Gujarat HC Quashes Demand; ITC Allowed on Insurance for Stock & Premises.

Gujarat HC Quashes Demand; ITC Allowed on Insurance for Stock & Premises.

Issue

Whether Input Tax Credit (ITC) availed on insurance premiums for stock, plant & machinery, and business premises (under a Standard Fire and Special Perils Policy) can be denied by treating it as “motor vehicle insurance” under the blocked credit provisions of Section 17(5) of the CGST Act.

Facts

• Petitioner: Arraycom (India) Limited, a manufacturer of electronic materials registered under CGST/GGST.

• The Claim: The petitioner availed ITC on insurance premiums paid for policies covering stock-in-trade, factory premises, and plant & equipment. The policies provided coverage for risks like fire, earthquake, and special perils (STFI).

• The Denial: The GST department issued a Show Cause Notice (SCN) and subsequently passed an order disallowing this ITC.

• The Basis: The adjudicating authority treated these insurance services as falling under the blocked category of “insurance of motor vehicles” under Section 17(5), despite the policy documents clearly showing they covered non-motor assets.

• Consequence: The department confirmed the demand and initiated recovery by attaching the petitioner’s bank account.

• Procedural Lapse: The authority ignored the insurance schedules and policy documents submitted by the petitioner in their reply (Form DRC-06) which proved the nature of the asset insured.

Decision

• The Gujarat High Court ruled in favour of the assessee and quashed the assessment order (Form DRC-07) and the bank attachment.

• Factually Incorrect: The Court found the order to be “perverse” and contrary to the record. The insurance policy documents indisputably covered stock, building, and equipment, not motor vehicles.

• Scope of Section 17(5): The Court clarified that the restriction on ITC under Section 17(5) (specifically clause (ab)) regarding insurance services applies only to insurance related to motor vehicles, vessels, or aircraft.

• No Block on General Insurance: There is no provision in the GST Act that blocks ITC on general insurance taken for business assets like factories, warehouses, or inventory. Such expenditure is incurred in the “course or furtherance of business” and is fully eligible for credit under Section 16.

• Writ Maintainable: Despite the expiry of the statutory appeal period, the Court entertained the writ because the order suffered from a jurisdictional error—the officer had no authority to block credit on valid business expenses by misclassifying them.

Key Takeaways

• Asset Type Matters: The nature of the insured asset determines ITC eligibility.

  • Motor Vehicles: ITC on insurance is Blocked (Section 17(5)(ab)), unless used for specific eligible purposes (transport, training, etc.).

  • Business Assets (Building/Stock): ITC on insurance is Allowed.

• Read the Policy: Tax officers cannot ignore the actual terms of the insurance policy. Treating a “Standard Fire and Special Perils” policy as “Motor Vehicle Insurance” is a factual error that vitiates the demand.

• Jurisdictional Error: Disallowing eligible credit by factually misclassifying the service is considered an act “without jurisdiction,” allowing taxpayers to bypass the appellate route and approach the High Court directly.