2026 (1) TMI 894 - HC - GST

Input Service Distributor monthly time-bar in Rule 39(1)(a) invalidated for contravening Section 20; audit and notices quashed

Dominant issue: validity of Rule 39(1)(a) of the CGST Rules vis-à-vis Section 20 CGST Act. Reasoning: Section 20 prescribes the manner of ISD distribution ... Maintainability of petiiton - availability of alternative remedy - Constitutional validity of Rule 39(1)(a) of the Central Goods and Services Tax Rules 2017 - Final Audit Report and SCN in violation of principles of natural justice or not - levy of penalty u/s 122(1)(ix) of the CGST Act, 2017 - distribution of accumulated ITC in the last month (March 2018-2019) instead of distributing it month wise - proceedings barred by time limitation or not - delegated legislation has exceeded the authority conferred by the parent enactment or not. Validity of Rule 39(1)(a) of the CGST Rules 2017 - HELD THAT:- Section 20 of the CGST Act lays down the statutory framework governing the distribution of Input Tax Credit by an Input Service Distributor (ISD), and does not stipulate any time limit within which such distribution is required to be effected. Prior to 01.04.2025, it merely provides that the credit ‘shall be distributed in such manner as may be prescribed’. Rule 39(1)(a) of the CGST Rules, during the relevant period, however, mandates that the credit available for distribution in a particular month shall be distributed in that very month - Rule 39(1)(a) travels beyond the scope of the parent provision, by introducing a mandatory time limit for distribution, which is not contemplated under Section 20 of the Act. A plain and textual reading of Section 20 of the CGST Act reveals that the legislature has consciously confined the delegated power to regulate the procedural mechanism of distribution and has not contemplated the imposition of any time limit for such distribution. In the absence of any express or implied statutory mandate authorising the prescription of a limitation period, the rule-making authority cannot, under the guise of prescribing the “manner”, introduce a substantive restriction which has the effect of extinguishing a vested statutory entitlement. This Court finds substance in the reliance placed by the petitioner on the decision of the Hon’ble Supreme Court in Sales Tax Officer v. K. I. Abraham [1967 (4) TMI 114 - SUPREME COURT], wherein it has been authoritatively held that a rule-making authority cannot introduce a period of limitation in the absence of any such prescription in the parent statute. It is trite law that when the parent statute does not provide for a limitation period, the rule-making authority cannot introduce a time restriction by invoking general rule-making powers, particularly where such restriction results in extinguishment of a statutory right, as this would amount to rewriting the statute and is impermissible in law - Further, once ITC is lawfully availed in terms of the Act, it crystallizes into a vested statutory right. Any curtailment thereof through delegated legislation, bereft of express legislative sanction and unsupported by a rational nexus to the statutory objective, cannot be sustained. Such arbitrary deprivation offends Article 14 of the Constitution. Violation of principles of Natural Justice - HELD THAT:- On perusal of the record, it is relevant to note that the petitioner had sought reasonable time to respond to the spot memos dated 07.12.2023 and 15.12.2023, citing bona fide difficulties in collating voluminous data pertaining to the FY 2017–18 and 2018– 19, compounded by year-end statutory compliance obligations. Notwithstanding the said request, the respondent-authorities declined to grant any extension and proceeded to conclude the audit in undue haste - It is evident that the audit objections were finalized and the matter was also placed before the Monthly Monitoring Committee Meeting (MMCM) without prior notice to the petitioner and without affording an opportunity of being heard to the petitioner, thereby depriving the petitioner company to present its explanation or clarify its position. This action is in clear derogation of the fundamental principles of natural justice. Time Limitation - HELD THAT:- It is pertinent to note that the proceedings pertain to the FY 2017–18 and 2018–19, whereas the show-cause notice was issued on 30.01.2024 which is clearly beyond the normal period of limitation as prescribed under Section 73 of the CGST Act, 2017. The respondents have sought to invoke the extended period of limitation under Section 74 of the CGST Act on the allegation of ‘suppression’. However, such invocation does not appear to be sustainable, inasmuch as the record indicates that the particulars of distribution of ITC were duly disclosed by the petitioner in its periodical returns in Form GSTR-6 and were available to the department on the common GST portal. In circumstances, where the relevant facts are within the knowledge of the tax authorities, the allegation of ‘suppression’ is legally untenable. In this regard, reference may be made to the Judgment of the Supreme Court in Pushpam Pharmaceuticals Company v. CCE [1995 (3) TMI 100 - SUPREME COURT], wherein it was held that suppression cannot be alleged when the facts are known to both the parties. Availing of alternative remedy - respondents argued that the petitioner should avail the alternative remedy of replying to the show-cause notice - HELD THAT:- It is settled law that the existence of an alternative statutory remedy does not operate as an absolute bar to the exercise of writ jurisdiction under Article 226 of the Constitution of India, particularly in cases where the vires of a statutory provision is under challenge or where there is a manifest violation of the principles of natural justice. Thus, there are no merit in the objection raised by the respondents and holds that the writ petition is maintainable. Thus, 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 Final Audit Report dated 22.01.2024 and the show-cause notice dated 30.01.2024, along with all consequential proceedings are hereby quashed and set aside. Petitioner may claim refund of any amount deposited in connection with the impugned proceedings as per law. Petition allowed. Issues: (i) Whether Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017, insofar as it mandates distribution of Input Tax Credit within the same month, is ultra vires Section 20 of the Central Goods and Services Tax Act, 2017, as in force prior to 01.04.2025; (ii) Whether the Final Audit Report dated 22.01.2024 and the show-cause notice dated 30.01.2024 violate principles of natural justice; (iii) Whether the impugned proceedings are barred by limitation; (iv) Whether the existence of an alternative statutory remedy bars writ jurisdiction; (v) Whether the delegated legislation exceeded the authority conferred by the parent enactment.Issue (i): Whether Rule 39(1)(a) mandating month-wise distribution of ITC is ultra vires Section 20 of the CGST Act as it stood prior to 01.04.2025.Analysis: Section 20 confines rule-making to the manner and conditions of distribution and is silent on any time limit for distribution. Rule 39(1)(a) prescribes a mandatory timeline that results in extinguishment or forfeiture of vested ITC rights. Established principles disallow delegated legislation from creating substantive obligations or limitations not contemplated by the parent Act. Comparative statutory instances where time-limits are intended show express legislative prescription; absence of such in Section 20 indicates no delegated power to impose a forfeiture timeline.Conclusion: In favour of Assessee.Issue (ii): Whether the Final Audit Report and the show-cause notice violated principles of natural justice.Analysis: Procedural safeguards, including opportunity to respond to spot memos and discussion of audit objections before finalization as reflected in the applicable audit manual, were not afforded. The audit was finalized and placed before the monitoring committee without prior notice or adequate time for response, depriving the affected party of a fair hearing.Conclusion: In favour of Assessee.Issue (iii): Whether the proceedings are barred by limitation.Analysis: The show-cause notice was issued beyond the normal limitation period under Section 73. Extended limitation under Section 74 was invoked on alleged suppression, but the record shows periodic disclosures on the common portal and absence of concealment; suppression is therefore not established and extended limitation is not attracted.Conclusion: In favour of Assessee.Issue (iv): Whether the existence of an alternative statutory remedy bars writ jurisdiction.Analysis: Writ jurisdiction is not an absolute bar where vires of a statutory provision is challenged or where there is manifest denial of natural justice. The challenge to the validity of subordinate legislation and the procedural infirmities justify exercise of writ jurisdiction in the present factual matrix.Conclusion: In favour of Assessee.Issue (v): Whether the delegated legislation exceeded the authority conferred by the parent enactment.Analysis: Rule 39(1)(a) introduces a substantive time-based limitation effecting forfeiture of a statutory entitlement, which goes beyond regulating the manner of distribution contemplated by Section 20. Such exercise of rule-making power to create substantive disability is beyond the scope of the parent enactment.Conclusion: In favour of Assessee.Final Conclusion: The challenged provision of the subordinate legislation imposing a mandatory month-wise distribution requirement is invalid to the extent it imposes a time-forfeiture regime; consequential departmental action founded on that provision and affected by procedural and limitation defects has been set aside.Ratio Decidendi: A rule-making power confined to prescribing the manner of carrying out a statutory scheme cannot be exercised to introduce a substantive time bar that extinguishes vested statutory credits where the parent statute is silent on such limitation.