Determine Time of Supply for Consignment Sale

Tally Solutions | Updated on: August 16, 2021

Sale on returnable basis is popularly known as ‘Sale on Approval’ or ‘Consignment Sale’. Under this concept, an arrangement is made by the supplier which allows the buyer or the recipient to use or evaluate the product. If he is satisfied, he agrees to buy the product, else he can return it. This is a commonly used sales strategy for newly introduced products in the market to push up the sales. Also, it is often followed for products like books, magazines etc. which are kept at the retail stores and acceptance will occur only when these products are sold. The remaining unsold are returned by the retail stores to the supplier.

The sale on approval transaction is unique and peculiar compared to other types of supply. Here, the goods are delivered by the supplier with an intention to sell but only if the recipient chooses. The time of supply in such cases will not be the date when the goods are delivered to the recipient but earliest of the date when the recipient of the goods accepts the same or on lapse of 12 months from the date of delivery by the supplier.

Time of Supply for Sale on returnable basis or Sale on Approval

Sale on Approval / Sale on returnable basis / Consignment Sale

Earliest of the following

Date on which supply of goods was accepted by the recipient.

Lapse of 12 months from the date of delivery by the supplier or goods placed at the disposal of the recipient.

Apart from the above dates, if the date of payment receipt or the date of tax invoice is earlier than the dates mentioned in the above table, then the date of payment receipt or tax invoice should be considered while arriving at the time of supply. However, given the nature of supply, it is unlikely that these dates will occur before the acceptance of supply by the recipient.

Let us understand the time of supply for sale on approval or sale on returnable basis under VAT in UAE, considering different business scenarios with examples.

Medi Equipment Ltd is a manufacturer of health-related products located in UAE. They introduced a new health product and supplied it to various pharmacy outlets (retailer) on a returnable basis. In other words, the health product will be billed by Medi Equipment Ltd only when the pharmacy outlets supply it to their customers.

Considering the above example, we have created different scenarios to understand the determination of the time of supply in case of sale on returnable basis or consignment sale.

Scenario-1

Date of Delivery	Date of Approval from the recipient	Time of Supply	Return Period (Period In which VAT needs to be reported and Paid)
20th March, 2018	15th May,2018	15th May,2018	Monthly	Quarterly
			May ‘18	Apr-Jun’18

In the above scenario, the time of supply will be 15th May, 2018. The reason being, the date of supply will be the earliest of:

Date on which supply of goods was accepted by the recipient.
Lapse of 12 months from the date of delivery.

In this case, the date on which the acceptance is received is earlier than the lapse of 12 months from the date of delivery. Accordingly, the output VAT needs to be reported and paid for Apr-Jun’18 quarter, if it is quarterly return and May’18, if it is monthly return

Scenario-2

Date of Delivery	Date of Approval from the recipient	Time of Supply	Return Period (Period In which VAT needs to be reported and Paid)
5th Jan, 2018	5th Feb,2019	6th Jan,2019	Monthly	Quarterly
			JAN ‘19	Jan-Mar’19

In the above scenario, the date of supply will be 6th Jan, 2019. The reason being, the date of supply will be the earliest of:

Date on which supply of goods was accepted by the recipient.
Lapse of 12 months

In this case, the acceptance for sale is received after the lapse of 12 months from the date of delivery. Accordingly, the output VAT needs to be reported and paid for Jan- Mar’19 quarter, if it is quarterly return and Jan’19, if it is monthly return.

Conclusion

In the sale on returnable basis or approval, the goods are delivered to the recipient but the decision to accept the sale has not yet been made by the recipient. The acceptance will happen at a later date. Firstly, the supplier engaged in such supplies should be clear that the VAT liability will not arise on the date of delivery of goods. Rather, it will be the date on which the recipient accepts the supply. Secondly, it is essential for a supplier to have a suitable system to monitor the ageing of stock supplied on approval basis, so as to determine the lapse of 12 months period from the date of delivery of goods. Wrong determination of the time of supply of goods will have an impact on the cash flow of the businesses, either due to early payment of VAT or imposition of penalties.

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