Consignment

Consignment — Meaning, Definition & Full Explanation

Consignment is a commercial arrangement in which a business owner (consignor) entrusts goods to another party (consignee) for sale, with ownership remaining with the consignor until the goods are sold. The consignee acts as a sales agent, displaying and selling the products on behalf of the consignor, then remitting an agreed percentage of the sales proceeds to the consignor after a sale is completed. This model eliminates upfront inventory risk for the consignee while providing the consignor with access to additional sales channels.

What is Consignment?

Consignment is a distribution and sales model commonly used in retail, wholesale, and e-commerce where physical goods are placed with a retailer or agent without an immediate cash payment. The consignor—typically the manufacturer or wholesaler—retains legal ownership of the merchandise until it sells. The consignee—the retailer, agent, or intermediary—takes possession but not ownership, agreeing to display, promote, and sell the goods in exchange for a commission or profit share.

The consignee does not pay for inventory upfront; instead, it pays only when goods are sold. Payment usually consists of the selling price minus an agreed consignment percentage (often 20–50%), which the consignee retains as commission. Unsold goods can typically be returned to the consignor without financial penalty. This arrangement reduces the consignee's working capital requirements and inventory risk, making it attractive for small retailers, boutiques, and online sellers. For the consignor, it expands market reach without directly managing retail operations.

How Consignment Works

Step 1: Agreement Setup The consignor and consignee enter into a written consignment agreement specifying terms: commission percentage, payment schedule, handling responsibilities, return policy, and dispute resolution mechanisms.

Step 2: Goods Transfer The consignor physically transfers goods to the consignee's location (shop, warehouse, or online platform). Ownership legally remains with the consignor; the consignee receives custody only.

Step 3: Display and Sale The consignee displays the goods, markets them to customers, and executes sales using its sales channels and customer base.

Step 4: Sale Recording Upon each sale, the consignee records the transaction—capturing the sale price, date, and customer details. Unsold items remain in the consignee's possession but are tracked separately in inventory records.

Step 5: Payment Settlement At agreed intervals (weekly, bi-weekly, or monthly), the consignee calculates total sales, deducts its commission, and remits the consignor's share along with a detailed sales report (often called a consignment statement or account sales).

Step 6: Unsold Goods Handling Goods not sold within an agreed period can be returned to the consignor, usually at no cost to the consignee. Some agreements set a deadline for return; others allow indefinite holding.

Variants:

• Outright consignment: Simple sales-based payment after any sale.
• Sale-or-return: Consignee can return unsold stock without penalty.
• Consignment with buyback: If goods don't sell within a set period, the consignee buys them at a discounted rate.

Consignment in Indian Banking

Consignment is regulated through the Bharatiya Nyaya Sanhita (BNS), 2023 and the Indian Contract Act, 1872, which define the consignor-consignee relationship as a bailment for sale. The RBI does not directly regulate consignment but addresses it in the context of trade finance and supply chain lending.

GST Treatment: Under the Goods and Services Tax (GST), consignment sales are taxable. The consignor is liable for GST on the sale value, not just the commission received. This is a critical distinction from commission-only arrangements.

Trade Finance & Banking: Indian banks including SBI, HDFC Bank, and ICICI Bank offer consignment-specific financing products. They may provide:

• Consignment funding: Working capital loans against consignment inventory
• Supply chain financing: Advances to consignors based on consignment sales pipelines
• Inventory financing: Credit lines secured by consignment stock at the consignee's location

Insurance & Risk: Banks typically require consignment goods to be insured. The consignor usually carries the risk until sale; consignee liability is limited by contract.

Accounting: Under Ind AS 15 (revenue recognition standards adopted by Indian firms), consignment sales are recognized as revenue only when goods are sold by the consignee, not when transferred. This affects financial reporting for consignors.

Consignment appears in JAIIB exam syllabi under trade finance and CAIIB under advances management and credit risk.

Practical Example

Riya, a fashion designer in Bangalore, manufactures hand-dyed sarees. She enters a consignment agreement with Ethnique, a boutique in Indiranagar, to sell 50 sarees at ₹5,000 each. The agreement stipulates a 40% commission for Ethnique (₹2,000 per saree) and ₹3,000 remitted to Riya per sale.

Riya delivers the 50 sarees to Ethnique; ownership remains hers. Ethnique displays them and within three weeks sells 35 sarees for a total of ₹1,75,000. Ethnique retains ₹70,000 (40% commission) and sends Riya ₹1,05,000 (60% of sales) along with a detailed sales statement. The remaining 15 unsold sarees are returned to Riya after 60 days per the agreement, at no cost to Ethnique.

Riya's bank had provided her ₹2,00,000 as consignment working capital financing against this arrangement with Ethnique and two other retailers. The bank tracks sales via Ethnique's monthly reports and adjusts Riya's available credit based on outstanding consignment inventory.

Consignment vs Commission Sale

Aspect	Consignment	Commission Sale
Ownership	Remains with consignor until sale	Transfers to agent/consignee immediately
Risk	Consignor bears unsold inventory risk	Consignee bears risk once goods are accepted
Payment	Only after goods are sold	Usually upfront or on a time-based schedule
Returns	Unsold goods returned to consignor	No return; agent absorbs losses
GST Liability	Consignor liable for GST on sale value	Typically the purchasing agent/reseller

Both models involve a third party selling on behalf of another, but consignment is riskier for the consignor (goods remain unsold longer) and safer for the consignee (no upfront payment). Commission sales transfer ownership and risk immediately, making them suitable when the agent has stronger purchasing power or customer base.

Key Takeaways

• Consignment is a bailment for sale under Indian Contract Act, 1872, where ownership remains with the consignor until purchase by the end customer.
• The consignee pays only after goods are sold, remitting the consignor's share minus an agreed commission percentage, typically 20–50%.
• Unsold consignment goods can be returned to the consignor without penalty, unless the agreement specifies otherwise.
• GST is levied on the full sale price by the consignor, not just the commission received; this is critical for GST compliance and invoicing.
• Indian banks offer consignment funding and supply chain financing products, treating consignment inventory as collateral for working capital advances.
• Accounting under Ind AS 15 recognizes consignment sales as revenue only when the consignee sells to the end customer, not at transfer.
• Consignment agreements must clearly define commission %, payment terms, return deadlines, and liability for damage or loss to minimize disputes.
• Consignment is regulated through contract law and GST rules; the RBI does not set specific guidelines but acknowledges it in trade finance frameworks.

Frequently Asked Questions

Q: Is consignment considered a sale for accounting purposes in India?

A: No. Under Ind AS 15, consignment sales are recognized as revenue only when the consignee sells to the end customer, not when goods are transferred to the consignee. Until then, the consignor records consignment inventory on its balance sheet.

Q: Who is responsible for GST on consignment sales?

A: The consignor (original owner) is responsible for GST on the full sale price of the goods, regardless of commission split. The consignee does not file GST returns for consignment sales; the consignor does.

**Q: Can a bank finance consignment inventory?