Distribution of Credit by ISD in Same Month – A Digests to read

The Hon’ble Madras High Court in Reliance Jio Infocomm Ltd Rep by its Power of Attorney Holder Kumar Jayaraman Versus Union of India, State of Tamilnadu Through the Secretary Commercial Taxes and Registration Department, Commissioner of Central Tax and Central Excise Audit - I Commissionerate, Chennai, Government of Puducherry Through the Secretary Commercial Taxes Department - 2026 (3) TMI 298 - MADRAS HIGH COURT held that the distribution of Input Tax Credit (ITC) by an Input Service Distributor (“ISD”) is triggered only upon fulfilment of conditions under Section 16(2) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and not merely upon receipt or issuance of a tax invoice by supplier(s). The Court further held that Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), which mandates distribution of ITC in the same month as the underlying invoice, cannot be interpreted to require distribution before the conditions of Section 16(2) are satisfied, and remanded the show cause notices back to the Adjudicating Authority for fresh consideration in light of this interpretation.

Facts:

The petitioner, Reliance Jio Infocomm Ltd., is a telecom company registered under the GST regime as an ISD, with 36 separate GST registrations across States and Union Territories. As an ISD, it is required to distribute common input service credit among its branch units on a pro-rata basis based on their respective turnovers. Show cause notices dated June 26 and 27, 2025, were issued against the petitioner for alleged delayed distribution of ITC for financial years 2018–2019 to 2023–2024, on the ground that Rule 39(1)(a) required distribution of ITC in the same month as the month of issuance of the underlying input service invoice.

The petitioner challenged the validity of Rule 39(1)(a) of the CGST Rules/ TNGST Rules/Puducherry GST Rules for the period prior to April 01, 2025, contending that the parent legislation i.e., the pre-amended Section 20 of the CGST Act, did not empower the Government to prescribe a time limit for ISD distribution. Further, it was contended that the requirement to distribute ITC in the same month as the invoice issuance is practically impossible, arbitrary, and contrary to the scheme of Section 16 of the CGST Act.

Issues:

• Whether Rule 39(1)(a) of the CGST Rules, which requires an ISD to distribute ITC in the same month as the month of issuance of the input service invoice, is ultra vires the pre-amended Section 20 of the CGST Act, which did not confer express power upon the Government to prescribe a time limit for such distribution, and is therefore unconstitutional and unenforceable for the period prior to April 01, 2025?
• Whether the expression “input tax credit available for distribution in a month” in Rule 39(1)(a) is to be interpreted as ITC that becomes available only upon fulfilment of all conditions stipulated under Section 16(2) of the CGST Act, and not upon mere issuance or receipt of the input service invoice?

Held:

The Hon’ble Madras High Court in Reliance Jio Infocomm Ltd Rep by its Power of Attorney Holder Kumar Jayaraman Versus Union of India, State of Tamilnadu Through the Secretary Commercial Taxes and Registration Department, Commissioner of Central Tax and Central Excise Audit - I Commissionerate, Chennai, Government of Puducherry Through the Secretary Commercial Taxes Department - 2026 (3) TMI 298 - MADRAS HIGH COURT held as under:

• Observed that, the expression “input tax credit” under Section 20 of the CGST Act cannot be equated with “input”, “input tax” or the taxable value of supply. What the ISD is mandated to distribute is “ITC”, which can only come into existence after all the conditions prescribed under Section 16(2) of the CGST Act are satisfied, namely: (a) receipt of the tax invoice [Section 16(2)(a)]; (b) reporting of the invoice in the supplier’s outward supply returns [Section 16(2)(aa)]; (c) actual receipt of the service [Section 16(2)(b)]; (d) payment of tax to the Government [Section 16(2)(c)]; and (e) furnishing of return by the recipient [Section 16(2)(d) read with Section 39(4)].
• Noted that,Rule 39(1)(a) only incorporates the expression “the input tax credit available for distribution” and does not, in any manner, mandate that distribution must occur immediately upon issuance of an invoice, in derogation of the conditions of Section 16(2). To hold otherwise would be to attribute an interpretation to the Rule that renders it ultra vires the parent Act.
• Held that, the distribution mechanism under Rule 39(1)(a) is triggered only after completion of the various conditions incorporated in Section 16(2) of the CGST Act. Accordingly, the expression “input tax credit available for distribution in a month” must be interpreted as ITC that becomes available upon fulfilment of all conditions under Section 16(2), and not on mere issuance of an invoice by the supplier.
• Directed that, the show cause notices, insofar as they allege delayed distribution of ITC, shall not be adjudicated on the assumption that distribution was required in the same month as the invoice. Instead, upon receipt of the assessee’ s replies, the authorities shall decide the matter afresh in light of the correct interpretation of Rule 39(1)(a) as laid down in this judgment.

Hence, the matter is remanded back to the Adjudicating Authority for fresh consideration.

Our Comments:

Relevant Statutory Provisions:

Section 20 of the CGST Act governs the concept of Input Service Distributor (ISD) and provides that the ISD shall distribute the credit of Central Tax paid on input services to its units in accordance with the prescribed manner. Rule 39 of the CGST Rules prescribes the manner of distribution of credit by the ISD. Rule 39(1)(a) provides that the ISD shall distribute the “input tax credit available for distribution in a month” by means of ISD invoices issued to each recipient of credit.

Section 16(2) of the CGST Act sets out the pre-conditions for availing ITC: receipt of the tax invoice, reporting of the invoice by the supplier in GSTR-1, actual receipt of goods or services, payment of tax by the supplier to the Government, and filing of return by the recipient. It is only upon satisfaction of all these conditions that “input tax” crystallises into “input tax credit” eligible for distribution.

Importantly, prior to the amendment effective from April 01, 2025, Section 20 did not contain any express enabling power to prescribe a time limit for ISD distribution. The phrase “within such time and subject to such restrictions and conditions as may be prescribed” was inserted into Section 20(2) only by the Finance Act, 2024 with effect from April 01, 2025. The Court rightly held that for the pre-amendment period, any reading of Rule 39(1)(a) that imposes a same-month distribution obligation would be an impermissible exercise of subordinate legislation exceeding the scope of the parent statute.

Pari Materia and Contrary Judgments:

The Court placed reliance on the Supreme Court’s judgment in Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court, which had laid down that the provisions of the GST statute must be interpreted in a manner consistent with the overall scheme of the Act. The Court also followed ALD Automotive Pvt. Ltd. Versus The Commercial Tax Officer Now Upgraded As The Assistant Commissioner (CT) & Ors. - 2018 (10) TMI 814 - Supreme Court, which established the principle that a rule cannot travel beyond the scope of the enabling Act.

Further, in Sales Tax Officer, Ponkunnam and Another Versus KI. Abraham - 1967 (4) TMI 114 - Supreme Court, the Supreme Court struck down a rule prescribing a time limit as ultra vires the parent Act for the very reason that the parent provision did not empower such prescription — a principle directly applicable to Rule 39(1)(a) for the pre-April 01, 2025 period.

From a practical standpoint, this judgment brings significant relief to large multi-unit taxpayers and ISDs who had been subjected to show cause notices for alleged delayed ITC distribution. The ruling clarifies that ISD obligations crystallise only after the full set of conditions under Section 16(2) are met, and that authorities cannot treat the date of invoice issuance as the starting point for distribution obligations for any period prior to April 01, 2025. Taxpayers facing similar show cause notices may rely on this judgment while filing their replies and in any subsequent appellate proceedings.

 (Author can be reached at [email protected])