The Primacy of the Act: Analyzing the Telangana High Court’s Landmark Ruling on ISD Credit Distribution
The jurisprudence surrounding the Goods and Services Tax (GST) in India has frequently grappled with the rigidity between legislative intent and administrative rule making. A significant milestone in this evolving legal landscape was reached when the Honourable Telangana High Court delivered its judgment in the case of BirlaNu Ltd. (ISD) v. Union of India & Ors. (2026-VIL-26-TEL). The court addressed a fundamental question of constitutional and administrative law, whether a procedural rule impose a restrictive time limit on a substantive right when the parent statute remains silent? By striking down the “same month” distribution requirement for Input Service Distributors (ISD) for the period prior to April 1, 2025, the court reaffirmed that rules cannot travel beyond the boundaries of the Act they seek to implement.
Diving deep, the honourable Telangana High Court in a detailed and reasoned judgment dated 30 December 2025, held that the “same month” distribution of ITC condition by ISD was ultra vires Section 20 of the CGST Act (as it stood before 01.04.2025). This case deals with Input Service Distributor (ISD) ITC distribution and the mandatory requirement under Rule 39(1)(a) of the CGST Rules, 2017, which prescribed that ITC availed and available in a month must be distributed in the same month. The ephemeral fact of the case is that, M/s. BirlaNu Limited was registered as an Input Service Distributor (ISD) under the CGST Law. Like many large organisations, it received invoices for common input services availed by their branches and then distributed the corresponding ITC in proportion to the turnover, to its operational units. During audit for FY 2017–18 and 2018–19, the department objected that the Taxpayer had accumulated ITC and distributed it in the last month instead of doing it on monthly basis and proposed to recover it while imposing penalty too. According to the department, this violated the manner of distribution as prescribed under Rule 39(1)(a) of CGST Rules, 2017, which states that ITC available for distribution in a month “shall be distributed in the same month.
To understand the crux of the dispute, one must look at the structural framework of the Input Service Distributor. An ISD is an office of the supplier of goods or services which receives tax invoices for common input services for the branches under it and issues a prescribed document for the purposes of distributing the credit of central tax, state tax, or integrated tax to its operational units. This mechanism is vital for large organizations to ensure that credit is seamlessly moved to the locations where the output liability actually arises. However, the Department’s audit of BirlaNu Limited for the financial years 2017–18 and 2018–19 exposed a point of conflict. The company had accumulated credits and distributed them in the final month of the year rather than on a monthly basis. The Department took umbrage at this practice, citing Rule 39(1)(a) of the CGST Rules, 2017, which stipulates:
“The Input Service Distributor shall distribute the input tax credit available for distribution in a month in the same month, and details thereof shall be furnished in FORM GSTR-6 in accordance with the provisions of Chapter VIII of these rules.”
Based on this rule, the Department proposed to recover the “delayed” distributed credit and impose penalties, arguing that the taxpayer had failed to adhere to the mandatory “same month” condition. The heart of the legal battle lay in whether this specific rule was ultra vires (i.e.beyond the power of) Section 20 of the CGST Act, 2017 before the significant legislative overhaul that took effect in 2025, Section 20 of CGST Act 2017 which read as follows:
Section 20 (Pre-amendment):
(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:— (a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed; (b) the amount of the credit distributed shall not exceed the amount of credit available for distribution…”
The taxpayer’s primary contention in this dispute was that Section 20, of CGST Act 2017 as reproduced supra, granted the government the power to prescribe the manner of distribution but did not explicitly grant the power to prescribe a time limit. The use of the word “manner” typically refers to the mode or method of performing an action, such as the type of document to be issued or the formula for calculation but does not encompass the authority to curtail a substantive right by imposing a rigid temporal restriction of time limits. Furthermore, the taxpayer argued that Input Tax Credit (ITC) is a vested statutory right. Once the conditions for availing credit are met, in terms of Section 16(2) of CGST Act 2017, this right cannot be defeated by a subordinate procedural rule that is more restrictive than the parent provision itself.
The Telangana High Court found substantial merit in these arguments. The court noted that while the Department viewed Rule 39(1)(a) as a mere operational tool, it effectively functioned as a restrictive gatekeeper. By mandating that credit must be distributed in the same month, the rule created a “use it or lose it” scenario that the Act actually did not contemplate. The court observed a striking anomaly too. A normal taxpayer who is the recipient of goods or services is permitted to claim ITC of a financial year until the expiry of the 30th November deadline following the subsequent financial year. To deny an ISD similar flexibility, simply because the credit is being routed through a central office, was deemed arbitrary and discriminatory. This disparity was seen as a violation of Article 14 (Equality before the law) and Article 300-A (Right to property) of the Constitution of India, as it unjustly deprived the taxpayer of a legitimate financial asset.
Article 14. Equality before law
The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.
300A. Persons not to be deprived of property save by authority of law
No person shall be deprived of his property save by authority of law.
Moving on, the Court’s reasoning was further bolstered by the subsequent legislative history. The Finance Act, 2024, introduced a comprehensive substitution of Section 20, of the Finance Act 2017, which finally granted the administration the specific power to prescribe a time limit. This amendment, which became effective on April 1, 2025, reads thus:
Section 20 (post-amendment w.e.f 01-04-2025):
“(2) Any office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, shall be liable to be registered as an Input Service Distributor and shall distribute the credit of central tax or integrated tax charged on such invoices in the manner, within such time and subject to such restrictions and conditions as may be prescribed.”
The court interpreted this amendment as a clear admission by the legislature that the prior version of the Section 20 in the CGST Act 2017 did not contain the words “within such time.” Since the 2024 amendment was only prospective, it could not be used to validate the Department’s actions for the earlier years of 2017 through 2019. If the power to prescribe a time limit already existed under the old “manner” clause, there would have been no need for the Parliament to specifically insert the phrase “within the time” in the new section.
In its final conclusion, the Telangana High Court struck down the “same month” requirement of Rule 39(1)(a) for the period preceding April 1, 2025. It held that the rule travelled beyond the scope of the delegating legislation (Section 20). Consequently, the Show Cause Notices issued to BirlaNu Limited were quashed. This judgment serves as a vital reminder of the “Doctrine of Ultra Vires” in tax law that a rule-making authority cannot create a condition that limits a right granted by the statute unless the statute expressly authorizes such a limitation.
For taxpayers, this is a verdict protects accumulated credits from being denied on purely technical or temporal grounds for the initial years of the GST regime. However, the “situation changed” significantly on April 1, 2025. With the new Section 20 now in force, the requirement to distribute credit within the prescribed time is no longer just a rule-based mandate but a statutory obligation. While the past has been clarified by the High Court, the future requires strict adherence to the updated timelines to ensure the continued flow of credit within large-scale enterprises.
Before bidding adieu……
It is in fact very clear that the honourable Court made a crucial distinction. The provisions of Section 20 of the CGST Act 2017 authorises rules to prescribe how ITC is distributed. It does not authorise rules to decide by when ITC must be distributed. Imposing a rigid time limit through a rule when the Act is silent, changes the nature of the provision. It stops being procedural and starts taking away a substantive right bestowed by the legislation. Moving on, the Court also noted the anomaly that a normal recipient can avail ITC with reference to one financially year till the September/November cut-off of the succeeding financial year. Denying the same flexibility merely because credit flows through an ISD is arbitrary and discriminatory, violating Articles 14 and 300-A of the Constitution.
Ultimately, the bottom line is that Rules cannot override the Act is again an established truth.
As it stands now, Section 20(2) of the CGST Act, as substituted effective April 1, 2025, requires Input Service Distributors (ISDs) to distribute credit of central tax or integrated tax (including on RCM services under sections 9(3)/(4) or IGST sections 5(3)/(4)) charged on invoices received by them for distinct persons under section 25. The Distribution must occur in the manner, within the time, and subject to restrictions/conditions prescribed by CGST Rules, 2017
The situation changed with effect from 01st April 2025 with the amendment of Section 20 prospectively.
Jai Hind!!!!!
Postscript reference: –
BirlaNu Ltd. (ISD) v. Union of India & Ors., Telangana High Court, Judgment dated 30.12.2025, 2026-VIL-26-TEL
Author Bio
Well Articulated and elegantly presented, providing an insightful analysis of the High Court’s judgement.
Would also like to see an article from the author comparing the judgment of the Hon’ble Supreme court in the case of Osram Surya P. Ltd. vs CCE, Indore (dealing with restriction of time limit for taking modvat/cenvat credit) and BirlaNu judgment of the Telangana High Court.