TRADE FINANCE – INCO TERMS – IN-CLASS ACTIVITY TOWARDS SKILL BUILDING

1. M/s Capital Imports enters into a purchase contract with a foreign supplier in New
York, U.S.A for import of 1000 tons of special steel bars worth USD 375,000 after
obtaining necessary approvals. As per the contract, the importer has to meet the cost
of insurance and freight besides the cost of the goods. While the cost of insurance will
be at 1% of the value of goods, the freight charges will be USD 500 per ton.

Please find out as to the type of INCO term that covers this contract and the total cost
of imports for the Indian importer.

2. An Indian exporter of seafood has entered into a sale contract with a Middle East
buyer for supply of 3000 Kgs. of catfish worth USD 125,000/- under CFR terms. The
cost of insurance and sea freight are as under: -

Insurance @ USD 3000 per ton

Freight @ 8% of the value of goods shipped

Please arrive at the total cost of the exports to be drawn by the Indian exporter.

3. M/s Eveready Textiles have obtained an export order from a buyer in U.K for supply
of readymade garments worth PD. STG. 450,000/- on FCA basis with the goods to be
airlifted from Bangalore International Airport to Heathrow airport in London. The cost
of insurance will be PD. STG 25,000/- and the airfreight charges will be PD. STG.
75,000/- Please advise as to the total value of the exports for the Indian exporter.

4. M/s Providence Exports, Delhi have obtained an export order from a buyer in
Singapore for supply of 500 tons of Alphonso mangoes costing USD 125,000/- to be
shipped from Kolkata seaport to Singapore seaport on FOB terms. The exporter
maintains the stocks of mangoes in a processing centre on the outskirts of N. Delhi
and they approach you for your guidance and services for execution of the order.

What are the pre-cautionary measures you will advise the exporter to take in the
execution of the contract?
5. M/s Quality Traders, one of your valued importer customers, approaches us for your
advice in respect of the proposed import of 1000 tons of palm oil from Indonesia. They
inform you that they do not have any prior experience in such imports and seeks your
guidance for the imports without taking up any statutory responsibilities either in the
seller’s country or in India.
What type of INCO term you would recommend in the above case after consideration
of the customer’s submission? What are the costs that would be involved in such a
case besides the cost of the goods to be imported?
SOLUTION:

1. The type of INCO term covering the import is ‘CIF’ as the cost of goods, insurance
and freight are being covered.
Cost of special steel bars to be imported: USD 375,000.00
Cost of insurance @ 1% of the cost of material: USD 3,750.00
Cost of freight @ USD 500 per ton for 1000 tons USD 50,000.00

Total CIF cost of the goods imported: USD 428,750.00

2. The INCO term covering the import is ‘CFR’. As such, only the cost of goods and
freight are borne by the exporter and the cost of insurance by the importer.
Cost of catfish to be exported: USD 125,000.00
Cost of freight @ 8% of the value of goods shipped: USD 10,000.00

Total CIF cost of the goods imported: USD 135,000.00

3. The INCO term ‘FAS’ is not applicable in the term can be used exclusively for sea
based shipment only and the contract requires shipment of goods by Air. As such,
we may advise the exporter to replace the term with ‘FCA’ which is similar in terms
of cost to FAS and can be used for any mode of transportation.
As per FCA terms, the cost of insurance and freight are to be borne by the
importer. As such, the cost of the export will be PD. STG. 450,000.00 and the local
transportation cost.
4. It is noted that the goods have to be transported to Kolkata airport from the Delhi
processing centre of the exporter. As such, it has to be ensured that the
transportation of goods from Delhi to Kolkata seaport has to be covered by
adequate transit insurance.
Besides, the cost of the local transportation has to be added to the cost of the
goods towards cost of export.
It will also be advisable that a quality inspection of the mangoes, before packing
at Delhi processing centre, may be insisted upon with the importer to avoid any
commercial dispute any dispute as to the quality of the mangoes.

5. In view of the lack of experience by the Indian importer of palm oil and taking into
account the various requirements at both the ends, the term DDP (Delivery Duty
Paid) may be recommended for the contract. This will ensure that all the
responsibilities in the movement of the goods from the exporter’s place to the
importer’s place, except for unloading, will be on the foreign supplier. Of course,
the cost towards all these requirements will be included in the final cost of the
imports.