Incoterms 2020 answer three questions and nothing else: who pays for each leg, where risk passes from seller to buyer, and who handles export and import clearance. They do not decide when you get paid, what law governs the contract, or who owns the goods. Indian exporters lose money on this distinction constantly — a term is agreed by habit, the cost split turns out to be different from what was assumed, and the difference lands on the seller’s P&L.
The rules are published by the International Chamber of Commerce and the current edition is Incoterms 2020. Older editions remain valid if the contract names them, so always write the edition into the contract: “FOB Mundra, Incoterms 2020”.
The eleven rules, grouped properly
Two groups matter. Seven rules work for any mode of transport, including road, rail, air and multimodal. Four are for sea and inland waterway only, and they exist because the ship’s rail once meant something.
Any mode (7)
- EXW — Ex Works. Seller makes goods available at its own premises. Everything else is the buyer’s.
- FCA — Free Carrier. Seller delivers, export-cleared, to a carrier nominated by the buyer at a named place.
- CPT — Carriage Paid To. Seller pays carriage to a named destination; risk passes at handover to the first carrier.
- CIP — Carriage and Insurance Paid To. As CPT, plus the seller buys insurance.
- DAP — Delivered at Place. Seller delivers ready for unloading at destination; buyer imports.
- DPU — Delivered at Place Unloaded. As DAP, but the seller also unloads. This is the only rule where the seller unloads.
- DDP — Delivered Duty Paid. Seller does everything, including import clearance and duties.
Sea and inland waterway only (4)
- FAS — Free Alongside Ship. Seller places goods alongside the vessel at the named port.
- FOB — Free On Board. Risk passes when goods are on board the vessel.
- CFR — Cost and Freight. Seller pays ocean freight; risk still passes on board at origin.
- CIF — Cost, Insurance and Freight. As CFR, plus seller-bought insurance.
The sea-only four are for bulk and for conventional break-bulk. They are not designed for containers. A container handed to a terminal at Mundra days before loading is out of the seller’s control long before it is “on board”, which is exactly the gap FCA was written to close.
Who pays, who risks, who clears under Incoterms 2020
| Rule | Mode | Risk passes | Main carriage paid by | Export clearance | Import clearance |
|---|---|---|---|---|---|
| EXW | Any | At seller’s premises, goods placed at disposal | Buyer | Buyer | Buyer |
| FCA | Any | On delivery to buyer’s carrier at named place | Buyer | Seller | Buyer |
| CPT | Any | On handover to first carrier | Seller | Seller | Buyer |
| CIP | Any | On handover to first carrier | Seller (plus insurance) | Seller | Buyer |
| DAP | Any | At destination, before unloading | Seller | Seller | Buyer |
| DPU | Any | At destination, after unloading | Seller | Seller | Buyer |
| DDP | Any | At destination, before unloading | Seller | Seller | Seller |
| FAS | Sea | Alongside the vessel | Buyer | Seller | Buyer |
| FOB | Sea | On board the vessel | Buyer | Seller | Buyer |
| CFR | Sea | On board at origin | Seller | Seller | Buyer |
| CIF | Sea | On board at origin | Seller (plus insurance) | Seller | Buyer |
The row that catches people is CFR and CIF: the seller pays freight all the way to the destination port, but risk passed back at origin. If the vessel is lost mid-ocean, it is the buyer’s loss even though the seller booked and paid for the voyage. Cost and risk are separate columns, always.
Five traps Indian exporters hit
1. EXW dressed up as FOB
The most common quotation error. The exporter quotes “FOB Mundra” and then hands over at the factory gate expecting the buyer’s agent to take it from there. Under FOB the seller is responsible for export clearance and for getting the goods on board — inland haulage to the port, terminal handling, the shipping bill, everything up to loading. If you only want to hand over at your gate, quote EXW and say so, or quote FCA and price the haulage in. Quoting FOB while behaving as EXW means you have accepted costs you did not price.
EXW also has a structural problem for an Indian exporter: the buyer is formally responsible for export clearance, but a foreign buyer cannot file a shipping bill in India. In practice the exporter does it anyway, which means doing it without a contractual basis. FCA is the honest version of what most EXW deals actually are.
2. CIF and CIP insurance minimums
Under CIF the seller need only provide minimum cover — Institute Cargo Clauses (C) or equivalent — which covers a short list of named perils and will not respond to ordinary handling damage or theft. Incoterms 2020 changed CIP to require the higher all-risks level, Clauses (A), while CIF stayed at the minimum. So the same cargo insured under CIF and under CIP is not equally protected. If you sell CIF and your buyer expects wide cover, agree a higher level in the contract; if you buy CIF, assume you are thinly covered and arrange your own top-up.
3. DDP and the importer-of-record problem
DDP asks the seller to clear goods for import in the buyer’s country and pay the duty and local taxes. That requires standing as importer of record there, which in many countries needs a local tax registration a foreign exporter does not have and cannot easily get. Unrecoverable VAT or GST in the destination country is another silent cost — the buyer could often have reclaimed it; you cannot. Unless you have a genuine local entity or a properly appointed fiscal representative, DAP is usually the right delivered term and DDP is a liability you agreed to by accident.
4. FCA, letters of credit, and the on-board notation
For containers, FCA is technically the right term. The problem was always the L/C: banks routinely demand a bill of lading bearing an on-board notation, but under FCA delivery happens at the terminal or CFS before the vessel loads, so the seller has no automatic right to that document. Incoterms 2020 added an optional mechanism — the parties may agree that the buyer instructs its carrier to issue a transport document stating the goods have been loaded on board, which the seller can then present. It is optional, so it only helps if you write it into the sale contract and mirror it in the credit. Agree it before the L/C is opened, not when the documents are rejected.
5. Naming the place vaguely
Every Incoterm needs a named place, and precision decides where risk sits. “FCA Ahmedabad” is ambiguous: is delivery at your factory, at ICD Khodiyar, at the CFS? If delivery is at the seller’s own premises the seller loads; anywhere else, the seller merely places the goods at the carrier’s disposal and does not unload. Write the exact address. The same applies to DAP — “DAP Hamburg” is not the same as “DAP buyer’s warehouse, Hamburg”, and the difference is several days of demurrage risk.
Choosing a term in practice
- Containers: FCA, CPT or CIP. Avoid FOB, CFR and CIF unless your buyer or bank insists.
- Air freight: FCA or CIP. The sea-only terms have no meaning for an air freight consignment out of the Ahmedabad air cargo complex.
- Bulk and break-bulk: FAS, FOB, CFR or CIF are fine — that is what they are for.
- New buyer, uncertain market: avoid DDP. DAP keeps you out of the foreign tax system.
- You want control of the freight: sell CIF or CIP and choose the carrier and the routing yourself.
Whatever you pick, price it properly. Before quoting a delivered term, confirm your volume with the CBM calculator, get your ocean freight quote on the same basis, and settle the export documentation with your broker during customs clearance planning. If you are still choosing a gateway, our comparison of Mundra, Pipavav and Nhava Sheva makes the cost lines easier to line up.
Talk to Scapex
If you are negotiating a term with a new buyer and want to know what it will actually cost you at your gateway, send us the draft. We will map the cost and risk lines against Incoterms 2020 before you sign. Contact Scapex.