Businesses frequently send goods to prospective customers for inspection, trial, or exhibition before an actual sale occurs. In sectors like industrial machinery, jewellery, custom furniture, and precision scientific instruments, customers want to test products at their site before committing to purchase. Because title to the goods does not pass at dispatch, this transaction is not a taxable supply at the point of removal.
Transporting goods without a tax invoice often causes anxiety during roadside vehicle inspections. Transporters worry about vehicle detention under Section 129 of the CGST Act, while accountants wonder when output GST must be reported in GSTR-1 and how the customer will claim input tax credit. The law provides a clear statutory framework governing approval movements, delivery challans, e-way bill generation, and subsequent billing.
Statutory basis under Section 31(7) and Rule 55
The core timing rule for sale on approval basis is established in Section 31(7) of the CGST Act, 2017. Under normal rules in Section 31(1), a tax invoice must be issued before or at the time of removal of goods. Section 31(7) overrides this general rule:
“Notwithstanding anything contained in sub-section (1), where the goods being sent or taken on approval for sale or return are removed before the supply takes place, the invoice shall be issued before or at the time of supply or six months from the date of removal, whichever is earlier.” Section 31(7), Central Goods and Services Tax Act, 2017
Because no taxable supply occurs when goods leave your factory or warehouse, you must not issue a tax invoice at that time. Instead, the dispatch is governed by Rule 55(1)(c) of the CGST Rules, 2017, which allows the consigner to issue a delivery challan in lieu of invoice for transportation of goods for reasons other than by way of supply.
Under Rule 55(1), the delivery challan must carry a consecutive serial number not exceeding 16 characters, unique for the financial year. It must contain the challan date and number, supplier details with GSTIN, recipient details, HSN code, description of goods, quantity, taxable value, applicable tax rate and provisional tax amount, place of supply for inter-State movement, and the authorised signature. The delivery challan must be prepared in triplicate: original for consignee, duplicate for transporter, and triplicate for consigner.
Common mistake: Never issue a regular tax invoice at the time of sending goods on approval. If you issue a tax invoice, you create an immediate output tax liability in GSTR-1 and GSTR-3B for that calendar month. If the customer subsequently rejects the consignment, issuing credit notes creates unnecessary documentation and risks audit objections.
The Central Board of Indirect Taxes and Customs clarified this procedure in CBIC Circular No. 10/10/2017-GST. The circular affirms that goods taken for supply on approval basis can move within the State or outside the State on a delivery challan along with an e-way bill wherever applicable. The invoice is issued when the supply is fructified upon customer acceptance.
Generating the e-way bill under Rule 138
Under Rule 138 of the CGST Rules, 2017, an e-way bill is required for any movement of goods where the consignment value exceeds Rs 50,000, including movements for reasons other than supply. You can review standard inter-unit transfer principles in our companion guide on e-way bills for stock transfers with delivery challan.
When logging into the e-way bill portal to generate an e-way bill for goods sent on approval, complete Part A using the following field selections:
- Supply type: Select Outward.
- Sub-type: Choose Line Sales when sales staff carry stock for client doorstep approval within 300 km. Otherwise choose Others and write "Sale on Approval" in the text box.
- Document type: Pick Delivery Challan from the menu. Never select Tax Invoice.
- Document number and date: Provide the delivery challan serial number and date issued under Rule 55.
- To GSTIN: If the prospective buyer has a GST registration, enter their 15-digit GSTIN. If the prospect is unregistered or you are demonstrating to multiple prospects whose names are not yet fixed, enter URP.
- Item details: Provide HSN code, product description, quantity, and estimated taxable value as declared on the delivery challan.
- Part B details: Enter vehicle registration number or Transporter ID for movement.
Ensure that vehicle movement matches validity schedules. If transport faces delays or breakdowns, extend the document in time per e-way bill expiry extension under Rule 138.
Handling partial acceptance, full rejection, and sales returns
When goods arrive at the prospective customer premises, three practical business outcomes can emerge during the trial period:
Full acceptance by customer
If the recipient inspects the goods and agrees to purchase the entire consignment, a taxable supply takes place on the date of approval. The supplier immediately issues a standard tax invoice under Section 31(1) and Rule 46. The invoice references the original delivery challan number. The supplier reports this invoice in Table 4A (B2B) of GSTR-1 for that tax period. The recipient then receives the invoice in GSTR-2B to avail input tax credit.
Partial acceptance and partial return
Often, a customer tests five industrial motors sent on approval and agrees to purchase two units, rejecting the remaining three units. In this scenario, two separate documentation streams occur:
- For the accepted portion: The supplier issues a tax invoice for the two accepted units. This invoice is reported in GSTR-1 and creates tax liability.
- For the rejected portion: The three rejected units must return to the supplier warehouse. The return movement cannot be covered by the initial delivery challan because its original journey ended. If the customer is registered, the customer generates a fresh delivery challan under Rule 55 with transaction sub-type “Sales Return” or “Others” and an accompanying e-way bill. If the customer is unregistered, the supplier generates an Inward delivery challan and e-way bill to bring the unsold goods back.
Full rejection and complete return
If the customer rejects the entire batch, no taxable supply has occurred. No tax invoice is issued, and no entry enters GSTR-1 or books of account as revenue. The goods return to the supplier under a fresh delivery challan and e-way bill for sales return.
The six-month statutory deadline under Section 31(7)
Section 31(7) creates a mandatory statutory deadline. If goods sent on approval are neither approved nor brought back within six months from the date of removal, the law creates a legal fiction: the supply is deemed to have taken place on the date of expiry of the six-month period.
For example, if goods were removed under delivery challan on 15 November 2025, the six-month period expires on 15 May 2026. If the goods are still lying at the customer premises on 15 May 2026 without formal acceptance or return dispatch, the supplier must issue a regular tax invoice dated 15 May 2026 for the entire unreturned quantity. This tax invoice must be reported in GSTR-1 for the month of May 2026.
Notice risk: If you allow goods on approval to linger past six months without issuing a tax invoice, GST audit officers will treat the omission as tax evasion under Section 73 or Section 74A. Output tax will be demanded along with mandatory 18% annual interest under Section 50 from the date the six-month period expired.
CBIC reiterated this principle for export exhibitions in Circular No. 108/27/2019-GST. Where goods taken out for exhibition or approval are neither sold nor brought back within six months, a tax invoice must be raised immediately upon the lapse of the six-month window.
Worked practical example with realistic figures
Consider Precision Tooling Private Limited in Pune, Maharashtra. On 10 November 2025, the company dispatches 10 specialized CNC cutting heads to an engineering firm in Pune on approval basis under Delivery Challan DC-042. Each cutting head has an estimated taxable value of ₹25,000, bringing total consignment value to ₹2,50,000. Applicable CGST is 9% (₹22,500) and SGST is 9% (₹22,500).
On 22 January 2026 (well within the six-month limit), the customer evaluates the tooling heads and confirms purchase of 6 units. The remaining 4 units are rejected and dispatched back to Precision Tooling Private Limited on 24 January 2026.
| Event & document | Quantity | Taxable value | GST (18%) | GSTR-1 & GSTR-2B status |
|---|---|---|---|---|
| Delivery Challan DC-042 (10 Nov 2025) | 10 units | ₹2,50,000 | ₹45,000 | Not reported in GSTR-1; no tax liability |
| Tax Invoice INV-2026-081 (22 Jan 2026) | 6 units | ₹1,50,000 | ₹27,000 | Reported in Jan 2026 GSTR-1; ITC in GSTR-2B |
| Return Challan RET-019 (24 Jan 2026) | 4 units | ₹1,00,000 | ₹18,000 | Inventory restocked; no tax impact |
| Deemed supply if held past 10 May 2026 | 4 units | ₹1,00,000 | ₹18,000 | Mandatory tax invoice under Section 31(7) |
In this worked case, Precision Tooling Private Limited pays GST only on the ₹1,50,000 supply that actually materialized. The buyer claims ₹27,000 input tax credit after verifying the tax invoice in their GSTR-2B.
Impact on monthly GSTR-2B reconciliation
From an accounting and audit standpoint, movements on delivery challan create unique reconciliation checkpoints between physical inventory and the GST return ecosystem:
First, delivery challans do not appear in GSTR-1. Consequently, no credit flows into the customer GSTR-2B. Accounts teams must ensure that their ERP does not post an inward delivery challan as an operational purchase bill that expects auto-population in GSTR-2B. Doing so creates false missing invoice alerts in monthly reconciliation.
Second, when customer acceptance occurs, the supplier must report the tax invoice in GSTR-1 of that month. Under Section 16(2)(aa) of the CGST Act, the customer can only claim input tax credit once the supplier files GSTR-1 and the invoice reflects in the recipient GSTR-2B. If the supplier forgets to convert the approved delivery challan into a tax invoice in their billing software, the customer cannot avail credit.
Related guides
- E-way bill for equipment and machinery moving for site work
- E-way bill validity calculation for over dimensional cargo under Rule 138
- E-way bill detention under Section 129: bank guarantee and Form GST MOV-08
- E-way bill for goods sent for job work and Form GST ITC-04 reconciliation
Frequently asked questions
Can goods be dispatched on approval without a tax invoice?
Yes. Under Rule 55(1)(c) of the CGST Rules, 2017, goods dispatched on approval or sale or return basis move under a serially numbered delivery challan because the initial removal is not a supply. A tax invoice is issued only when the recipient confirms acceptance or at the expiry of six months from removal, whichever happens first.
Which transaction sub-type should be selected on the e-way bill portal?
On the e-way bill portal, select Outward as the supply type. For the sub-type, select Line Sales if taking goods for doorstep client approvals within 300 km, or select Others and specify 'Sale on Approval' in the text field. The document type must always be selected as Delivery Challan.
What happens if the recipient keeps goods beyond six months without approval?
Under Section 31(7) of the CGST Act, 2017, if goods are neither accepted nor returned within six months from the date of initial removal, supply is deemed to take place on the exact date the six-month period expires. The supplier must issue a regular tax invoice on that date, declare it in GSTR-1, and pay GST with applicable interest if delayed.
How does the recipient claim input tax credit on goods taken on approval?
The recipient cannot claim input tax credit on a delivery challan. Credit becomes available under Section 16(2) only after the supplier issues a valid tax invoice upon acceptance or deemed supply, uploads that invoice in GSTR-1, and the record appears in the recipient's GSTR-2B.
Check your own GSTR-2B
When vendors bill you for accepted approval consignments, verify that their invoices match your purchase register. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 19 October 2026. Sources: Section 31(7), CGST Act, 2017, Rule 55, CGST Rules, 2017, CBIC Circular No. 10/10/2017-GST, E-Way Bill Rules under Rule 138.