The Telangana High Court has ruled that Rule 39(1)(a) of the CGST Rules, which mandates the distribution of Input Service Distributor (ISD) credit within the same month, is ultra vires Section 20 of the CGST Act, prior to its amendment. This decision came in the case of BirlaNu Ltd. v. Union of India & Ors., where the petitioner, an ISD, had distributed accumulated Input Tax Credit (ITC) at the financial year's end instead of monthly, as required by the rule.
During audit proceedings, the department alleged that this practice violated Rule 39(1)(a) and proposed penalties and demands, issuing an audit report and a show cause notice with extended limitation. The petitioner challenged these proceedings by questioning the constitutional validity of the rule.
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The court found that before its amendment, Section 20 of the CGST Act did not authorize setting a time limit for ISD credit distribution. As a result, the court declared Rule 39(1)(a) ultra vires to the extent it required same-month distribution of ITC. It emphasized that delegated legislation cannot curtail or extinguish substantive statutory rights without legislative sanction.
Consequently, the audit report, show cause notice, and all related proceedings were quashed. The court also granted the petitioner the liberty to seek a refund of any amounts deposited, in accordance with the law.
Parties: BirlaNu Ltd. v. Union of India & Ors.
Order Date: 30 December 2025
Facts –
- The petitioner, registered as an Input Service Distributor (ISD), distributed accumulated ITC at the end of the financial year instead of on a monthly basis.
- During audit proceedings, the department alleged violation of Rule 39(1)(a) of the CGST Rules and proposed penalty and demand.
- The audit report and show cause notice were issued invoking extended limitation and proposing substantial liability.
- The petitioner challenged the proceedings by questioning the constitutional validity of Rule 39(1)(a).
Issue –
- Whether Rule 39(1)(a) of the CGST Rules, mandating same-month distribution of ISD credit, is ultra vires Section 20 of the CGST Act (prior to its amendment).
Order –
- The High Court held that Section 20 of the CGST Act did not authorize prescription of a time limit for ISD credit distribution prior to its amendment.
- Rule 39(1)(a), to the extent it mandates same-month distribution of ITC, was declared ultra vires the parent statute.
- The Court held that delegated legislation cannot curtail or extinguish substantive statutory rights in absence of legislative sanction.
- The audit report, show cause notice, and all consequential proceedings were quashed.
- Liberty was granted to the petitioner to seek refund of amounts deposited, in accordance with law.
