Telangana High Court Strikes Down GST Rule Mandating Monthly ITC Distribution By Input Service Distributor

The Telangana High Court has struck down a GST rule that required an Input Service Distributor, typically the head office of a company with multiple branches, to pass on the input tax credit of a month to its branch units in the same month.

A division bench of Chief Justice Aparesh Kumar Singh and Justice G. M. Mohiuddin ruled that Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017, was ultra vires Section 20 of the Central Goods and Services Tax Act, 2017.

The bench said, “Rule 39(1)(a) of the CGST Rules, 2017, to the extent it mandates that Input Tax Credit available for distribution in a month shall be distributed in the same month, is declared ultra vires Section 20 of the CGST Act, 2017, and is hereby struck down.”

The case reached the High Court after tax authorities audited BirlaNu Ltd., a home-building solutions company, which is registered as an Input Service Distributor under GST. As an ISD, the company receives invoices for common services used across its units and later distributes the related input tax credit to its recipient units.

During the audit, officials noticed that BirlaNu did not distribute credit every month. Instead, it allowed the credit to build up during the financial year and passed it on at the end of the year, in March.

The department took the view that this approach violated Rule 39(1)(a), which required credit available in a month to be distributed in that same month. Audit objections followed. Soon after, the company received a show cause notice proposing a penalty of more than Rs 8.38 crore, even though there was no dispute about the eligibility of the credit.

Challenging this, BirlaNu approached the High Court. The company argued that Section 20 of the CGST Act only explains how an ISD should distribute credit among its recipient units. It does not fix a deadline. According to the company, once input tax credit is validly earned, it becomes a vested right and cannot be taken away through a procedural rule. It also pointed out that Parliament itself amended Section 20 only in 2024 to expressly allow time limits to be prescribed, and that change applies only from April 1, 2025. The tax department defended the rule, saying it formed part of the statutory framework governing ISDs and ensured orderly credit distribution.

The court was not persuaded. It held that Section 20, as it stood during the years under audit, did not authorise the imposition of a rigid monthly timeline.

“Section 20 of the CGST Act is intended to ensure seamless flow and equitable distribution of ITC. Any interpretation of the rulemaking power that imposes rigid time constraints not envisaged by the statute would defeat this object and run contrary to the purpose of the provision,” the bench said.

With that finding, the High Court set aside the final audit report, the show cause notice, and all consequential proceedings. It also said BirlaNu may seek a refund of any amount deposited in connection with the case, in accordance with law.

The bench rejected the government's objection on maintainability, holding that writ jurisdiction can be exercised where the validity of a rule itself is under challenge or where principles of natural justice are violated.

Case Title: BirlaNu Ltd. v. Union of India & Ors.

Citation: 2026 LLBiz HC(TEL)2

Case Number: Writ Petition No. 14564 of 2024

For Petitioner: Advocate Sparsh Bhargava, counsel representing Shireen Sethna Baria

For Respondent: Advocates Bokaro Sapna Reddy, Standing Counsel for CBIC, and B. Mukherjee, counsel representing Sri Bhujanga Rao, Deputy Solicitor General of India