ITC denial on insurance premium quashed, policy not motor vehicle cover under s.17(5) CGST Act

HC held that ITC on insurance premium for stock in trade and business premises was wrongly disallowed by treating the policy as motor vehicle insurance under s.17(5) CGST Act. Examining the policies, HC found they covered stock, premises, STFI risk, earthquake, and manufacturing equipment, not motor vehicles. As the demand was based solely on this incorrect factual assumption and all other proposed additions were dropped, HC held the authority had improperly assumed jurisdiction to deny ITC. The impugned order and notice were quashed, and the petition was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether input tax credit on insurance premium paid for stock-in-trade and business premises could be denied by classifying it as motor vehicle insurance and invoking section 17(5) of the Central Goods and Services Tax Act, 2017.

1.2 Whether, despite expiry of the statutory period for appeal, the extraordinary writ jurisdiction could be invoked to set aside the demand and consequential bank attachment founded on a patently erroneous application of section 17(5) of the Central Goods and Services Tax Act, 2017.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Disallowance of input tax credit on insurance premium by invoking section 17(5) CGST Act

Legal framework

2.1 The Court referred to section 17(5) of the Central Goods and Services Tax Act, 2017, noting in particular that input tax credit is not available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons, and associated ineligible supplies.

Interpretation and reasoning

2.2 The Court examined the insurance policies produced on record and found they were "standard fire and special peril policies" covering stock and premises of the petitioner for STFI cover and earthquake, with the description of property referring to "Electronic Goods Manufacturing/Assembly" and manufacturing equipment, and not to any motor vehicle.

2.3 It noted that the demand confirmed by the department was solely on the basis that the insurance premium was treated as motor vehicle insurance and therefore as ineligible ITC under section 17(5), while all other proposed demands in the show cause notice were dropped.

2.4 The Court reproduced the adjudicating authority's findings where, despite the petitioner's categorical stand that no ITC was claimed on motor vehicle insurance or airline travel, the authority concluded that an "ineligible ITC of Motor Vehicle Insurance" had been availed from United India Insurance Company Limited and proceeded to raise demand under section 17(5) with interest and penalty.

2.5 From this, the Court found that the respondent authority had not considered the actual insurance policies or their contents, and had wrongly treated the insurance as motor vehicle insurance, contrary to the factual record.

2.6 The Court held that section 17(5) applied only where the input tax credit was in respect of motor vehicles as contemplated therein, which was not the case on the undisputed facts; the disallowance was thus based on an incorrect factual assumption and a misapplication of the statute.

Conclusions

2.7 Input tax credit on the insurance premium for stock-in-trade and business premises was lawfully availed and did not fall within the ineligible category under section 17(5) of the Central Goods and Services Tax Act, 2017.

2.8 The finding that the petitioner had availed "ineligible ITC of Motor Vehicle Insurance" was contrary to the record and unsustainable in law, rendering the disallowance and resultant demand liable to be quashed.

Issue 2 - Maintainability of writ petition and validity of recovery/attachment actions after lapse of appellate limitation

Interpretation and reasoning

2.9 The Court recorded that the statutory remedy of appeal under section 107 of the Central Goods and Services Tax Act had become time-barred, as both the normal limitation period and the maximum condonable extended period had elapsed before the petitioner could file an appeal.

2.10 It took note of the petitioner's grievance that, subsequent to the order in Form DRC-07, coercive recovery was initiated by issuing communication under section 79(1)(c) of the Act to the petitioner's bank, resulting in attachment and withholding of the disputed amount from the petitioner's account, without affording further hearing or considering the clarification regarding the nature of insurance.

2.11 The Court also noted that the respondent State did not controvert that section 17(5)(b) had been wrongly invoked by treating the subject insurance as motor vehicle insurance, although the policies were admittedly for stock and premises.

2.12 Emphasizing that the only surviving addition in the impugned order was the disallowance of ITC on insurance premium and that all other proposed additions were dropped, the Court held that the order was passed on incorrect and contrary-to-record facts, and that in such "glaring facts" the respondent could not have assumed jurisdiction to disallow ITC on an insurance policy that did not relate to motor vehicles.

2.13 On this basis, the Court considered it appropriate to entertain the writ petition notwithstanding the lapse of the appellate limitation, as the impugned order and consequential recovery were founded on a patent factual and legal error affecting the very assumption of jurisdiction to invoke section 17(5).

Conclusions

2.14 The Court exercised its writ jurisdiction under Articles 226/227 of the Constitution to intervene despite the expiry of the appellate remedy, in view of the manifestly erroneous and jurisdictionally flawed disallowance of ITC and consequential coercive recovery.

2.15 The impugned order under section 73 and the consequential notice/communication to the bank for recovery and attachment were quashed and set aside, and the rule was made absolute to that extent, with no order as to costs.

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