GST ITC Need Not Be Distributed on Invoice Date: Madras HC Clarifies Scope of Rule 39(1)(a) in Reliance Jio Case [Read Order]

In a recent ruling, the Madras High Court held that input tax credit (ITC)distributed through the Input Service Distributor (ISD) system need not be distributed strictly on the invoice date under the Goods and Services Tax (GST) Act.

The court explained that Rule 39(1)(a) of the CGST Rules should be read to mean that ITC must be distributed in the month when the credit becomes legally available after fulfilling the conditions under Section 16 of the CGST Act.

Reliance Jio Infocomm Ltd filed writ petitions before the Madras High Court challenging the scope and interpretation of Rule 39(1)(a) of the CGST Rules, 2017. The case was filed against the Union of India, the State of Tamil Nadu and the Commissioner of Central Tax and Central Excise regarding show cause notices issued during audit proceedings.

The petitioner company provides telecommunication services across India and has separate GST registrations in many States and Union Territories. Each branch office is treated as a distinct person under GST law. The company receives invoices for common services at its head office and distributes the ITC to its different registered units through the ISD mechanism under Section 20 of the CGST Act

During audit, the tax department alleged that the petitioner distributed ITC through ISD invoices in months later than the months when the original service invoices were issued. The department claimed this violated Rule 39(1)(a), which states that ITC available for distribution in a month must be distributed in the same month.

The petitioner’s counsel argued that ITC cannot be distributed immediately just because an invoice is received. He argued that before distributing credit, the ISD must check whether the credit is eligible under Section 16 of the CGST Act. This includes checking invoice details, receipt of services, supplier reporting the invoice and tax payment to the government. Counsel argued that this process takes time and distribution only based on invoice date is not practical.

The department’s counsel argued that Rule 39(1)(a) clearly says ITC available for distribution in a month must be distributed in that same month. The department argued that the ISD process is only internal distribution of credit between branches of the same company and the rule helps maintain proper tracking of credit.

The Division Bench of Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan examined the GST law, especially Section 16 which deals with eligibility for ITC and Section 20 which deals with distribution of credit. The court observed that under Section 16(2), a person can take ITC only after fulfilling certain conditions like having a tax invoice, receiving services, supplier reporting the invoice and tax being paid to the government.

The court explained

“The language of Section 20 of the CGST Act does not talk of distribution of “invoice”, but of “credit”. Merely because the expression used is distribution of credit upon receipt of “invoice”, it cannot be taken to mean that the legislative intention is to mandate distribution of credit indicated in the advice even before the registered person is entitled to claim ITC.”

The court further observed that the phrase “input tax credit available for distribution in a month” in Rule 39(1)(a) means credit that has legally become available after meeting the conditions in Section 16. The bench explained that distribution should happen when the credit becomes available under law, not just when the invoice is issued.

The court held that Rule 39(1)(a) is valid but it must be interpreted together with Sections 16 and 20 of the CGST Act. The court clarified that ITC should be distributed in the month when the credit becomes legally available, not necessarily the month of the invoice.

The court directed the authorities to reconsider the show cause notices about delayed distribution of credit based on this interpretation.

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