By CA Surekha S Ahuja
Case: Arraycom India Ltd. v. State of Gujarat (Gujarat High Court, 13 November 2025)
The GST Department has issued an important advisory on 21 November 2025 following the Gujarat High Court decision in Arraycom India Ltd. The advisory corrects a recurring misunderstanding in audits and assessments regarding Input Tax Credit on insurance services.
The central principle now reaffirmed is that the restriction under section 17(5)(b) of the CGST Act applies exclusively to motor vehicle insurance and cannot be extended to insurance relating to stock in trade, plant and machinery, buildings, business premises, or other non motor assets.
Background and Facts
Arraycom India Ltd. is engaged in manufacturing of electronic materials, installation of solar power systems, and telecom system integration. For FY 2020-21, the company availed ITC on insurance policies covering stock in trade, manufacturing premises, plant and equipment, and risks under a standard fire and special perils policy.
Despite the policy documents clearly identifying the nature of coverage, the department issued DRC-01A and subsequently a show cause notice alleging that the ITC related to motor vehicle insurance and was blocked under section 17(5)(b). After considering the reply and documents in DRC-06, the adjudicating authority still confirmed the demand and initiated recovery by attaching the company’s cash credit account under section 79(1)(c).
During the proceedings, the State could not dispute that no motor vehicle was insured under the policies.
Issue Before the Court
Whether ITC on insurance of stock, building and premises, and equipment covered under a standard fire and special perils policy can be disallowed by treating it as motor vehicle insurance under section 17(5)(b).
Whether the consequent recovery initiated under section 79 was sustainable when the underlying disallowance was based on an incorrect factual premise.
Statutory Position under Section 17(5)(b)
Section 17(5)(b) blocks ITC only on
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Insurance of motor vehicles used for transportation of persons, and
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Repair, maintenance, or servicing relating to such motor vehicles.
The restriction does not extend to any other category of insurance.
Insurance for stock, inventory, industrial premises, plant and machinery, equipment, manufacturing infrastructure, or business risks is fully eligible for ITC as it is used in the course or furtherance of business.
The legislative intent behind a blocking provision is narrow and specific. Its application cannot be widened by interpretation.
Court’s Findings and Legal Reasoning
The High Court set aside the order on the following grounds.
Lack of factual basis
The insurance policies clearly covered stock, industrial premises, equipment, and risks such as earthquake and STFI. They did not include any motor vehicles. The adjudicating authority proceeded on a factual assumption unsupported by the record.
Misapplication of Section 17(5)(b)
Since the policies were not motor vehicle policies, the restriction under section 17(5)(b) had no application. Disallowing ITC on this basis amounted to an error of jurisdiction.
Ignoring documents furnished in DRC-06
The authority failed to consider relevant evidence submitted by the taxpayer. Findings based on non-existent facts were held to be arbitrary and unsustainable.
Maintainability of writ
Even though the appellate remedy had expired, the High Court intervened because the entire proceeding was founded on a factual mistake and resulted in illegal recovery.
Illegality of coercive recovery
Since the underlying tax demand itself had no legal basis, the attachment of the cash credit account under section 79 was quashed.
Departmental Advisory dated 21.11.2025: Key Clarifications
The GST advisory reiterates and operationalises the Court’s findings:
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The ITC restriction under section 17(5)(b) applies only to insurance of motor vehicles.
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Insurance relating to stock, plant and machinery, property, premises, equipment, and all non motor assets is fully eligible.
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Field officers should not treat standard fire, property damage, machinery breakdown, IAR, marine, or business risk policies as motor vehicle insurance.
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Objections and SCNs issued on the basis of misclassified insurance are not legally sustainable.
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Coercive recovery action is not permissible where the underlying demand is founded on incorrect facts.
Practical Implications for Businesses
Businesses should ensure the following:
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Maintain clear documentation of all insurance policies, schedules, and annexures specifying the assets covered.
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During audits and assessments, furnish complete policy details to avoid misclassification.
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Contest any SCN that attempts to invoke section 17(5)(b) for non motor insurance.
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Seek release of bank accounts if recovery has been initiated on a similar incorrect basis.
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Update GST compliance SOPs to distinguish clearly between motor vehicle insurance (restricted) and all other insurance services (eligible).
Conclusion
The Gujarat High Court and the GST advisory have now clarified the legal position with certainty. Input Tax Credit on insurance of stock, industrial assets, business premises, plant and machinery, and equipment is fully permissible. Section 17(5)(b) is a narrow restriction and is confined solely to motor vehicle insurance. Any contrary assessment, objection, or recovery action is without legal foundation.
