• Dated 16^th January, 2026

TELANGANA HIGH COURT STRIKES DOWN MANDATORY SAME MONTH ISD ITC DISTRIBUTION

BRIEF FACTS:

The Assessee, was registered as an Input Service Distributor (ISD) under the CGST Act, 2017. During audit proceedings for FYs 2017–18 and 2018–19, the Department observed that the Assessee had accumulated Input Tax Credit (ITC) during the year and distributed the same in later months, instead of distributing it on a month-to-month basis. Treating this as a violation of Rule 39(1)(a) of the CGST Rules, 2017 the Department show-cause notice proposing penalty of ₹8.38 crore under Section 122(1)(ix) of the Act. Aggrieved, the Assessee challenged the constitutional validity of Rule 39(1)(a) and the consequential proceedings before the Telangana High Court.

ASSESSEE'S CONTENTION:

The Assessee contended that Section 20 of the CGST Act (prior to 01.04.2025) merely prescribed the manner of distribution of ITC by an ISD and did not prescribe of any time limit or forfeiture of credit. It was argued that Rule 39(1)(a), by mandating same-month distribution, introduced a substantive restriction not contemplated by the parent statute and was therefore ultra vires. The Assessee further submitted that ITC, once validly availed, is a vested statutory right, and procedural rules cannot extinguish such right, particularly when there was no dispute regarding eligibility or any revenue loss. It was also argued that the audit proceedings were conducted in violation of principles of natural justice and that the show-cause notice was barred by limitation, as all relevant disclosures were duly made in statutory returns and there was no suppression or misstatement.

DEPARTMENT'S CONTENTION:

The Department contended that Rule 39(1)(a) was intra vires Section 20 of the CGST Act, as the statute expressly empowered prescription of the manner of distribution of ITC and the requirement of same-month distribution formed part of such manner. It was argued that the amendment to Section 20 by the Finance Act, 2024 was prospective and did not invalidate the rule for the earlier period. The Department further submitted that the Assessee had failed to comply with the statutory procedure and that the audit and penalty proceedings were valid and within jurisdiction. It was also argued that the Assessee had an effective alternative remedy by responding to the show-cause notice, and therefore the writ petition was not maintainable.

Court's Decision:

The Telangana High Court held that Rule 39(1)(a) of the CGST Rules, 2017, to the extent it mandated same-month distribution of ITC, was ultra vires Section 20 of the CGST Act as it stood prior to 01.04.2025, as the parent statute did not contemplate any time limit or forfeiture of credit. The Court held that delegated legislation cannot introduce substantive restrictions that have the effect of extinguishing a vested statutory right, and that ITC once validly availed cannot be denied through procedural rules. The Court further held that denial of ITC in such circumstances was arbitrary and violative of Articles 14 and 300A of the Constitution. It was also observed that the audit proceedings were concluded in violation of principles of natural justice and that the show-cause notice was barred by limitation, since all facts were disclosed in returns and no suppression was established.
Accordingly, the Court struck down Rule 39(1)(a) to the aforesaid extent, quashed the audit report and show-cause notice along with all consequential proceedings, and permitted refund of any amount deposited.

BTA's COMMENT:

This landmark judgment decisively reaffirms that delegated legislation under the GST regime cannot travel beyond the express mandate of the parent statute, particularly where such delegation results in deprivation of vested rights. By striking down the mandatory same-month distribution requirement for ISDs, the Telangana High Court has reinforced the principle that procedural prescriptions cannot be elevated to substantive conditions leading to denial of Input Tax Credit, especially in the absence of revenue loss or statutory authority. The ruling provides much-needed certainty and relief to ISDs and is expected to have significant persuasive value in pending audits and appellate proceedings involving delayed distribution of ITC for the pre-01.04.2025 period.

Case Reference - Birla Nu Ltd. vs. Union of India and 3 others. [WRIT PETITION No.14564 of 2024]

Author: Madhurima Bose