Telangana HC strikes down GST Rule 39(1)(a), Holds Mandatory Same-Month ITC Distribution Ultra Vires [Read Order]

In a recent ruling, the Telangana High Court held that GST Rule 39(1)(a), which requires an Input Service Distributor to distribute Input Tax Credit in the same month in which it becomes available, is ultra vires Section 20 of the CGST Act.

The court struck down the rule to that extent and quashed the GST audit report and penalty proceedings initiated against BirlaNu Ltd.

BirlaNu Ltd., the petitioner, is registered as an Input Service Distributor under the Central Goods and Services Tax Act, 2017. For the financial years 2017-18 and 2018-19, the company accumulated Input Tax Credit during the year and distributed the accumulated credit in the last month of the financial year.

The GST authorities took the view that this practice violated Rule 39(1)(a) of the CGST Rules which states that credit available for distribution in a month must be distributed in the same month.

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Based on this interpretation, the department issued spot memos, followed by a Final Audit Report dated 22 January 2024. A show cause notice dated 30 January 2024 was then issued, proposing a penalty of more than Rs. 8.38 crore under Section 122(1)(ix) of the CGST Act. Aggrieved by these actions, the petitioner approached the High Court.

The petitioners’ counsel argued that Section 20 of the CGST Act only deals with the manner and conditions of distribution of Input Tax Credit and does not prescribe any time limit. They argued that Rule 39(1)(a), by mandating same-month distribution, introduced a condition that the parent statute did not permit.

The counsel also argued that once Input Tax Credit is lawfully availed, it becomes a vested right and cannot be taken away through a procedural rule. They further argued that the Finance Act, 2024 amended Section 20 to expressly allow prescription of time limits from 1 April 2025 which shows that no such power existed earlier. They also argued that the audit proceedings were completed without granting sufficient opportunity to respond, in violation of natural justice.

The respondents’ counsel argued that Rule 39(1)(a) was valid and merely prescribed the manner of distribution of credit as permitted under Section 20. They also argued that the 2024 amendment operates prospectively and does not affect the validity of the rule for earlier years.

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The Division Bench comprising Chief Justice Aparesh Kumar Singh and Justice G.M. Mohiuddin observed that Section 20 of the CGST Act, as it stood before 1 April 2025, did not prescribe any time limit for distribution of Input Tax Credit.

The court observed that Rule 39(1)(a), by introducing a mandatory time limit, went beyond the scope of the parent statute. The court also observed that delegated legislation cannot take away a vested statutory right and that the audit proceedings were conducted in violation of the principles of natural justice.

In view of these findings, the High Court struck down Rule 39(1)(a) to the extent it mandates same-month distribution of Input Tax Credit and quashed the audit report, show cause notice, and penalty proceedings. The writ petition was allowed with no order as to costs.

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