Incoterms

In short

Incoterms (International Commercial Terms) are a set of eleven three-letter rules published by the International Chamber of Commerce (ICC) that define, in a sale contract, who arranges carriage, who bears which costs, where delivery happens and where the risk of loss passes from seller to buyer. They do not transfer ownership, do not fix the price and are not law by themselves — they bind only because the parties write them into the contract, so a quotation must read "CIF Nhava Sheva, Incoterms 2020". The current edition is Incoterms 2020, in use since 1 January 2020; older editions (2010, 2000) remain valid if a contract names them. For Indian students the term chosen decides the export/import invoice value, the assessable value under the Customs Act, 1962, the insurance claim route and the freight booking — so it is examined in EXIM, international business and logistics papers and asked in almost every interview for export documentation, freight forwarding, procurement and shipping jobs (Maersk, DP World, DHL, Allcargo, Safexpress, Tata International, Reliance, Amazon Global).

Explained

What an Incoterm does and does not do

• Does: fixes the point of delivery, the point where risk passes, the split of costs (freight, loading, unloading, terminal charges), who does export and import clearance, who buys insurance (only two rules require it) and who supplies documents like the transport document.
• Does not: transfer title/ownership (that is governed by the sale contract and the Sale of Goods Act, 1930 in domestic Indian sales), fix price or payment terms, specify the governing law, cover breach or remedies, or deal with sanctions and tariffs.
• Not a treaty or statute — published by ICC, a private body. Courts and Indian customs honour it because the contract adopts it.
• Always write it as rule + named place + edition: "DAP Ludhiana warehouse, Incoterms 2020". A term without a precise named place is the single commonest drafting error.

The four groups (E, F, C, D) and the two families

• Group E — EXW (Ex Works): seller only makes goods available at its own premises; minimum seller obligation.
• Group F — FCA, FAS, FOB: seller delivers to a carrier or ship nominated by the buyer; buyer pays main carriage.
• Group C — CPT, CIP, CFR, CIF: seller pays main carriage to the destination but risk still passes at origin — the critical exam point. Two different places exist: place of delivery (origin) and place of destination (to which cost is paid).
• Group D — DAP, DPU, DDP: seller bears cost and risk up to the destination; maximum seller obligation.
• Family 1 — any mode of transport (7 rules): EXW, FCA, CPT, CIP, DAP, DPU, DDP. Use for air, road, rail, courier, multimodal and containerised sea cargo.
• Family 2 — sea and inland waterway only (4 rules): FAS, FOB, CFR, CIF. Meant for bulk and break-bulk loaded over the ship's rail, not for containers handed over at a CFS/ICD.

The eleven rules, one line each

• EXW (Ex Works, named place): delivery when goods are placed at the buyer's disposal at seller's premises, not loaded; buyer does even export clearance — impractical for Indian exporters because the exporter must file the shipping bill to claim drawback/RoDTEP.
• FCA (Free Carrier, named place): seller clears for export and delivers to the carrier named by the buyer — loaded on the buyer's vehicle at seller's premises, or ready for unloading at a terminal/ICD. Incoterms 2020 added an option for the buyer to instruct its carrier to issue an on-board bill of lading to the seller, so FCA can be used with a letter of credit requiring a B/L.
• FAS (Free Alongside Ship, named port of shipment): seller places goods alongside the vessel on the quay or in a barge; suited to heavy-lift and bulk.
• FOB (Free On Board, named port of shipment): risk passes when goods are on board the vessel; seller does export clearance, buyer books and pays ocean freight.
• CFR (Cost and Freight, named port of destination): seller pays freight to destination port; risk passes on board at load port; no insurance obligation.
• CIF (Cost, Insurance and Freight, named port of destination): CFR plus seller must buy cargo insurance — minimum Institute Cargo Clauses (C) under Incoterms 2020 — for at least 110% of contract value in the contract currency.
• CPT (Carriage Paid To, named place of destination): any-mode equivalent of CFR; delivery/risk at handover to the first carrier.
• CIP (Carriage and Insurance Paid To): CPT plus insurance, and 2020 raised the default cover to Institute Cargo Clauses (A) (all-risks) — the main substantive change from Incoterms 2010.
• DAP (Delivered at Place): seller delivers at destination ready for unloading; buyer unloads and does import clearance and duty.
• DPU (Delivered at Place Unloaded): the only rule where the seller unloads; renamed from DAT (Delivered at Terminal) in 2020 and widened to any place.
• DDP (Delivered Duty Paid): seller also clears for import and pays import duty and taxes — maximum obligation; risky where the seller is a non-resident and cannot be the importer of record (in India, IGST and BCD need an IEC-holding importer).

Allocation of obligations — what to memorise

What changed in Incoterms 2020

• DAT renamed DPU, and the place need no longer be a terminal.
• CIP insurance upgraded to ICC (A); CIF stays at ICC (C) because bulk commodity trades did not want the cost.
• FCA on-board B/L option added for LC-based container trade.
• Security-related obligations and costs (screening, chain-of-custody requirements) spelt out in each rule.
• Own-means-of-transport recognised: under FCA, DAP, DPU and DDP a party may carry the goods in its own vehicle instead of contracting a carrier.
• A single cost article (A9/B9) in each rule lists all costs in one place, to stop terminal-handling-charge disputes.
• Rules re-ordered as A1–A10 / B1–B10 with delivery and risk moved up to A2/A3.

Indian practice: customs value, GST and documents

• Customs Act, 1962 + Customs Valuation (Determination of Value of Imported Goods) Rules, 2007: import duty is charged on a CIF-type assessable value. Where the invoice is FOB, actual freight and insurance are added; if insurance is not ascertainable it is taken at 1.125% of FOB, and for air freight the amount included is capped at 20% of FOB. These percentages are set by notification and can change — verify against the current rules before quoting in practice.
• Export value in the shipping bill is declared FOB for RoDTEP, duty drawback and RBI/EDPMS realisation purposes, so Indian exporters convert CIF/CFR quotations back to FOB.
• GST: exports are zero-rated supplies under the IGST Act, 2017 (with LUT/bond or refund); imports attract IGST on the assessable value plus BCD and social welfare surcharge. Ocean freight on imports and the GST treatment of CIF imports have been litigated — the Supreme Court in *Union of India v. Mohit Minerals* (2022) struck down IGST under reverse charge on ocean freight for CIF imports, since the freight is already in the value.
• Documents affected by the term: commercial invoice (must state the term), bill of lading / airway bill, marine insurance policy or certificate (seller's under CIF/CIP), shipping bill or bill of entry, certificate of origin.
• Payment interface: under a letter of credit, UCP 600 documents must match the term — a CIF LC requires the insurance certificate; an FOB LC does not.
• Domestic use: Incoterms can be used inside India (DAP/DPU for factory-to-factory moves) but e-way bill and GST place-of-supply rules decide tax, not the Incoterm.

Choosing a term — commercial logic

• Exporter wants control and revenue: quote CIF/CIP/DAP — books freight, earns margin on it, controls the carrier; needed when the buyer is small or the lane is thin.
• Buyer wants control: insists on FOB/FCA — uses its own freight contract rates, common for large Indian importers and for buying houses sourcing apparel.
• Containerised cargo: prefer FCA/CPT/CIP over FOB/CFR/CIF, because the container leaves the seller's control at the CFS days before loading; using FOB leaves a gap where the seller carries risk over cargo it cannot protect.
• Avoid EXW for exports from India: the exporter cannot file the shipping bill or claim export benefits if the buyer is the exporter of record.
• Avoid DDP into India unless the seller has an Indian entity/IEC — a foreign seller usually cannot be importer of record.
• Letter of credit, insurance claim and loss allocation all follow the risk point, so a mismatch between term and insurance cover is where money is actually lost.

Key points

• Incoterms - eleven ICC rules on delivery, risk and cost split in a sale of goods contract; current edition Incoterms 2020.
• Three elements to quote - rule + named place + edition, e.g. "FCA Tughlakabad ICD, Incoterms 2020".
• No title transfer - ownership and payment are outside Incoterms; the sale contract governs them.
• Groups - E (EXW, minimum seller duty), F (buyer pays main carriage), C (seller pays carriage, risk at origin), D (seller bears risk to destination).
• C-rules trap - cost paid to destination, risk passes at origin; two places in one term.
• Only CIF and CIP require insurance - CIF minimum ICC (C), CIP ICC (A) at 110% of invoice value.
• Four sea-only rules - FAS, FOB, CFR, CIF; the other seven suit any mode and containers.
• FOB risk point - goods on board the vessel at the named port of shipment.
• DPU - only rule obliging the seller to unload at destination; renamed from DAT in 2020.
• DDP - seller pays import duty and taxes; heaviest seller obligation, often unworkable cross-border.
• FCA 2020 addition - buyer may have an on-board bill of lading issued to the seller for LC compliance.
• Indian imports - assessed on CIF-type value under the Customs Valuation Rules, 2007; notional insurance 1.125% of FOB, air freight capped at 20% of FOB (verify current notification).
• Indian exports - shipping bill FOB value drives drawback, RoDTEP and export realisation.
• Mohit Minerals (SC, 2022) - no separate reverse-charge IGST on ocean freight for CIF imports.
• Named place precision - "FOB Mumbai" is weak; "FOB Jawaharlal Nehru Port (Nhava Sheva)" is enforceable.
• Unloading and terminal charges - the 2020 single cost article (A9/B9) prevents double billing of destination terminal handling.
• Security obligations - explicitly allocated in Incoterms 2020 for each rule.
• Old editions survive - a contract citing Incoterms 2010 is governed by 2010, so always state the edition.

Formulas and examples

Example 1 — Building FOB, CFR and CIF from ex-works cost. An exporter in Ludhiana ships knitwear. Ex-works cost ₹8,00,000; inland haulage to Nhava Sheva ₹35,000; CFS, terminal and loading charges ₹18,000; export clearance and documentation ₹7,000; ocean freight to Hamburg ₹60,000; marine insurance rate 0.35% on 110% of CIF.

1. FOB = 8,00,000 + 35,000 + 18,000 + 7,000 = ₹8,60,000.
2. CFR = 8,60,000 + 60,000 = ₹9,20,000.
3. CIF with premium loaded: CIF = 9,20,000 / (1 − 1.10 × 0.0035) = 9,20,000 / (1 − 0.00385) = 9,20,000 / 0.99615 = ₹9,23,556 (rounded).
4. Check: sum insured = 1.10 × 9,23,556 = ₹10,15,912; premium = 0.35% × 10,15,912 = ₹3,556; CFR + premium = 9,20,000 + 3,556 = ₹9,23,556. ✔
5. Shipping bill FOB stays ₹8,60,000 — that is the figure for RoDTEP and drawback, not the CIF invoice value.

Example 2 — Indian import duty from an FOB invoice. Machinery invoiced FOB USD 50,000; actual ocean freight USD 3,000; insurance not ascertainable; exchange rate (CBIC notified) ₹88/USD; BCD 7.5%; SWS 10% of BCD; IGST 18%.

1. FOB = 50,000 × 88 = ₹44,00,000. Freight = 3,000 × 88 = ₹2,64,000.
2. Notional insurance = 1.125% × 44,00,000 = ₹49,500.
3. Assessable value = 44,00,000 + 2,64,000 + 49,500 = ₹47,13,500.
4. BCD = 7.5% × 47,13,500 = ₹3,53,512.50. SWS = 10% × 3,53,512.50 = ₹35,351.25.
5. IGST base = 47,13,500 + 3,53,512.50 + 35,351.25 = ₹51,02,363.75; IGST = 18% × that = ₹9,18,425.48.
6. Total duty + IGST = 3,53,512.50 + 35,351.25 + 9,18,425.48 = ₹13,07,289 (rounded). IGST is creditable to a registered importer; BCD and SWS are costs.

Example 3 — Air freight cap. Spare parts, FOB USD 20,000, actual air freight USD 6,000, insurance USD 150, rate ₹88/USD.

1. FOB = ₹17,60,000. Actual air freight = ₹5,28,000. Cap = 20% × 17,60,000 = ₹3,52,000.
2. Freight included = the lower, ₹3,52,000; insurance = 150 × 88 = ₹13,200.
3. Assessable value = 17,60,000 + 3,52,000 + 13,200 = ₹21,25,200 — ₹1,76,000 lower than if the full air freight were added. (The cap is a valuation-rule provision; confirm the current notification before relying on it.)

Example 4 — Who bears a mid-voyage loss? Container of auto components sold CFR Rotterdam, invoice ₹30,00,000. The vessel is caught in heavy weather and the container is lost overboard after sailing from Chennai. Buyer has paid against documents.

1. CFR is a C-rule: delivery and risk passed when the goods were on board at Chennai.
2. Loss therefore falls on the buyer, who must still pay the price.
3. CFR carries no insurance obligation on the seller, so if the buyer took no cover, the buyer's only recourse is a claim against the carrier, limited by the Hague/Hague-Visby package limitation.
4. Had the term been CIF, the seller's minimum ICC (C) policy would still not have responded: total loss of a package lost overboard, and washing overboard, are ICC (B) perils, and clause C covers only jettison (a deliberate throwing overboard), not accidental loss in heavy weather — so the parties must agree cover above the CIF minimum (ICC (B) or (A)) for container cargo.
5. Lesson: under CFR/CPT and FOB/FCA the buyer must arrange its own marine cover from the risk point.

Example 5 — EXW versus DDP landed cost comparison (import of USD 10,000 goods, rate ₹88/USD).

Buyer pays ₹68,000 more under DDP but carries no freight, risk-management or clearance workload; under EXW the buyer also takes risk from the seller's factory gate, including loading. Where the seller has no Indian IEC, DDP cannot legally be performed and should be replaced by DAP Pune.

Where it is used

• Export houses and merchant exporters (apparel in Tiruppur and Ludhiana, engineering goods in Rajkot, pharma in Hyderabad): quoting FOB to buying houses and CIF/CFR to direct overseas buyers.
• Freight forwarders and customs brokers (Allcargo, Jeena, DHL Global Forwarding, Maersk Logistics, Expeditors): advising terms, issuing B/L or AWB, filing shipping bills and bills of entry consistent with the term.
• Procurement and import teams in automotive, electronics and capital goods (Tata Motors, Bajaj, Dixon, L&T): negotiating FCA/CPT for container imports, auditing suppliers' DDP quotes.
• Commodity trade — crude, coal, edible oil, fertiliser imports by IOCL, Adani, Ruchi-type refiners: FOB and CIF cargoes with charter parties, laytime and demurrage riding alongside the Incoterm.
• Banks' trade-finance desks: checking LC documents under UCP 600 against the stated term; insurance certificate mandatory only for CIF/CIP.
• E-commerce cross-border and courier (Amazon Global, Shiprocket X, India Post ePacket): DAP/DDP-style delivered duty-paid models, where the platform or carrier acts as importer of record.

Interview questions

• Q: What is the single biggest difference between FOB and CIF? A: Under both, risk passes when goods are on board at the load port; under CIF the seller additionally pays ocean freight and buys minimum cargo insurance to the destination port.
• Q: In a C-rule, where does risk pass? A: At origin — on board the vessel for CFR/CIF, or at handover to the first carrier for CPT/CIP — even though the seller pays carriage to the destination.
• Q: Which Incoterms oblige the seller to insure, and at what level? A: Only CIF (minimum Institute Cargo Clauses C) and CIP (Clauses A under Incoterms 2020), for at least 110% of the contract value in the contract currency.
• Q: Why should containerised cargo not be sold FOB? A: The seller hands the container over at a CFS/ICD days before loading but keeps risk until it is on board, over goods it no longer controls; FCA fits that handover.
• Q: What changed from Incoterms 2010 to 2020? A: DAT became DPU, CIP insurance rose to ICC (A), FCA gained an on-board B/L option, security costs and own-transport use were made explicit, and all costs were consolidated in article A9/B9.
• Q: Which rule puts the greatest burden on the seller, and which on the buyer? A: DDP on the seller (delivered, import-cleared, duty paid); EXW on the buyer (collects from the seller's premises and even handles export clearance).
• Q: Which is the only Incoterm requiring the seller to unload at destination? A: DPU — Delivered at Place Unloaded.
• Q: Does an Incoterm transfer ownership of the goods? A: No. It fixes delivery, risk and cost; title passes as the sale contract and the applicable sale-of-goods law provide.
• Q: An Indian exporter quotes CIF USD 1,00,000. What value goes in the shipping bill? A: The FOB value — CIF less actual freight and insurance — because export incentives and foreign-exchange realisation are tracked on FOB.
• Q: Why do Indian exporters avoid EXW? A: The exporter must file the shipping bill to claim drawback/RoDTEP and complete EDPMS realisation; under EXW the buyer is responsible for export clearance, which breaks that chain.
• Q: Goods sold DAP Delhi are damaged while the buyer unloads the truck. Who bears it? A: The buyer — under DAP the seller delivers ready for unloading, so risk has already passed before unloading begins.
• Q: Why is DDP risky for a foreign seller shipping to India? A: Import clearance needs an IEC-holding importer of record and IGST/BCD payment in India; without an Indian entity or an agent willing to act, the seller cannot perform, and GST credit is lost.
• Q: How does the Incoterm affect Indian import duty? A: Duty is charged on a CIF-type assessable value under the Customs Valuation Rules, 2007, so an FOB invoice needs freight and insurance added (notional insurance 1.125% of FOB; air freight restricted to 20% of FOB).

Common mistakes

• Saying risk passes at destination under CIF/CFR/CPT/CIP — cost goes to destination, risk passes at origin.
• Using FOB, CFR or CIF for containers, air, road or courier shipments; those four are sea and inland-waterway only.
• Omitting the named place or the edition, writing just "CIF" or "FOB basis" in a quotation or purchase order.
• Assuming insurance is automatic under CFR or CPT, then having no cover when cargo is lost.
• Treating an Incoterm as transferring ownership, or as deciding the GST place of supply.
• Quoting CIF value in the shipping bill, or FOB value as the import assessable value, in numerical problems.
• Forgetting to load the premium when converting FOB + freight into a CIF price (the 1 − 1.10 × rate divisor) and forgetting that the sum insured is 110%, not 100%.
• Still calling the rule DAT, or applying ICC (C) cover to CIP under Incoterms 2020.

Related topics

Customs clearance and EXIM documents · GST and e-way bill in logistics · Letters of credit and export payment terms · Marine cargo insurance and claims · Ocean freight, bills of lading and multimodal transport · Export costing and pricing.