Part of Materials Management as taught to MBA students specialising in Operations.

1. Materials Management
Lecture 6: International Purchase
Udit Chaudhuri

2. Main Activities
1. Sourcing
2. Procurement
3. Documentation

3. Main Steps
1.
2.
3.
4.
5.
6.
7.
Sourcing
Negotiation
Import Clearance / License
Purchase Order / Contract
Banking, Payment
Shipment, Clearing & Forwarding
Inland transport & receipt of goods

4. 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

5. 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

6. Trade Policy – Why?
1.
2.
3.
4.
5.
6.
7.
8.
To appreciate trade with other nations.
To protect domestic market prevailing in the country.
To increase the export of particular product which will help in expanding
domestic market.
To prevent the imports of particular goods for giving protection to infant
industries or developing key industry or saving foreign exchange, etc.
To encourage the imports of capital goods for speeding up the economic
development of the country.
To restrict the imports of goods which create unfavourable balance of
payments.
To assist or prevent the export or import of goods and services for
achieving the desired rate of exchange.
To enter into trade agreements with foreign nations for stabilizing the
foreign trade.

7. Trade Policy – Points to explore
1.
2.
Permissible, Restricted, Prohibited goods – ITC No., Compendium
Local industry to be protected
a.
b.
3.
4.
5.
Specific Indian industry sector to be encouraged – e.g.
handicrafts, toys… local market
Specific export sector to be encouraged –
garments, leather, pharmaceuticals
Trade agreements
a.
b.
6.
Bilateral – India-US, India-EU, India-China …
General – GATT-WTO, UNCTAD, UNIDO, GSP
Industry Policy
a.
b.
7.
Strategic – Nuclear, Defence, Petroleum…
Economic – Petrochemicals, Fertiliser, Steel, Cement
SSI, Export Promotion, Product-specific - Ministry of Industry / Others
Any assistance, subsidies, Duty Drawback, concessions…
Standards & Specifications

8. Banking & Finance
1. Foreign Exchange markets
a.
b.
Over-valued and under-valued currencies
Stable and unstable currencies
2. Forex Control Regulations
a.
b.
Permissible sources of funds
Permissible means of transfer – direct, via banks, on-line
3. Sources & Choices of Finance
a.
b.
c.
d.
e.
Buyer’s & Sellers Credit
IFIs - World Bank, IMF, ADB, IDA, IBRD…
International banks – Forex loans, Soft loans, Lines of Credit
RBI and Commercial Banks, e.g. Exim bank, ICICI, IDBI, SIDBI…
Various payment instruments available – L/C, IBR, International
Drafts, Lease, Credit, Bill Discounting, Payment Gateway & Internet options

9. Customs
1. Law
a.
b.
c.
d.
e.
Customs Act, 1962
Foreign Trade (Development and Regulation) Act, 1992
Foreign Trade (Regulation) Rules, 1993
Foreign Trade (Exemption from application of Rules in certain cases)
Order, 1993
Customs Tariff Act, 1975
2. Customs Tariff
a.
b.
Basic Duty, CVD, Auxilliary, Cess…
Draw-back, set-off, concession…
3. Procedures
–
Customs Manual

10. 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

11. Other Matters
1. Logistic services
2. Clearing & Forwarding
3. Overseas transport & trans-shipment
4. Inland Transportation
5. Insurance

12. 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.

13. 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 Parisbased International Chamber of Commerce.

14. 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.

15. 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

16. 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

17. 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

18. Letter of Credit

19. Import Documentation
1.
2.
3.
4.
5.
6.
7.
Bill of Lading
Commercial Invoice
Certificate of Origin
Weight Certificate
Packing List
Insurance Policy
Markings on packages

20. Import Documentation
Bill of Lading
1.
2.
3.
Evidence of despatch by exporter
Most important document accompanying Bill of Exchange while
carrying out L/C transaction
Combines –
1.
2.
3.
4.
5.
Carrier’s goods receipt,
Contract between shipper & carrier, to transport the goods and deliver
to consignee or order
Document giving the holder title to the goods mentioned in it
Signed by ship Master / Owner / Agent – set of 3 or 4 copies
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.

21. 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

22. 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

23. 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

24. 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

25. 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

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

27. 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.

28. Price & Transfer Terms
•
•
•
“FCA or Free Carrier” Applies to multimodal transport, such as container or rollon, 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.

29. 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.

30. Customs Tariff
1. Part – I
–
–
2.
Customs Tariff Act 1975 and General Rules Interpretation
Notifications, e.g. NCCD, Edu Cess… Exemptions, etc
Part – II
–
–
3.
First Schedule - Import Tariff – Product-wise Chapters 1 to 98 (2012-13)
General Exemptions
Part – III
–
4.
Second Schedule – Export Tariff & Appendix – 1
Part – IV
–
–
Anti-dumping Duty – Chapter-wise Notifications
Alphabetic listing

31. Customs Tariff

32. Specimen Duty Calculation
Calculation of customs duty payable is as follows, w.e.f. 17-3-2012
Seq.
(A)
(B)
Duty Description
Assessable Value Rs
Basic Customs Duty
Duty %
(C)
Sub-Total for calculating CVD ‘(A+B)’
(D)
(E)
(F)
(G)
CVD ‘C’ x excise duty rate
Sub-total for edu cess on customs ‘B+D
Edu Cess of Customs – 2% of ‘E’
SAH Education Cess of Customs – 1% of ‘E’
(H)
Sub-total for Spl CVD ‘C+D+F+G
(I)
(J)
(M)
Special CVD u/s 3(5) – 4% of ‘H’
Total Duty
Total duty rounded to
-
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
Rs.
AmountTotal Duty
1,000
10 100.00
100.00
1,100.0
0
12 132.00
132.00
232.00
2
4.64
4.64
1
2.32
2.32
1,238.9
6
4 49.56
49.56
288.52
289

33. Customs Clearance
1.
2.
3.
4.
5.
6.
7.
Landing – Customs Notified Ports
Import-Export Code – by importer
Manifest – IGM to be filed by carrier
EDI System to facilitate, Risk Management System – to strike balance between
facilitation and enforcement
First Check by importer
Bill of Entry – Home Consumption / Warehousing (auto-generated if EDI System)
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, as
applicable
(n) Separately split up value of spares, components, machinery
(o) Certificate of Origin, if preferential rate of duty is claimed

34. Customs Clearance
7. Noting B/E Vs IGM, forwards to concerned Appraising Group in Customs House –
Shed Appraiser to examine the consignment
8. Filing of Declaration – as required by importer
9. Self Assessment u/s 17 of Finance Act, 2011
10. First Check & Second Check
11. Payment of Duty
12. Execution of Bond – Bonded Clearance
13. Order of Clearance, Gate Pass
14. Inland transportation, despatch to Container Depot / Freight Station / Customs
Warehouse / Importer’s location

35. Materials Management
Lecture 6: International Purchase
Thank you