"Same-Month ISD Credit" Rule Struck Down: Telangana High Court Draws a Red Line

Input Service Distributor (ISD) credit is meant to be a "seamless flow" mechanism-an internal allocation tool that ensures GST paid on common input services is fairly and proportionately distributed to the right registrations. Yet, for years, businesses have faced a recurring compliance trap: what if eligible input tax credit (ITC) is accumulated over a period and distributed later-especially at year-end-rather than "month-by-month"?

In a significant decision, the Telangana High Court in M/s BirlaNu Ltd. v. Union of India &

Ors. (W.P. No. 14564 of 2024, decided 30.12.2025) 2025(12)LCX0250 examined the constitutional validity of Rule 39(1)(a) of the CGST Rules, 2017, insofar as it mandated that credit available for distribution in a month "shall be distributed in the same month." The Court held that this mandatory time requirement (for the relevant period) travels beyond Section 20 of the CGST Act and is therefore ultra vires, striking it down to that extent, and quashing the consequential audit report and show cause notice.

1) Why this ruling matters (and to whom)

This verdict is not merely a technical reading of Rule vs. Section. It goes to the heart of GST design:

• ITC is a statutory entitlement once validly earned under the Act (subject to conditions).

• Rules can regulate procedure, but cannot extinguish or curtail a right where the parent statute does not authorise such curtailment.

• Compliance prescriptions that create a de facto limitation period-without legislative sanction-risk being struck down as excess of delegated authority.

For organisations with multiple registrations, central procurement models, and significant common input services (rent, audit, legal, IT, consulting, telecom, insurance, etc.), this is a high-impact development.

2) Background: ISD framework in simple terms

Under GST, a head office (or another specified office) may register as an ISD to distribute credit of GST paid on input services to its other registrations. The statute-Section 20 of the CGST Act-lays down the framework for how and subject to what conditions distribution can occur. The distribution is typically based on turnover ratios and attribution of services.

However, for the relevant period prior to 01.04.2025, Section 20 did not prescribe any specific time limit for when distribution must be completed. The dispute arose because Rule 39(1)(a) imposed a strict "same-month distribution" command, creating compliance exposure whenever distribution was delayed or consolidated.

3) Facts in brief: what BirlaNu was accused of

The petitioner, M/s BirlaNu Limited, was registered as an ISD. During audit for FY 2017-18 and 2018-19, the Department observed that the company allegedly accumulated ITC during the financial year and distributed it in the last month (March 2018-19) rather than distributing it month-wise. This was treated as contrary to Rule 39(1)(a).

A Spot Memo dated 07.12.2023 was issued, followed by another Spot Memo, and then a Final Audit Report dated 22.01.2024. Thereafter, a show cause notice dated 30.01.2024 proposed a penalty of about Rs.8.38 crore under Section 122(1)(ix) of the CGST Act. The petitioner also argued that the proceedings moved at an undue pace and without adequate opportunity.

4) Issues before the Court

The High Court framed multiple questions, including:

1. Whether Rule 39(1)(a) (to the extent it mandates same-month distribution) is ultra vires Section 20 (as it stood prior to 01.04.2025).

2. Whether the audit report and SCN violated principles of natural justice.

3. Whether the proceedings were barred by limitation, and whether "suppression" could be invoked.

4. Whether an alternative statutory remedy barred a writ petition.

5. Whether delegated legislation exceeded the authority conferred by the parent enactment.

5) Core holding: Rule 39(1)(a) cannot create a time limit where Section 20 did not

The Court’s central reasoning was straightforward but powerful:

• Section 20 sets the statutory framework for ISD distribution and authorises distribution "in such manner as may be prescribed."

• However, it did not (for the relevant period) impose any explicit time limit for distribution.

• Rule 39(1)(a), by mandating distribution "in the same month," effectively introduces a mandatory timeline-which is not a mere procedural detail but a substantive restriction capable of defeating validly earned credit.

In other words, a rule-making authority may regulate manner, but cannot use "manner" as a Trojan horse to insert a limitation period that the legislature did not enact. The Court relied on established principles that delegated legislation cannot override the parent Act and cannot extinguish rights without statutory sanction.

6) Why the Finance Act, 2024 amendment strengthened the taxpayer’s case

A particularly persuasive point was legislative intent visible through later change.

The petitioner highlighted that Section 20(2) was amended by the Finance Act, 2024, expressly empowering prescription of time limits with effect from 01.04.2025. The Court treated this as an indicator that such power did not exist earlier-otherwise the amendment would be redundant.

This matters for interpretation: when Parliament later inserts an express empowerment for time limits, it often signals that earlier law did not authorise that constraint.

7) Natural justice: audit and committee meeting without proper opportunity

Beyond vires, the Court also found force in the grievance that proceedings were pursued in undue haste and without adequate hearing.

The record reflected that:

• The taxpayer sought reasonable time to respond due to voluminous data and year-end compliance pressures.

• The matter was also placed before the Monthly Monitoring Committee Meeting (MMCM) without prior notice and without an opportunity of being heard-depriving the taxpayer of a chance to explain or clarify its position.

The Court treated this as inconsistent with fundamental principles of natural justice, especially when high-stakes consequences (penalty and adverse findings) were involved.

8) Limitation and "suppression": extended period could not be casually invoked

The dispute related to FY 2017-18 and 2018-19, while the SCN was issued on

30.01.2024-well beyond normal limitation under Section 73 (as noted by the Court). The Department sought to rely on extended limitation under Section 74 alleging "suppression." The Court noted that:

• The particulars of distribution were disclosed in periodic returns (GSTR-6) and were available on the common portal.

• Where facts are within the knowledge of tax authorities and properly disclosed, the allegation of "suppression" becomes difficult to sustain.

Hence, the invocation of extended limitation was viewed as untenable on the given facts.

9) Alternative remedy: writ was maintainable

The respondents argued that the taxpayer should pursue the statutory route (reply to SCN etc.). The Court reiterated a well-settled position: the existence of an alternative remedy is not an absolute bar to writ jurisdiction, especially where:

• Vires of a provision/rule is challenged; or

• There is manifest violation of natural justice.

On both counts, the writ was held maintainable.

10) Final relief granted by the Court

The Court allowed the writ and ordered:

• Rule 39(1)(a) (to the extent it mandates that ITC available for distribution in a month must be distributed in the same month) is declared ultra vires Section 20 and struck down (for the relevant period).

• The Final Audit Report dated 22.01.2024 and the SCN dated 30.01.2024, along with consequential proceedings, were quashed and set aside.

• The petitioner was permitted to claim refund of amounts deposited, as per law.

Practical takeaways for businesses and professionals

A) For periods prior to 01.04.2025

If your organisation distributed ISD credit in a consolidated manner (especially at year-end) and is facing audit objections purely on "same-month distribution," this ruling provides strong support to argue that a rule cannot impose a limitation-style restriction where the statute did not.

B) For periods from 01.04.2025 onwards

The legal landscape changes because the statute has been amended to permit prescription of time limits. This means:

• Compliance should be tightened for ISD distributions.

• Internal SOPs and monthly closing calendars should be aligned to distribution timelines.

C) Documentation and portal disclosures still matter

Even where merit is strong, limitation disputes often turn on disclosure. Ensure:

• GSTR-6 reporting is accurate and consistent.

• Working papers show attribution, turnover ratio basis, and reconciliation.

D) Don’t ignore natural justice angles

Where audit reports are finalised without meaningful opportunity or internal committee meetings are held without notice, procedural unfairness can become an independent ground of challenge.

Conclusion

The BirlaNu ruling is a clear statement that delegated legislation cannot do what the parent Act did not permit-especially when it risks denying or diluting a statutory entitlement like ITC. By striking down the "same-month" compulsion embedded in Rule 39(1)(a) (for the relevant period), the Telangana High Court restored the principle that procedural rules must facilitate justice, not defeat it.

For taxpayers and advisors, the decision is both a shield and a reminder: challenge overreach where rules rewrite the Act, but also prepare for tighter compliance now that the statute itself has been amended from 01.04.2025.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.