Reliance Jio Infocomm Ltd Vs Union of India (Madras High Court)
Conclusion: While interpreting Rule 39(1)(a) to mandate distribution immediately upon receipt of invoice would lead to absurdity and conflict with the statutory scheme, as ITC could not be claimed or distributed before satisfaction of the conditions prescribed under Section 16. The rule did not mandate distribution of credit merely on receipt of invoice; rather, it required distribution in the month in which ITC becomes available in accordance with law.
Held: Assessee-company was having multiple GST registrations across India, operated an Input Service Distributor (ISD) mechanism for distribution of Input Tax Credit (ITC) relating to common input services received at its head office. During audit for the period FY 2018-19 to 2023-24, the department alleged that assessee had violated Rule 39(1)(a) of the CGST Rules, 2017 by not distributing ITC in the same month in which the underlying input service invoices were received. Show cause notices were issued alleging contravention of Section 20 of the CGST Act read with Rule 39. Assessee challenged the validity of Rule 39(1)(a), contending that prior to 01-04-2025, Section 20 did not empower the Government to prescribe a time limit for ISD distribution and that the rule requiring same-month distribution was ultra vires, arbitrary and impossible to comply with. Assessee argued that ITC can be distributed only after verifying eligibility under Section 16(2). Distribution in the same month as the invoice was issued was practically impossible and inconsistent with the statutory framework. It was further argued that the amendment to Section 20 introduced from 01-04-2025, empowering prescription of time limits, was prospective and could not validate earlier rule-making. Respondents contended that Rule 39(1)(a) was validly framed under the rule-making power conferred by Section 164 read with Section 20, and merely prescribed the procedural manner and timeline for distribution of ITC. It was also argued that ISD distribution was only a book entry transferring credit between distinct persons and was distinct from availment of ITC under Section 16. It was held that Sections 16 and 20 of the CGST Act must be read harmoniously. Section 16 governs the entitlement and conditions for availing ITC, whereas Section 20 deals with distribution of such credit through the ISD mechanism. The expression “credit” used in Section 20 refers to input tax credit legally available under the Act, and not merely the tax amount reflected in the invoice. Consequently, the expression “input tax credit available for distribution in a month” in Rule 39(1)(a) must be interpreted to mean ITC that has become available after fulfilment of the statutory conditions under Section 16(2). Mere receipt of invoice did not confer entitlement to ITC. Distribution of credit must therefore occur in the month when the ITC becomes legally available, and not necessarily the month of receipt of invoice. The Court observed that interpreting Rule 39(1)(a) to mandate distribution immediately upon receipt of invoice would lead to absurdity and conflict with the statutory scheme, as ITC could not be claimed or distributed before satisfaction of the conditions prescribed under Section 16. Accordingly, Rule 39(1)(a) was upheld but interpreted in a manner consistent with the statutory scheme. The rule did not mandate distribution of credit merely on receipt of invoice; rather, it required distribution in the month in which ITC becomes available in accordance with law. The show cause notices issued to assessee were directed to be adjudicated afresh in light of this interpretation, and assessee was permitted to file replies before the adjudicating authority. The writ petitions were allowed to the extent of the above interpretation, without declaring the rule unconstitutional.
In W.P.No.27038 of 2025, the challenge is to the validity of Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017 and Rule 39(1)(a) of the Tamil Nadu Goods and Services Tax Rules, 2017 in respect of two periods, viz., prior to 01.04.2025 and thereafter, as 01.04.2025 is the date on which the amendments to Section 20 of the Central Goods and Services Tax Act, 2017 and the Tamil Nadu Goods and Services Tax Act, 2017 were brought into effect. The petitioner also sought abashment of the show cause notice dated 27.6.2025.
