Materials Management

Lecture 6: International Purchase

Udit Chaudhuri

Main Activities

1. Sourcing

2. Procurement

3. Documentation

Main Steps

1. Sourcing2. Negotiation 3. Import Clearance / License4. Purchase Order / Contract5. Banking, Payment 6. Shipment, Clearing & Forwarding 7. Inland transport & receipt of goods

International Purchase - Impact

1. Laws of both countries, International Law

2. Changing regulations & tariffs

3. Severe commercial-legal liabilities

4. Impact on costs – Duties, Forex, Shipment

5. Needs research & planning with utmost care

India Regulatory Framework

1. Trade Policy - Ministry of Commerce

2. Banking, finance – RBI, World Bank

3. Duty, Tariffs, Taxes –

Central Board of Excise & Customs,

Ministry of Finance

Trade Policy – Why?1. To appreciate trade with other nations.2. To protect domestic market prevailing in the country.3. To increase the export of particular product which will help in expanding

domestic market.4. To prevent the imports of particular goods for giving protection to infant

industries or developing key industry or saving foreign exchange, etc.5. To encourage the imports of capital goods for speeding up the economic

development of the country.6. To restrict the imports of goods which create unfavourable balance of

payments.7. To assist or prevent the export or import of goods and services for achieving

the desired rate of exchange.8. To enter into trade agreements with foreign nations for stabilizing the

foreign trade.

Trade Policy – Points to explore1. Permissible, Restricted, Prohibited goods – ITC No., Compendium2. Local industry to be protected

a. Strategic – Nuclear, Defence, Petroleum…b. Economic – Petrochemicals, Fertiliser, Steel, Cement

3. Specific Indian industry sector to be encouraged – e.g. handicrafts, toys… local market

4. Specific export sector to be encouraged – garments, leather, pharmaceuticals

5. Trade agreements a. Bilateral – India-US, India-EU, India-China … b. General – GATT-WTO, UNCTAD, UNIDO, GSP

6. Industry Policy a. SSI, Export Promotion, Product-specific - Ministry of Industry / Others b. Any assistance, subsidies, Duty Drawback, concessions…

7. Standards & Specifications

Banking & Finance

1. Foreign Exchange marketsa. Over-valued and under-valued currenciesb. Stable and unstable currencies

2. Forex Control Regulations a. Permissible sources of funds b. Permissible means of transfer – direct, via banks, on-line

3. Sources & Choices of Financea. Buyer’s & Sellers Credit b. IFIs - World Bank, IMF, ADB, IDA, IBRD…c. International banks – Forex loans, Soft loans, Lines of Credit d. RBI and Commercial Banks, e.g. Exim bank, ICICI, IDBI, SIDBI… e. Various payment instruments available – L/C, IBR, International Drafts, Lease,

Credit, Bill Discounting, Payment Gateway & Internet options

Customs

1. Lawa. Customs Act, 1962b. Foreign Trade (Development and Regulation) Act, 1992 c. Foreign Trade (Regulation) Rules, 1993d. Foreign Trade (Exemption from application of Rules in certain cases) Order,

1993e. Customs Tariff Act, 1975

2. Customs Tariff a. Basic Duty, CVD, Auxilliary, Cess… b. Draw-back, set-off, concession…

3. Procedures– Customs Manual

Other Sources of Info

1. Foreign Consulates & Embassies

2. Indian Consulates in other countries

3. Business & Industry Associations, Federations,

Chambers of Commerce…

4. Trade Development organisations, UNCTAD, UNIDO,

e.g. STC, MMTC…

5. Websites/portals as applicable

Other Matters

1. Logistic services

2. Clearing & Forwarding

3. Overseas transport & trans-shipment

4. Inland Transportation

5. Insurance

Common Terms of Import

1. Consignment Purchase– Importer makes payment to the overseas supplier only after sales to end user is made and payment

received.

– High risk to supplier.

– Usually when supplier is trying to enter a new market.

2. Cash-in-Advance (Pre-Payment)– Importer must send payment to the supplier prior to shipment of goods. the goods will be as advertised.

– Entire risk to importer.

– Usually when buyer has poor credit rating / when goods are in short supply.

3. Down Payment– Importer pays the supplier a portion of the cost of the goods "in advance" when the contract is signed or

shortly thereafter.

– Induces supplier to start performance.

– Risk: Supplier may not complete the execution.

Common Terms of Import

6. Open Account– Allows importer to pay at some specific date in the future and without issuing any negotiable instrument

evidencing importer’s legal commitment.

– When the importer/buyer has a strong credit history and is well-known to the seller.

– When there are several sources for supply or when open account is the norm in the buyer's market.

– No protection to exporter in case of non-payment.

7. Documentary Collections / Bank Draft– Transaction is settled by the bank through an exchange of documents, thus enabling simultaneous

payment and transfer of title.

– Cash Against Documents• Document against acceptance - Term Draft or against presentation Sight Draft

• Remitting bank and Collecting bank are usually involved.

– Importer is not obliged to pay for goods prior to shipment and the exporter retains title to the goods until the importer either pays for the value of the draft upon presentation (sight draft) or accept to pay at a later date and time (term draft)

– Principal obligations are set out in the guidelines of the "Uniform Rules for Collection" (URC) drafted by the Paris- based International Chamber of Commerce.

Common Terms of Import

Flow of a Documentary Collection Transaction 1. Exporter/drawer and Importer/drawee agree on a sales contract, including payment to be

made under a Documentary Collection.

2. The Exporter ships the merchandise to the foreign buyer and receives in exchange the shipping documents.

3. Immediately thereafter, the Exporter presents the shipping documents with detailed instructions for obtaining payment to his bank (Remitting bank).

4. The Remitting bank sends the documents along with the Exporter's instructions to a designated bank in the importing country (Collecting Bank).

5. Depending on the terms of the sales contract, the Collecting Bank would release the documents to the importer only upon receipt of payment or acceptance of draft from the buyer. (The importer will then present the shipping documents to the carrier in exchange for the goods).

6. Having received payment, the collecting bank forwards proceeds to the Remitting Bank for the exporter's account.

7. Once payment is received, the Remitting bank credits the Exporter's account, less its charges.

Common Terms of Import

Bank-to-bank transactions are suitable when:

1. When the exporter and importer have a well established relationship

2. When there is little or no threat of a total loss resulting from the buyer's inability

or refusal to pay

3. When the foreign political and economic situation is stable

4. When a letter of credit is too expensive or not allowed

Common Terms of Import

6. Letter of Credit – Formal bank letter, issued for a bank's customer, which authorizes an individual or company to draw

drafts on the bank under certain conditions.

– Instrument through which a bank furnishes its credit in place of its customer's credit.

– The bank plays an intermediary role to help complete the trade transaction.

– The bank deals only in documents and does not inspect the goods themselves.

– The banks provide additional security for both parties in a trade transaction by playing the role of intermediaries. The issuing bank works for the importer and the advising bank works for the exporter.

– The banks assure the seller that he would be paid if he provides the necessary documents to the issuing bank through the advising bank.

– The banks also assure the buyer that his money would not be released unless the shipping documents evidencing proper and accurate shipment of goods are presented.

1. A letter of credit can not prevent an importer from being taken in by an unscrupulous exporter.

2. Compared to other payment forms, the role of banks is substantial in documentary Letter of Credit transactions.

3. A letter of credit may be Revocable or Irrevocable, Confirmed or Unconfirmed

Letter of Credit• Preferable – An L/C should be confirmable by a first class banker, for assurance to

exporter • Under 1993 revision of Uniform Customs & Practices, L/C is irrevocable unless

specifically contracted otherwise• An L/C contains:

1. Name of issuing bank – must be acceptable to exporter 2. Name and full address of beneficiary 3. Amount of credit – Collecting bank may accept exact amount by the

quantity of goods shipped – for flexibility, “about ___” may be mentioned. 4. Name of importer – may be of little consequence to exporter if the issuing

bank is sound 5. Tenor of the Draft or Drafts to be drawn under the L/C 6. List of accompanying documents – Transfer, Insurance, Commercial, others 7. Expiry date – by which the transaction will be completed 8. Type of credit – revocable or irrevocable 9. Any other conditions stated by the importer

Letter of Credit

Import Documentation

1. Bill of Lading 2. Commercial Invoice 3. Certificate of Origin 4. Weight Certificate5. Packing List 6. Insurance Policy 7. Markings on packages

Import Documentation

Bill of Lading 1. Evidence of despatch by exporter 2. Most important document accompanying Bill of Exchange while

carrying out L/C transaction 3. Combines –

1. Carrier’s goods receipt, 2. Contract between shipper & carrier, to transport the goods and deliver to

consignee or order 3. Document giving the holder title to the goods mentioned in it

4. Signed by ship Master / Owner / Agent – set of 3 or 4 copies5. Mentions - Number, date & place of shipment, names of vessel, consigner &

consignee, port of destination, contents, quantity and amount of freight to pay or paid; No. of packages and their identifying marks.

Import Documentation

Negotiability of B/L• Delivery is subject to the consignment not being affected by

any fraud or malpractice, hence quasi-negotiable

Clean & Foul B/L• Clean – if goods are in good condition, with no qualifications• Foul – if B/L carries remarks of damage, defective packing etc

at the time of receiving by the shipper• Foul B/Ls are not acceptable but protect shipper from claims

arising due to defect/damage/deficiency of packing

Import Documentation

Commercial Invoice • Describes merchandise, price, transaction details:

– Names of buyer, seller, vessel, port of discharge, Shipping, export and import permit nos, No. of contract, invoice…

– Financial terms of sale, e.g. if under L/C, if sight drafts given…– No. of packages, their identifying marks and numbers– Itemised list of goods and prices, total net value after deducting trade

discount or commission – Other charges - packing, freight, insurance…

• Double check: actual goods Vs invoice, invoice Vs order• Non-negotiable, not document of title • Checked by buyer, banker, shipper and agents involved

Import Documentation

Certificate of Origin• A printed form, completed by the exporter or its agent and certified by an issuing

body, attesting that the goods in a particular export shipment have been wholly

produced, manufactured or processed in a particular country.

• To be produced for Customs examination

• Usually required where goods from certain countries receive special preference,

quota, entitlement or embargo

• “Certified Invoice” - where Certificate of Origin is endorsed at the back of an

invoice

Import Documentation

Packing List• Nature of contents, quantity and quality of goods in each

package of a shipment

• Helps importer to identify the goods and check against

Purchase Order

• Required by banks if they have any interest in the goods

• Facilitates Customs clearance

Import Documentation

Marine Insurance Policy• Contract between insurer & insured – to indemnify insured

against losses incurred from “perils of the sea” or other risks

as covered

• Insurable interest – Insurer gains by existence of goods and

stands to lose if damaged or lost

• Insurer – insurance company or underwriter firm

• Covers the risk from origin to delivery of consignment

Import Documentation

Markings on packages• Identification of each package in Packing List • Address, dimensions, weight, other particulars • Buyer may issue specific instructions

Price & Transfer Terms• "Ex works" means the seller's only responsibility is to make the goods available at

the seller's premises, i.e., the works or factory. The buyer bears the full costs and risk involved in bringing the goods from there to the desired destination. Ex works represents the minimum obligation of the seller.

• "F.O.R." and "F.O.T." mean "free on rail," “free on road” or "free on truck." The risk of loss or damage is transferred when the goods are loaded onto the train or truck.

• "F.A.S." or "free alongside ship" requires the seller to deliver the goods alongside the ship on the quay. From that point on, the buyer bears all costs and risks of loss and damage to the goods.

• "F.O.B." or "free on board." The goods are placed on board the ship by the seller at a port of shipment named in the sales agreement. The risk of loss of or damage to the goods is transferred to the buyer when the goods pass the ship's rail (i.e., off the dock and placed on the ship). The seller pays the cost of loading the goods.

• “FOB Airport” The seller fulfills its obligation by delivering the goods to the air carrier at the airport of departure. The risk of loss is transferred from the seller to the buyer at such time.

Price & Transfer Terms• “FCA or Free Carrier” Applies to multimodal transport, such as container or roll-on,

roll-off traffic by trailers and ferries. It is based on the same name principle as F.O.B. (free on board), except the seller fulfills its obligations when the goods are delivered to the custody of the carrier at the named point.

• "C. & F." or "cost and freight" (also abbreviated CFR) requires the seller to pay the costs and freight necessary to bring goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. Insurance is the buyer's responsibility.

• "C.I.F” or "cost, insurance, and freight"--is C. & F. with the additional requirement that the seller procure transport insurance against the risk of loss or damage to goods. The seller must contract with the insurer and pay the insurance premium. Insurance is generally more important in international shipping than domestic shipping.

Price & Transfer Terms• “CPT” or "freight/carriage paid to" can be used for all modes of transportation, including

container or roll-on roll-off traffic by trailers and ferries. • “CIP” or “Freight/Carriage and Insurance Paid To” - same as "freight/carriage paid to" but

with the additional requirement that the seller has to procure transport insurance against the risk of loss or damage to the goods during the carriage.

• “DES Ex Ship” - seller shall make the goods available to buyer on board the ship at the destination named in the sales contract. The cost of unloading the goods and any customs duties must be paid by the buyer.

• “DEQ Ex Quay” - seller agrees to make the goods available to the buyer on the quay or the wharf at the destination named in the sales contract.

• “DAF” or Delivered at Frontier” - seller's obligations are fulfilled when the goods have arrived at the frontier but before the customs border of the buyer’s country.

• “DDU” or “Delivery Duty Unpaid” - seller fulfills his obligation to deliver when the goods have been available to the buyer uncleared for import at the point or place of the named destination. There is no obligation for import clearance.

• “DDP” or “Delivery/Duty Paid” - seller's maximum obligation. The term "DDP." is generally followed by words indicating the buyer's premises.

Customs Tariff

1. Part – I– Customs Tariff Act 1975 and General Rules Interpretation – Notifications, e.g. NCCD, Edu Cess… Exemptions, etc

2. Part – II – First Schedule - Import Tariff – Product-wise Chapters 1 to 98 (2012-13) – General Exemptions

3. Part – III– Second Schedule – Export Tariff & Appendix – 1

4. Part – IV – Anti-dumping Duty – Chapter-wise Notifications – Alphabetic listing

Customs Tariff

Specimen Duty Calculation

Calculation of customs duty payable is as follows, w.e.f. 17-3-2012

Seq. Duty Description Duty % AmountTotal Duty (A) Assessable Value Rs 1,000 (B) Basic Customs Duty 10 100.00 100.00

(C) Sub-Total for calculating CVD ‘(A+B)’ 1,100.00

(D) CVD ‘C’ x excise duty rate 12 132.00 132.00 (E) Sub-total for edu cess on customs ‘B+D 232.00 (F) Edu Cess of Customs – 2% of ‘E’ 2 4.64 4.64 (G) SAH Education Cess of Customs – 1% of ‘E’ 1 2.32 2.32

(H) Sub-total for Spl CVD ‘C+D+F+G 1,238.96

(I) Special CVD u/s 3(5) – 4% of ‘H’ 4 49.56 49.56 (J) Total Duty 288.52 (M) Total duty rounded to Rs. 289 - Notes – Buyer who is manufacturer, is eligible to avail Cenvat Credit of D and I above. A buyer, who is service provider, is eligible to avail Cenvat Credit of D above. . A trader who sells imported goods in India after charging Vat/sales tax can get refund of Special CVD of 4% i.e. ‘I’ above

Customs Clearance1. Landing – Customs Notified Ports2. Import-Export Code – by importer 3. Manifest – IGM to be filed by carrier 4. EDI System to facilitate, Risk Management System – to strike balance between

facilitation and enforcement 5. First Check by importer 6. Bill of Entry – Home Consumption / Warehousing (auto-generated if EDI System) 7. Documents to accompany Bill of Entry: (Declarations in electronic format in EDI)

(a) Signed invoice(b) Packing list(c) Bill of Lading or Delivery Order/Airway Bill(d) GATT valuation declaration form(e) Importers/CHA’s declaration(f) Letter of Credit, wherever necessary(g) Insurance document(h) Import license, where necessary(j) Industrial License, if required(k) Test report in case of items like chemicals(l) DEEC Book or DEPB in original, where relevant (m) Catalogue, technical write up, literature for machineries, spares or chemicals, asapplicable(n) Separately split up value of spares, components, machinery(o) Certificate of Origin, if preferential rate of duty is claimed

Customs Clearance7. Noting B/E Vs IGM, forwards to concerned Appraising Group in Customs House –

Shed Appraiser to examine the consignment8. Filing of Declaration – as required by importer9. Self Assessment u/s 17 of Finance Act, 2011 10. First Check & Second Check 11. Payment of Duty 12. Execution of Bond – Bonded Clearance13. Order of Clearance, Gate Pass 14. Inland transportation, despatch to Container Depot / Freight Station / Customs

Warehouse / Importer’s location

Materials Management

Lecture 6: International Purchase

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