Madras High Court Upholds Same-Month ISD Credit Rule Under CGST, Dismisses Reliance Jio's Challenge

The Madras High Court on 5 March upheld the validity of Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017, which mandates that an Input Service Distributor (ISD) must allocate tax credits within the same month in which an invoice is received.

A Bench comprising Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan was hearing a batch of writ petitions filed by Reliance Jio Infocomm Ltd, challenging the provision governing the timing of distribution of Input Service Distributor (ISD) credit.

The judges held:

"In the case on hand, much insistence has been laid on the language of Section 20(2) of the CGST Act to advance the submission that the legislative mandate is that the ISD shall distribute the credit of central tax or integrated tax charged on invoices received by him. Therefore, the expression 'credit available for distribution' as placed in Rule 39(1)(b) of the CGST Rules means that upon receipt of invoice, the ISD is required to distribute the credit in the same month in which it is received. Therefore, the Rule cannot be said to be ultra vires the enabling provision of Section 20 of the CGST Act, as the CGST Act itself mandates distribution upon receipt of invoice."

Reliance Jio, a telecom service provider operating across multiple states and union territories with separate GST registrations, distributes common input service credits through the ISD mechanism.

The company approached the High Court seeking to declare Rule 39(1)(a) of the CGST Rules and corresponding State GST Rules arbitrary, violative of Article 14, and ultra vires Section 20 of the CGST Act, and to quash the show cause notices alleging improper ISD credit distribution.

It argued that although the government could set a time limit for ITC distribution under Section 20 of the CGST/TNGST Act, requiring distribution in the same month as the invoice issuance was practically impossible. A taxpayer must first verify ITC eligibility under Section 16 and identify the appropriate recipient units, so imposing such a rigid deadline was arbitrary and unsupported by the statute.

The Union government opposed the challenge, submitting that the rule was validly framed in exercise of the rule-making power conferred under Section 164 of the CGST Act, 2017, read with Section 20 of the CGST Act, which empowers the Government to prescribe the manner of distribution of ITC by ISD.

After examining the statutory framework, the High Court held that Rule 39(1)(a) could not be struck down as unconstitutional or ultra vires.

The Court clarified that the expression “input tax credit available for distribution in a month” must be interpreted harmoniously with Section 16 of the CGST Act, meaning that the credit becomes available for distribution only after the conditions for entitlement to ITC are satisfied. Consequently, the requirement of same-month distribution applies to the month in which the credit actually becomes available under the law.

The Bench stated:

"the expression 'the input tax credit available for distribution in a month' contained in Rule 39(1)(a) of the CGST Rules has to be interpreted, construed and understood in the manner consistent with the statutory scheme of Section 16 read with Section 20 of the CGST Act and not otherwise."

The Court also observed that ITC is not an absolute right but a statutory concession regulated by legislative conditions. Interpreting the rule in a manner consistent with the statutory scheme avoids arbitrariness and preserves its validity. It held:

"the distribution mechanism is triggered only after completion of various stages and conditions incorporated in Section 16(2) of the CGST Act. Therefore, the requirement of distribution has to be accordingly construed to mean that it shall be in the month in which the registered person becomes entitled to ITC in terms of Section 16(2) of the CGST Act."

Accordingly, the High Court upheld the rule, leaving the statutory proceedings initiated through show cause notices to continue in accordance with law.

For Petitioner: Senior Counsel, Arvind P Datar for Rahul Unnikrishnan

For Respondent: Additional Solicitor General of India, AR.L.Sundaresan assisted by Senior Standing Counsel, Revathi Manivannan, Additional Advocate General, Haja Nazirudeen, assisted by V. Prashanth Kiran