(Expert) 24 October 2010
I am explaining purely as a Banker and not a lawyer. A Letter of Credit is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be tranferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.
HENCE IN LC TRANSACTION THERE MUST BE PHYSICAL TRANSFER OF GOODS ONLY AND THEREFORE IT GOES WITHOUT SAYING THAT IT IS NOT APPLICABLE TO SERVICE INDUSTRY.