HC quashes Order charging interest and penalty as payment made under protest by the Taxpayer cannot be construed as admission of liability

The Hon’ble Himachal Pradesh High Court in the case of Shyama Power India Ltd. Versus State of H.P. & Ors. - 2025 (6) TMI 1571 - HIMACHAL PRADESH HIGH COURT quashed the Impugned Order and held that reversal of Input Tax Credit (“ITC”) under protest cannot be treated as admission of liability and interest & penalty cannot be imposed on that basis.

Facts:

Shyama Power India Ltd. ('the Petitioner') is a company with its registered office in Nagaland and is engaged in providing services of survey, design, and construction of transmission lines and sub-stations for hydro-electric and rural electrification projects. These services fall under Chapter 99 of the GST Tariff with Services Accounting Codes 9954, 9987 etc.

An audit under Section 65 of the Himachal Pradesh Goods and Services Tax Act, 2017 (“HPGST Act”) was initiated by the Deputy Commissioner, State Taxes & Excise, Shimla for the financial years 2017–2018 and 2018–2019, and a notice in Form ADT-01 was issued. Subsequently, an audit memo was issued alleging wrongful availment of ITC amounting to ₹1.11 crore based on purchases from various suppliers.

In response to the said memo and audit observation, the petitioner submitted a detailed reply. However, discrepancy notice was issued under Rule 101(4) of the Himachal Pradesh Goods and Services Tax Rules, 2017 (“HPGST Rules”) pointing out the alleged discrepancies with suspected amount of tax evasion to the tune of Rs. 1,11,45,134/-. Further, it was directed to the petitioner to reverse the alleged wrong availed ITC along with interest and penalty under Section 74.

The petitioner filed a detailed response along with which it annexed copies of affidavits of transporter verifying on oath the factum of transportation of goods from Delhi and its delivery at Totu, Shimla. However, despite this, the petitioner received final audit report on March 15, 2023, from respondents No. 2 and 3. It also received Audit Report in Form ADT-02, under Section 65(6) on March 25, 2023, whereby it has been confirmed that no short payment of tax as well as no SGST, CGST or CESS was payable.

The Petitioner reversed the ITC under protestthrough Form DRC-03 dated March 31, 2023. However, the Commissioner, State Taxes and Excise (“Respondent No. 4”) passed an Order dated December 2, 2023, under Section 74, raising a demand for interest and penalty without determining the tax demand on account of disallowance of allegedly wrongly availed ITC and by treating the amount deposited under protest to be an admitted liability.

The petitioner accordingly prepared appeal but the portal only allowed to dispute penalty and interest as aforesaid with no option to challenge the basic demand of Rs. 1,11,45,134/- that had been demanded and even deposited by the petitioner under protest.

Therefore, the petitioner was not able to file appeal against the main demand. The petitioner was left with no other option but to submit the rectification application under Section 161 of the HPGST Act, 2017, whereby a request was made to rectify the order dated December 2, 2023, passed under Section 74 restricting the liability only to the extent of interest and penalty. The petitioner categorically pleaded that the amount in question was deposited under protest without admitting the liability. The petitioner further stated in the application that the appeal could not be filed in the case of nil basic demand.

Respondent No. 4 refused to rectify order dated December 2, 2023 on the ground that there was no mismatch between SCN dated September 30, 2023, and DRC-07 dated December 2, 2023. Respondent No. 4 did not address the basic point raised by the petitioner in rectification application questioning the creation of tax liability so as to enable the petitioner to agitate before the Appellate Authority.

Aggrieved, the Petitioner approached the Hon’ble High Court seeking quashing of the order and issuance of a revised DRC-07 reflecting only the disputed tax amount to enable filing of an appeal.

Issue:

Whether reversal of ITC “under protest” can be treated as an admission of tax liability to justify imposition of interest and penalty under Section 74?

Held:

The Hon’ble Himachal Pradesh High Court in Shyama Power India Ltd. Versus State of H.P. & Ors. - 2025 (6) TMI 1571 - HIMACHAL PRADESH HIGH COURTheld as under:

• Observed that, a payment made “under protest” cannot be construed as an admission of liability. Such a payment inherently carries the taxpayer’s right to dispute the demand.
• Held that, treating reversal of ITC “under protest” as voluntary payment without any independent inquiry or corroborative evidence violates the statutory framework under Section 74.
• Noted that, the necessary corollary of deposit “under protest” is that the amount towards the alleged liability has been deposited without admitting the liability and inherent therein is his right to challenge the order.
• Accordingly, the Impugned Order dated December 2, 2023, charging interest of Rs. 1,32,34,923/- and levying penalty of Rs. 1,11,45,134/- were quashed and set aside.
• Further directed that, the Commissioner shall issue a fresh DRC-07 reflecting only the disputed tax amount of ₹1.11 crore so that the Petitioner may pursue statutory appeal remedies under the GST law.

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