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Para 6.4.4 - LC Charges | KartavyaDesk

Goods Manual

Original Rule Text

4. Charges and Costs: a) Opening Charges: These are incurred by the procuring entity and include both commitment fees (charged for the LC’s validity period) and usance fees (if the LC allows deferred payment). b) Advising Fee: This is paid by the issuing bank to the advising bank and is included in charges to the procuring entity. c) Confirming Bank's Fee: If applicable, paid to the confirming bank by the supplier. d) Extension/ Amendment Fee: This fee applies when an LC needs to be extended or amended due to changes in delivery dates, terms, or other conditions. The party requesting the extension or amendment (purchaser or seller) pays this fee. e) Retirement Charges: The supplier’s (beneficiary) bank levies these charges on the supplier to handle payment from the issuing bank. f) Other Charges: Reimbursements for foreign trade law-related obligations, if any, to be borne by the party of that country. For example, if there are specific legal requirements related to foreign exchange regulations or documentation in the exporting country, the Seller may need to cover these costs. If there are specific taxes for foreign exchange remittances, then the purchaser may bear such charges.

What This Means

Para 6.4.4 of the Manual for Procurement of Goods, 2017, deals with the various charges and costs associated with Letters of Credit (LCs) in international procurement. Think of an LC as a guarantee from a bank that a seller will receive payment, provided certain conditions are met. This rule clarifies who is responsible for paying different types of fees that arise during the LC process. It ensures transparency and avoids disputes by clearly defining which party (the government procuring entity or the supplier) bears the burden of each specific charge.

This rule applies whenever a procuring entity uses a Letter of Credit to pay for goods sourced from international suppliers. It affects both the government department making the purchase and the foreign company selling the goods. Understanding this rule is crucial for government employees involved in international procurement, as it helps them budget accurately and negotiate effectively with suppliers. It also helps avoid misunderstandings and ensures smooth transactions.

Essentially, it breaks down the different fees associated with LCs – like opening charges, advising fees, confirming bank fees, extension fees, retirement charges, and other miscellaneous costs – and assigns responsibility for each. This ensures that both the buyer (the government) and the seller (the supplier) are aware of their financial obligations upfront, leading to a more transparent and efficient procurement process.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Key Points

  • •This rule outlines the different charges associated with Letters of Credit (LCs) in international procurement.
  • •It clearly defines which party (procuring entity or supplier) is responsible for paying each type of charge.
  • •Charges covered include opening charges, advising fees, confirming bank fees, extension/amendment fees, and retirement charges.
  • •The rule aims to ensure transparency and avoid disputes regarding payment of LC-related fees.
  • •Foreign trade law-related reimbursements are borne by the party of that country.

Practical Example

The Ministry of Textiles is procuring specialized weaving machines from a German company, 'TextileMach GmbH,' using a Letter of Credit. The LC includes a commitment fee of ₹5,000 (opening charge) and a usance fee of ₹2,000 (deferred payment). According to Para 6.4.4, the Ministry of Textiles, as the procuring entity, is responsible for these opening charges, totaling ₹7,000.

Later, due to unforeseen delays in customs clearance, the Ministry requests an extension of the LC. The extension fee is ₹1,000. Since the Ministry requested the extension, they are responsible for paying this fee. TextileMach GmbH's bank charges them ₹3,000 as retirement charges when the payment is finally processed. TextileMach GmbH is responsible for these retirement charges.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Frequently Asked Questions

What are 'opening charges' in the context of a Letter of Credit?▼
Opening charges are the fees incurred by the procuring entity (the government department) when establishing the Letter of Credit. They include commitment fees (for the LC's validity period) and usance fees (if the LC allows deferred payment).
Who pays the 'advising fee'?▼
The advising fee is paid by the issuing bank (the bank opening the LC on behalf of the procuring entity) to the advising bank (the bank that informs the supplier about the LC). This fee is ultimately included in the charges borne by the procuring entity.
If the delivery date needs to be changed and the LC needs to be amended, who pays the amendment fee?▼
The party requesting the amendment pays the amendment fee. If the purchaser (the government) requests the amendment, they pay. If the seller (the supplier) requests it, they pay.
What are 'retirement charges' and who is responsible for them?▼
Retirement charges are the fees levied by the supplier's (beneficiary's) bank to handle the payment received from the issuing bank. The supplier is responsible for paying these charges.
If there are specific taxes for foreign exchange remittances, who bears such charges?▼
The purchaser (the government) typically bears such charges.

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Test Your Knowledge

Question 1 of 3

According to Para 6.4.4 of the Manual for Procurement of Goods, 2017, who typically bears the 'Advising Fee' associated with a Letter of Credit?

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