference of Commissioners
on Uniform State Laws’s (NCCUSL) Uniform Electronic Transactions Act (UETA)
address issues arising from the use of electronic contracts. They both provide that a
contract may not be denied legal effect merely because it is evidenced by electronic
records or because it uses electronic signatures. However, transactions governed by
Article 5 of the UCC are specifically exempted from the application of both statutes.
Therefore, E-SIGN and UETA do not help answer the question of the need for paper
documentation in letter of credit transactions.

B. The UCC and the Use of a Paperless Credit

Paperless letters of credit are currently used in many contexts. It is clear that the drafters
of revised Article 5 anticipated that the use of electronic letters of credit would become
ever more prevalent. The formal requirements for a letter of credit now allow the letter
of credit to "be issued in any form that is a record". UCC 5-104. The 1995 revision of
UCC Article 5 also clarifies that records include "information that is inscribed on a
tangible medium, or that is stored in an electronic or other medium." UCC 5-102(a)(14).
It also defines "documents" to include records. UCC 5-102(a)(6). That same definition
permits the letter of credit documents to be "presented in a written or other medium
permitted by the letter of credit or, unless prohibited by the letter of credit, by the
standard practice referred to in Section 5-108(e)." UCC 5-102(a)(6).

Letters of credit are also required to be authenticated either "(i) by a signature or (ii) in
accordance with the agreement of the parties or the standard practice referred to in
Section 5-106(e)." UCC 5-104. This clearly permits the use of electronic authentication
by the agreement of the parties or if it is the standard practice of "financial institutions
that regularly issue letters of credit." See UCC 5-106(e). Article 1 of the UCC, which
contains definitions applicable to all the other Articles, defines signature to include any
"symbol executed or adopted by a party with the intention to authenticate a writing."
UCC 1-201(46). This definition does not specifically require handwritten signatures and
is general enough to include the application of electronic authentication techniques. In
any case, the drafters’ commentary on these formal requirements in the 1995 revision
makes it clear that "the way to interpret this language is, simply, to say that a written
document is no longer absolutely necessary to establish the existence of a valid letter of
credit or of any other associated obligation."

IV. CONCLUSION AND GENERAL RECOMMENDATIONS

If the three most important things in real estate are location, location, location, the three
most important things in commercial and standby credits are documents, documents,
documents. If you are a U.S. exporter, your right to payment under a commercial credit
depends to a large extent on your ability to present conforming documents to the right
bank at the right time.

We offer these general recommendations:

Educate yourself on the rules. The great majority of all international credits incorporate
by reference the UCP, and transactions in the U.S. are often subject to UCC Article 5.

Control the Process from the Start. Limit the number and complexity of the documents
required under the credit. Do not permit documentary requirements which are contingent
upon the approval of the buyer, and do not allow documentary requirements which are
impossible to fulfill.

Be Disciplined in Your Presentation. Make sure that you present all of the documents
required in the credit, and nothing more. Ensure that all the documents precisely comply
with the requirements in the credit, especially the commercial invoice. A good practice is
to draft the commercial invoice with the credit in hand. In addition, make sure that you
make your initial presentation well in advance of the expiration date in order to allow an
opportunity to cure any defects.
Request a Confirming Bank if You Are Uncertain of the Issuing Bank's Ability to Pay. A
commercial credit is only as good as the bank that issues it. If you are uncertain of the
credit of the issuing bank, or uncertain of the political stability of the country in which
the issuing bank is located, a confirming bank in the U.S. will assume these risks for you.

Hire Counsel. Competent counsel can be instrumental in helping you to handle the
technical issues involved in commercial credits.

The following are some additional resources you may wish to consult for further
information. In addition, you can contact our office directly if you have any questions.

ADDITIONAL RESOURCES:

1. Larry Lawrence, Anderson on the Uniform Commercial Code, Volume 7A, Third
Edition (2001)
2. John F. Dolan, The Law of Letters of Credit, Commercial and Standby Credits,
Revised Edition (1996)
3. Brooke Wunnicke, Diane B. Wunnicke (Editor), Paul S. Turner, Standby and
Commercial Letters of Credit (1996)

CONTACT INFORMATION:

Adam Bobrow

Attorney-Advisor
Office of the Chief Counsel for International Commerce

U.S. Department of Commerce

Tel: 202-482-0937

Fax: 202-482-4076

E-mail: occic@doc.gov

July 2002

Contact Us About OCC-IC OGC Privacy Statement

U.S. Department of Commerce | International Trade Administration
revocable letter of credit (L/C)
Definition

L/C that may be amended or canceled any time by the buyer (the account party) without
the approval of the seller (the beneficiary). Since it does not provide any protection to the
seller, it is rarely used. Some banks even refuse to issue such L/Cs because of the fear of
getting

Irrevocable Letter Of Credit - ILOC

What Does Irrevocable Letter Of Credit - ILOC Mean?

A letter of credit that can't be canceled. This guarantees that a buyer's payment to a seller will be
received on time and for the correct amount.

Investopedia explains Irrevocable Letter Of Credit - ILOC

This is often used in international transactions.
LETTERS OF CREDIT- ADVISED vs. CONFIRMED

The letter of credit transaction usually involves two banks: the

buyer's bank issuing the letter of credit and a bank in the seller's
country, which advised the letter of credit to the beneficiary. The
advising bank may also assume the role of confirming bank.
Whether advising and/or confirming, the seller's bank assumes
certain responsibilities.

Advising

An advising bank acts as the agent of the issuing bank. The

function of the advising bank is to take reasonable care to verify the
authenticity of credits received and then accurately transmit them to
their beneficiaries. When advising a letter of credit, the bank
assumes no other liability. On receipt of the documents for
examination and payment, the advising bank will pay the seller only
if it has received good funds from the issuing bank, even if it was
specifically named as paying bank in the letter of credit.

Confirmation

By confirming a letter of credit, the advising or another bank

assumes the same responsibilities as the issuing bank, including
the obligation to pay against presented documents if they are in
order and all of the letter of credit terms are met. In effect, the
beneficiary has the individual promise of two banks to pay against
conforming documents; the issuing bank and the confirming bank.

How is a Letter of Credit Confirmed?

When negotiating the terms of sale, the seller would require a letter
of credit requesting the advising bank to add its confirmation. The
buyer includes this request when submitting the application for L/C
issuance to his bank. In most instances the issued credit states:
"Please advise beneficiary adding your confirmation" or words to
similar effect. Note: This is a request, not a requirement. The
advising bank for various reasons may decline to add its
confirmation and simply advise the L/C without engagement on
its part. When adding confirmation, typical language included in the
cover letter would be, "We hereby confirm this credit and thereby
undertake that all drafts drawn under, and in strict compliance with
the terms stated therein (and any further terms stated herein) will
be duly honored on presentation and delivery of documents as
specified, if presented, at this office on or before the expiry date."

Why Request Confirmation?

The beneficiary may have concerns about the political or economic

stability of the buyer's country, or the strength and reputation of the
issuing bank. Confirmation by a bank known and convenient to the
seller promotes the commercial utility of letters of credit. Also in the
event of a dispute, jurisdiction will be determined by the confirming
bank's location.

A letter of Credit is basically a document that is used by financial institutions. This document provides an irre
and services at international level. It provides the buyer a security that the goods will be good and the seller

Now a letter of credit has many types such as Revocable, Confirmed, unconfirmed, transferable etc.

The Unconfirmed letter of Credit is basically not guaranteed or confirmed by any bank apart from the bank t