Madras HC holds fulfilment of conditions under section 16(2) necessary before ITC is distributed by ISD

 This Tax Alert summarizes a recent ruling of the Madras High Court (HC), on the validity of Rule 39(1)(a) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) requiring an Input Service Distributor (ISD) to distribute input tax credit (ITC) in the same month in which it is available for distribution.

The key observations of the HC are:

• On a bare reading of the provisions contained in Section 16(2) of the Central Goods and Services Tax Act, 2017 (CGST Act), it is clear that no registered person shall be entitled to input tax credit (ITC) unless the conditions prescribed therein are fulfilled. Mere receipt of invoice does not entitle a person to claim ITC.
• The expression “the input tax credit available for distribution in a month” contained in Rule 39(1)(a) on rational, fair, and logical interpretation would only mean ITC available for distribution in a month upon fulfillment of all the conditions incorporated in Section 16(2).
• The requirement that distribution of credit shall be upon receipt of invoices does not mean that distribution has to take place even before the registered person is entitled to ITC.
• If the law is interpreted as above, Rule 39(1)(a) is not required to be declared ultra vires the enabling Act

Basis above, HC allowed the writ petition and held that ITC need not necessarily be distributed in the month in which invoice is received. It remanded the matter back to Revenue to be adjudicated on the basis of harmonious interpretation made by the Court.

Comments:

• This ruling provides clarity on the long standing issue surrounding ISD credit distribution timelines. By adopting a purposive and harmonious interpretation, the HC has avoided striking down delegated legislation while simultaneously curbing arbitrary administrative interpretation.
• In an earlier ruling, for the period prior to the amendment in Section 20, Telangana HC had struck down Rule 39(1)(a) to the extent it mandated ISDs to distribute ITC within the same month as the same was not backed by the CGST Act [(2026) 38 Centax 172].