I am developing an iphone application.
In My Application I have a feature to send physical gifts, so we decided to use in app purchase. I have read the Apple documentati
Indeed, you are right. Apple does not allow using its IAP for payment of physical goods. Quoting from Apple's Guidelines - 11.3 Apps using IAP to purchase physical goods or goods and services used outside of the application will be rejected.
There are several options you can use to enable in-app payment of physical goods using credit cards - PayPal, Amazon Payments, Card.IO and ZooZ. Each has its own pros/cons.
Another possibility is to build your own credit card processing but this is a challenge of its own with all of the security, merchant account, PCI compliance and other issues.
Oh, and it should be noted that I am the CEO of ZooZ.com :)