Facts of the Case:

In this case, the petitioner is engaged in multiple business verticals including (i) manufacturing of thick-film materials, (ii) solar power system installation, and (iii) system integration in telecommunications and electronics. For FY 2020-21, the petitioner duly filed GST returns and availed Input Tax Credit (ITC) on various inward supplies, including insurance premium covering stock-in-trade and business premises, specifically described as “electronic goods manufacturing/assembly. 

The department issued an intimation in Form DRC-01A under Section 73(3), followed by a show cause notice. The petitioner filed a detailed reply enclosing the policy documents and invoices, asserting that the insurance premium pertained not to motor vehicles, but to stock and premises, and therefore ITC was eligible. The department confirmed demand alleging that the insurance premium related to motor vehicle insurance and was blocked under Section 17(5)(b) of the CGST Act. 

Thereafter, the department initiated coercive recovery under Section 79(1)(c) by attaching the petitioner’s cash credit account. The petitioner argued that Section 17(5)(b) applies only where ITC is claimed on motor vehicle insurance, and the department had incorrectly treated a stock and building insurance policy as motor vehicle insurance. The State’s counsel was unable to dispute that the insurance policies in question did not pertain to motor vehicles.

Issue:

Whether ITC on insurance premium paid for stock-in-trade and business premises, covered under a standard fire and special perils policy, can be disallowed under Section 17(5)(b) of the CGST Act by treating it as motor vehicle insurance, and whether the consequent coercive recovery under Section 79(1)(c) was legally sustainable.

Held that:

The Gujarat High Court held that Section 17(5)(b) applies only to cases where the ITC is claimed in relation to motor vehicles, and the insurance premium must relate to a motor vehicle policy to attract this restriction. On examining the insurance policies annexed by the petitioner, the Court found unequivocally that the policies were not motor vehicle insurance policies, but covered stock, premises, manufacturing equipment, and specific natural-peril risks such as STFI and earthquakes. The department had therefore proceeded on an incorrect factual premise and misapplied Section 17(5)(b).

The Court observed that the adjudicating authority had ignored the policy documents submitted with the reply in DRC-06 and had mechanically classified the insurance as motor vehicle insurance without any supporting material. Such findings were held to be contrary to the record and unsustainable in law. The Court emphasized that when a statutory authority bases its decision on non-existent facts, the resultant order is liable to be interfered with in writ jurisdiction despite the availability (and expiry) of an appellate remedy.

Since the impugned disallowance was based solely on an erroneous classification and all other proposed additions in the SCN had been dropped, the Court held that the adjudicating authority could not have assumed jurisdiction to disallow ITC on insurance premiums unrelated to motor vehicles.

Accordingly, the Court quashed and set aside the order  and the recovery/attachment notice. 

Case Name: Arraycom (India) Ltd. v. State of Gujarat dated 13.11.2025

To read the complete judgement 2025 Taxo.online 3021