BirlaNu Ltd. Vs Union of India and 3 others. (Telangana High Court)
The Telangana High Court held that Rule 39(1)(a) of the CGST Rules, 2017, insofar as it mandates distribution of Input Tax Credit (ITC) by an Input Service Distributor (ISD) within the same month, is ultra vires Section 20 of the CGST Act, 2017, and accordingly struck it down, along with quashing the consequential Final Audit Report and show-cause notice proposing a penalty of ₹8.38 crore. The petitioner, a registered ISD, had accumulated ITC during FY 2017–18 and 2018–19 and distributed the entire accumulated credit in the last month of each financial year, which was objected to by the tax authorities as violating the same-month distribution requirement under Rule 39(1)(a). The Court observed that prior to the amendment introduced by the Finance Act, 2024 (effective from 01.04.2025), Section 20 of the CGST Act consciously confined the delegated power only to prescribing the “manner” of distribution and did not authorize the imposition of any time limit. By introducing a rigid monthly timeline, the rule-making authority travelled beyond the scope of delegated legislation and imposed a substantive restriction capable of extinguishing a vested statutory right.
The Court emphasized that once ITC is lawfully availed under Sections 16 and 17 of the Act, it crystallizes into a vested right, and a procedural rule cannot arbitrarily curtail or forfeit such entitlement, particularly in the absence of any dispute on eligibility or revenue loss. It further held that the audit proceedings were concluded in undue haste without granting adequate opportunity of hearing, in violation of principles of natural justice and Para 5.13 of the CBIC GST Audit Manual, 2019. The invocation of the extended limitation period under Section 74 was also held unsustainable, as all relevant particulars were disclosed in statutory returns and available on the GST portal, negating any allegation of suppression. The Court rejected the objection on alternative remedy, holding that writ jurisdiction is maintainable where the vires of a rule is challenged and natural justice is violated. Consequently, Rule 39(1)(a) to the extent of mandating same-month distribution was struck down, and the audit report and show-cause notice were set aside.
