Rs. 838 Crore Penalty Proceedings Quashed: Telangana HC Strikes Down CGST Rule Mandating Same-Month ISD Credit Distribution

The Telangana High Court has declared Rule 39(1)(a) of the CGST Rules, 2017 ultra vires the CGST Act, holding that the rule unlawfully imposed a mandatory time limit for distribution of Input Tax Credit (ITC) by Input Service Distributors (ISDs). The bench of Bench comprising Chief Justice Aparesh Kumar Singh and Justice G.M. Mohiuddin quashed audit proceedings and a show-cause notice proposing a penalty of over Rs. 8.38 crore against BirlaNu Ltd., terming the action legally unsustainable and violative of natural justice. BirlaNu Ltd. was subjected to a GST audit for the financial years 2017–18 and 2018–19, during which tax authorities observed that the company had accumulated ITC over several months and distributed it to recipient units in the last month of the financial year, rather than distributing it on a monthly basis. The department alleged that this practice violated Rule 39(1)(a) of the CGST Rules, which states that ITC “available for distribution in a month shall be distributed in the same month.” On this basis, audit objections were raised, culminating in a final audit report dated 22 January 2024 and a show-cause notice dated 30 January 2024, proposing a penalty of ₹8,38,67,332 under Section 122(1)(ix) of the CGST Act. BirlaNu approached the High Court contending that the rule itself was unconstitutional and that the proceedings were barred by limitation and vitiated by procedural impropriety. The Court framed several substantial questions of law, including whether Rule 39(1)(a), prior to 1 April 2025, exceeded the rule-making power under Section 20 of the CGST Act. Whether the audit and show-cause proceedings violated principles of natural justice. Whether the demand was time-barred. Whether the availability of an alternative statutory remedy barred the writ petition The Bench held that Section 20 of the CGST Act, as it stood prior to its amendment by the Finance Act, 2024, did not prescribe any time limit for distribution of ITC by an ISD. The provision merely empowered the government to prescribe the manner of distribution. By mandating same-month distribution, Rule 39(1)(a) introduced a substantive restriction not contemplated by the parent statute. The Court ruled that delegated legislation cannot impose conditions that effectively extinguish a vested statutory right, especially in the absence of legislative sanction. Relying on established Supreme Court precedents, including Sales Tax Officer v. K.I. Abraham and Global Energy Ltd. v. CERC, the Bench reiterated that rule-making power cannot be used to introduce limitation periods where the statute is silent. The Court also noted that the Finance Act, 2024, which expressly empowered the prescription of time limits for ISD credit distribution, was made effective only from 1 April 2025, clearly indicating that such authority did not exist earlier. The High Court found serious procedural lapses in the conduct of the audit. Despite the petitioner seeking time to respond to spot memos, the authorities hurriedly finalized audit objections without meaningful consultation. Importantly, the Court noted non-compliance with Paragraph 5.13 of the CBIC GST Audit Manual, 2019, which mandates prior discussion of audit objections with the taxpayer. The failure to afford BirlaNu a reasonable opportunity to explain its position rendered the audit proceedings invalid. The Court held that the show-cause notice issued in January 2024 for transactions pertaining to FYs 2017–18 and 2018–19 was clearly beyond the normal limitation period under Section 73 of the CGST Act. The invocation of the extended limitation period under Section 74 on grounds of “suppression” was rejected, as all relevant details were disclosed in statutory returns and available on the GST portal. Citing Supreme Court jurisprudence, the Bench observed that suppression cannot be alleged when facts are within the department’s knowledge. The Court struck down Rule 39(1)(a) of the CGST Rules, 2017 to the extent it mandates same-month distribution of ITC and quashed the final audit report, show-cause notice, and all consequential proceedings and permitted BirlaNu Ltd. to claim refund of any amount deposited pursuant to the proceedings. Case Details Case Title: BirlaNu Ltd. Versus Union of India Case No.: Writ Petition No.14564 Of 2024 Date: 30-12-2025 Counsel For Petitioner: Sparsh Bhargava Counsel For Respondent: Bokaro Sapna Reddy Click Here To Read Order Read More: Past Customs Penalty Can Block Company From Obtaining Private Warehousing Licence: CESTAT

Rs. 838 Crore Penalty Proceedings Quashed: Telangana HC Strikes Down CGST Rule Mandating Same-Month ISD Credit Distribution

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Rs. 838 Crore Penalty Proceedings Quashed: Telangana HC Strikes Down CGST Rule Mandating Same-Month ISD Credit Distribution

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