FOB

FOB is an abbreviation for Free On Board. The term FOB (often seen as f.o.b.) is commonly used when shipping goods, to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer. FOB shipping is the term used when the ownership/liability of goods passes from the seller to the buyer at the time the goods cross the shipping point to be delivered. FOB destination designates that the seller is responsible for the goods until the buyer takes possession. This is important in determining who is responsible for lost or damaged goods when in transit from the seller to the buyer. The buyer is responsible when shipped FOB shipping and the seller is responsible if shipped FOB destination. CAP, or customer arranged pickup, is used to denote that the buyer will arrange a carrier of their choice to pick the goods up and the liability for any damage or loss belongs to the buyer.

CIF VS FOB
A good rule of thumb when doing business in international trade is that you should buy FOB and sell CIF. Why is this a good rule to follow? The reason is very obvious. When you sell CIF you can make a slightly higher profit and when you buy FOB you can save on costs. Let me explain how. An importer must look into the options of buying the goods under the terms that are more favorable to his or her expenses. So what does FOB and CIF means? CIF COST INSURANCE AND FREIGHT (named port of destination): Seller must pay the costs and freight includes insurance to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the ship.

FOB FREE ON BOARD (named port of shipment):

The seller must themselves load the goods on board the ship nominated by the buyer, cost and risk being divided at ships rail. The seller must clear the goods for export. Maritime transport only but NOT for multimodal sea transport in containers. The major difference between CIF and FOB is the transportation costs and insurance during it.

Why buy CIF?

Importers generally buy CIF if they are new in international trade or they have very small cargo. It is a more convenient way of shipping since they dont have to deal with freight or other shipping details, but you must realize that you are probably paying a lot more to get the goods than you should. Your supplier is responsible for arranging the freight and insurance details. Handling freight may be too detailed or complicated for a new importer, therefore they simply let their supplier deliver the product to them. It is an easy way of bringing the cargo from point A to point B without dealing with details but with a higher cost. Why CIF might cost you more? The vendor often will work with his own forwarder and mark up the cost offered from his forwarder as an additional way of making profit. Having CIF terms might not work

for you when you start buying more. As the number of CIF shipments increase, more problems can occur, since obtaining accurate shipment information becomes more difficult. Overseas suppliers might not help you on a timely manner to handle service issues that might develop in transit. Their responsibility ends on destination port and for any problem, you may have to bear extra demurrage, per diem or unexpected shipping related costs. Importers have to rely on their supplier and the freight agent they are using. The communication and information flow might be a hassle and even a day delay can be very costly. Also take into consideration that when you buy CIF you might end up paying duty on the freight and insurance charges your supplier adding on. The freight and insurance charges are not dutiable but it can be very difficult to separate those from the actual invoice value. These costs cannot be estimated. It has to be actual ones and evidence of payment must be submitted to US customs. This is not a problem when you buy FOB since those charges are not in the selling prices.

Why buy FOB?

Buying Free On Board simply has two major benefits over CIF. You have better control of the freight and the freight cost. The cost is always important and you will have a better chance of gaining a more competitive freight rate. Using your own freight forwarder will help you obtain more accurate information in a timely manner. They can assist you better once a problem arises.

A few tips to save cost on import

Introduction In the current scenario of globalization, many organizations take recourse to import of equipments and spares for their day to day operations and further diversification, expansion etc. Generally, the equipment is purchased on a competitive basis whereas the spares are purchased on Single Tender basis from the Original Equipment Manufacturers. At the time of processing the purchase, reasonableness of the price of the spares is examined with reference to available data and orders are placed on FOB basis. By placing import order on FOB basis the organization can save foreign currency involved by way of freight and insurance. Hence, always the import orders will be on FOB basis and the export orders will be on CIF basis. While importing the consignments, apart from the basic cost of the item, the other components like freight, insurance and customs duty are also involved. I have come across certain important points that impact the savings on freight, insurance and customs duty for the imported consignments. The following paragraphs highlight my practical experience. Insurance Charges For imported consignments, the insurance premium should cover the value of the order including the customs duty. It is important to include the customs duty also in the insurance premium since in the event of any damage noticed in the imported consignment after clearance, we will be in a position to claim full value of the consignment including the element of customs duty paid. For this purpose there are two ways of arranging insurance:

1) In the first method, we can go in for single premium i.e. immediately after the placement of order, the insurance premium is paid for the FOB value, freight charges, insurance and assessed customs duty. Here the personnel in charge of these responsibilities must have a clear exposure to and understanding of the customs tariff rates and procedures so that the assessed customs duty in most cases is very near to the actual customs duty. 2) In the alternate method, the premium is arranged with the insurance company in three stages. As soon as orders are released, the insurance premium can be arranged for the FOB value of the consignment only at the initial stage. When the materials are dispatched the second cover has to be arranged for freight charges and insurance charges at actuals and the customs duty (Authors Query). The customs duty will be for the assessed value. So insurance for an initial agreed value of to be customs duty can be paid. Finally after clearance of the consignment, the actual value of customs duty to be paid can be declared to the insurance company and the difference if any, over and above the amount already paid has to be paid to the insurance company. If the premium paid is in excess, action is to be taken for getting necessary refund from the insurance company. However, insurance companies do not generally entertain claims for refund of any excess premium received by them. This working requires an understanding and agreement from the insurance company. In case the insurance premium is not paid and insurance bill is not produced along with the bill of entry, the Customs will take the insurance charges as 1.125% of FOB value as per Section 14 of Customs Valuation Rules, 1988, of the Customs Act. It is therefore, imperative that consignments are invariably insured before the shipment of the materials, to reduce costs. It is better to have a single insurance company, preferably on a regular basis due to inherent advantages and convenience. It should also be a permanent arrangement, as far as possible. Financial managers may insist that insurance companies should be selected on the basis of competitive quotations. This is, however, not advisable since by selecting the single source of insurance company they may offer discount in the premium rate based on the earlier claim rate (Authors Query). For example, Chennai Port Trust was paying the premium rate of 0.4% less 5% earlier but it has been reduced in various stages as detailed below: Hence it is advantageous, if insurance is arranged continuously with the same insurance company, by way of obtaining insurance premium as stated above, which will bring in a considerable amount of savings in the long run, which may be in the range of a few lakhs of rupees. Freight Charges There is a general perception that airfreight charges are higher than the freight charges by sea. However, in actual practice this is not always true since freight is determined in relation to the weight, volume and value of the consignment to be carried. For instance, if the weight of the consignment is less than 500 kgs but the volume of the consignment is not considerable, the freight charges by air will be more economical. By airlifting the consignment, the delivery is faster apart from minimizing breakage, loss of consignment etc. Even in airfreight, if we utilize the services of a consolidated freight forwarder, the airfreight charges will be considerably less. One such airfreight consolidator in India is M/s. Balmer

Lawrie & Co. Ltd., a Government of India undertaking. A statement showing the airfreight charges of M/s. Air India and M/s. Balmer Lawrie & Co. Ltd. is enclosed (Annexure-I). From the statement, it may be seen that by utilizing the services of the consolidated freight forwarder, the airfreight charges will be more economical. Further, if the consignment value is more than US $17,000, the shipping companies will charge freight charges as 3% advalorem on the consignments arriving from European countries. Hence if the weight and volume of the consignment are comparatively less, but the value of the consignment is considerably high, it will be more advantageous to book the consignment by air. A few such cases are illustrated in the statement at Annexure-II. From the statement, it may be observed that booking the consignment through air instead of sea and vice versa can save a considerable amount of freight charges. The saving in the freight charges will also enable corresponding saving in the customs duty as well. In view of the above, whenever quotations are invited from the foreign suppliers, we should obtain from them the details of approximate weight and volume of the consignment for determining the right and advantageous mode of dispatch of the consignment. It is possible that sometimes, consolidated freight forwarders and shipping companies may charge higher freight charges than actuals (Authors Query). Therefore, the freight charges claimed by the airlines/ consolidated freight forwarder and the shipping lines are to be examined critically and the freight charges are to be paid only after comparing the tariff for freight charges. The details of such efforts taken by Chennai Port Trust are available in the enclosed statement (Annexure-III). It is important that freight charges should be paid and documentary proof enclosed along with the bill of entry, failing which, the freight charges will be taken as 20% on FOB value as per the Customs Act Section 14 of Customs Valuation Rules 1988 (7.1.8) (Authors Query). Usually, freight charges are lesser than 20% of the FOB value, hence we should ensure that the freight charges are paid immediately on receipt of the freight bill and such documentary evidence should be attached to the bill of entry. Even in cases where the actual freight charges are more than 20% of the FOB value, the freight charges will be taken as 20% of the FOB value by the Customs for assessment purpose. We may also follow the same principle while declaring the freight charges to the Customs at the time of filing the bill of entry. Customs Duty Customs duty is levied based on the customs tariff. However, by interpreting the material classification with reference to the heading of the customs tariff, considerable amount of customs duty can be saved for which, the personnel dealing with the clearance of consignment should have a thorough knowledge of customs tariff and procedures etc. A statement of such savings effected in Chennai Port Trust is detailed in Annexure-IV. In this connection, it is informed that the work of clearance of imported consignments is entrusted to the authorized customs clearing agents. Even though the agents will file the bill of entry and indicate the customs tariff heading, pay the customs duty and clear the consignments, it is the prime responsibility of the Materials Management or Commercial Department of the organizations to check whether the

customs duty levied is based on the relevant customs tariff heading. Even if it is noticed that any excess customs duty is paid, the claim can be preferred with Customs for the refund of the excess customs duty paid, within six months from the date of bill of entry.