CHRIST (DEEMED TO BE UNIVERSITY)

SCHOOL OF COMMERCE, FINANCE & ACCOUNTANCY

DEPARTMENT OF COMMERCE

6th Semester – B.Com Honours D

COH 641A – International Finance

CIA 1 – REPORT ON INCOTERMS

Submitted To: Submitted By:

Dr. Akhil P Yatharth Arora

2111362
 Introduction

Incoterms, short for International Commercial Terms, are a set of standardized rules created
by the International Chamber of Commerce (ICC) to facilitate international trade. These
terms define the responsibilities, risks, and costs associated with the transportation and
delivery of goods between buyers and sellers. This report aims to delve into the rules,
merits, demerits, and significance of Incoterms in global trade.

Understanding Incoterms Rules

Incoterms are regularly updated to adapt to the evolving landscape of international trade
practices. As of the latest revision in 2020, there are 11 Incoterms rules, each specifying
the obligations and responsibilities of both buyers and sellers. These rules can be divided
into two categories: those suitable for any mode of transport (such as EXW, FCA, CPT,
CIP, DAP, DPU, and DDP) and those specifically for sea and inland waterway transport
(FAS, FOB, CFR, and CIF). Each rule delineates the point at which risk and cost transfer
from the seller to the buyer.

Rules for Any Mode of Transport

• EXW (Ex Works): The seller's responsibility ends when they make the goods available
at their premises. The buyer assumes all risks and costs from this point, including
transportaCon.
• FCA (Free Carrier): The seller delivers the goods to a carrier nominated by the buyer
at a specified place. The risk transfers to the buyer once the goods are handed over
to the carrier.
 • CPT (Carriage Paid To): The seller arranges and pays for transportaCon to the named
desCnaCon. Risk transfers to the buyer when the goods are handed over to the
carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT but with the addiCon of
insurance coverage provided by the seller unCl the goods reach the desCnaCon.
• DAP (Delivered at Place): The seller is responsible for delivering the goods to a
named desCnaCon. The risk transfers to the buyer upon arrival at the named place of
desCnaCon.
• DPU (Delivered at Place Unloaded): The seller is responsible for delivery to the buyer
at an agreed-upon locaCon, unloaded from the arriving means of transport.
• DDP (Delivered Duty Paid): The seller bears all costs and risks in delivering the goods
to the named desCnaCon, including customs duCes and taxes.

Rules for Sea and Inland Waterway Transport

• FAS (Free Alongside Ship): The seller's responsibility ends when the goods are placed
alongside the vessel at the named port of shipment.
• FOB (Free on Board): The seller is responsible for delivering the goods onto the
vessel nominated by the buyer at the named port of shipment. Risk transfers to the
buyer once the goods cross the ship's rail.
• CFR (Cost and Freight): The seller arranges and pays for transportaCon to the named
port of desCnaCon. Risk transfers to the buyer when the goods pass the ship's rail.
• CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides
insurance coverage for the goods during transit to the named port of desCnaCon.
Merits of Incoterms

• Clarity and Uniformity: Incoterms provide clear, standardized definiCons, reducing

the risk of misunderstandings between parCes engaged in global trade. This
uniformity fosters smoother transacCons.
• Risk AllocaCon: These terms allocate risks and responsibiliCes explicitly, enabling
both buyers and sellers to understand their obligaCons at each stage of the
transportaCon process.
• Cost Efficiency: By defining the allocaCon of costs, Incoterms help in avoiding
disputes and unexpected expenses, contribuCng to cost efficiency in internaConal
transacCons.
• FacilitaCng Global Trade: Incoterms create a common language for internaConal
trade, promoCng smoother transacCons and reducing barriers that could impede
global commerce.

Demerits of Incoterms

• Complexity: Understanding and applying Incoterms correctly can be challenging,

especially for newcomers to internaConal trade, potenCally leading to
misinterpretaCon and disputes.
• Not Comprehensive: While Incoterms cover many aspects of trade, they may not
encompass every specific aspect of a transacCon, leaving room for addiConal
contractual agreements.
• Limited Legal Enforcement: Incoterms are not laws; they are guidelines for parCes to
voluntarily incorporate into their contracts. Consequently, their legal enforcement
might be limited in some jurisdicCons.
Importance of Incoterms

• Risk Management: By clearly defining obligaCons and responsibiliCes, Incoterms

assist in managing risks associated with internaConal transacCons.
• Global StandardizaCon: They provide a globally accepted framework for trade terms,
aiding in standardizing pracCces across various countries and cultures.
• Enhanced Efficiency: Incoterms streamline trade processes, reduce uncertainCes,
and facilitate smoother transacCons, thus enhancing overall efficiency in
internaConal commerce.

Conclusion

Incoterms play a crucial role in the smooth operation of international trade by providing a
standardized framework for defining the responsibilities, risks, and costs involved in the
transportation and delivery of goods. While they offer numerous advantages in
facilitating global commerce, their complexity and limited enforceability in legal contexts
can pose challenges. Nonetheless, their importance in promoting clarity, efficiency, and
risk management in international transactions cannot be overstated. Understanding and
correctly applying Incoterms remain essential for businesses engaged in global trade to
mitigate risks and ensure successful transactions.