The court ruled that Rule 39(1)(a) of the CGST Rules is ultra vires Section 20 of the CGST Act, prohibiting the imposition of mandatory timelines on Input Tax Credit distribution rights.

ORDER :

Heard Sri Sparsh Bhargava, learned counsel representing Smt.Shireen Sethna Baria, learned counsel for the petitioner; Smt.Bokaro Sapna Reddy, learned Standing Counsel for CBIC and Sri B.Mukherjee, learned counsel representing Sri N.Bhujanga Rao, learned Deputy Solicitor General of India appearing for respondent Nos.1 to 4 and perused the record.

2. The present Writ Petition is filed challenging the constitutional validity of Rule 39(1)(a) of the Central Goods and Services Tax Rules 2017 (for short ‘CGST Rules’), the Final Audit Report dated 22.01.2024 and the consequential show-cause notice dated 30.01.2024 proposing a penalty of Rs.8,38,67,332/- under Section 122 (1)(ix) of the Central Goods and Services Tax Act, 2017 (for short, ‘CGST Act, 2017’).

Factual matrix (in brief)

3. The petitioner M/s. BirlaNu Limited is registered as an Input Service Distributor (ISD) under the CGST Act. During the audit for the financial years 2017-2018 and 2018-2019, respondent Nos.2 to 4 observed that the petitioner had accumulated Input Tax Credit (ITC) during each Financial Year (for short, ‘FY’) and distributed the accumulated ITC in the last month (March 2018-2019) instead of distributing it month wise. This, according to the respondent authorities, is contrary to Rule 39(1)(a) of the CGST Rules, which mandates that the credit available for distribution in a month “shall be distributed in the same month”. Consequently, a Spot Memo dated 07.12.2023 (Annexure-P5) was issued, followed by additional Spot Memo (Annexure-P7) and Final Audit Report (Annexure-P11). A show-cause notice dated 30.01.2024 proposing a penalty of Rs.8,38,67,332/- (Annexure-P14) which according to the petitioner was issued without granting the petitioner adequate opportunity to respond.

Contentions of the petitioner

4. Learned counsel for the petitioner raised the following contentions:

i. That Rule 39(1)(a) of the CGST Rules, insofar as it mandates distribution of ITC within the same month, is ultra vires Section 20 of the CGST Act as it introduces a mandatory time limitation, not contemplated by the CGST Act, 2017 (for short “Parent Act”). of the Parent Act, only prescribes the manner and conditions of distribution and does not empower the rule-making authority to impose any time limit or consequence of lapse.

ii. That eligibility to ITC is governed exclusively by Sections 16 and 17 of the Act, and once validly availed, such credit constitutes a vested and indefeasible right. Procedural provisions relating to distribution by an ISD cannot operate to extinguish or invalidate such substantive entitlement, particularly in the absence of any dispute regarding eligibility or any allegation of revenue loss.

iii. In arguendo, even if Rule 39(1)(a) of the CGST Rules is taken, as it obtains today, it is required to be read as directory and not mandatory. The use of the expression “shall” in a procedural rule cannot be construed as mandatory where non- compliance causes no prejudice to the revenue and does not defeat the object of the statute, namely avoidance of cascading of taxes.

iv. That the impugned proceedings erroneously proceed on the assumption that the credit “available for distribution” is confined to the amount reflected in Form GSTR-6A. It is submitted that GSTR-6A is merely a system-generated, facilitative statement and cannot determine statutory entitlement or availability of ITC under the Act.

v