No, the Hon’ble Himachal Pradesh High Court held that payment made “under protest” cannot be treated as an admission of liability, and therefore, imposition of interest and penalty based on such payment is illegal. In this case, the petitioner, a registered entity engaged in construction of transmission lines, was subjected to audit under Section 65 for FY 2017–18 and 2018–19. The audit memo alleged wrongful ITC claim of Rs 1.11 crores in respect of purchases from three suppliers. Despite furnishing reconciliations, bank statements, purchase orders, and affidavits from transporters, the department directed the petitioner to reverse the credit. Under continuous departmental pressure, the petitioner deposited the ITC amount via DRC-03 on 31.03.2023—explicitly under protest. However, the adjudicating authority passed an order under Section 74 on 02.12.2023 levying Rs 1.32 crores as interest and Rs 1.11 crores as penalty, treating the payment as an admitted liability. The High Court noted that payment “under protest” by its very nature signifies non-admission of liability and preserves the taxpayer’s right to challenge. The Hon’ble Court held that the department erred by failing to investigate the alleged fake transactions or verify the supporting documents and had instead mechanically treated DRC-01 summary as sufficient proof of wrongdoing. It further noted that the portal did not allow filing appeal against the principal tax demand once it was treated as paid, thereby denying the petitioner the statutory remedy. The impugned order was quashed, and the department was directed to issue a fresh DRC-07 showing only the disputed ITC amount, thereby enabling the petitioner to file appeal.
Author’s Comments:
“Under Protest” as defined in Black’s Law Dictionary, Tenth Edition, Page 1419:
“Under protest” means:
(3) A formal statement, usually in writing, disputing a debt’s legality or validity but agreeing to make payment while reserving the right to recover the amount at a later time. The disputed debt is described as ‘under protest’.
(4) In tax law: A taxpayer’s statement to the collecting officer that payment is being made unwillingly because the taxpayer believes the tax to be invalid.
This definition makes it abundantly clear that such payments preserve the right to litigate, and cannot be equated with voluntary compliance. In the present case, the department mechanically proceeded with penalty and interest solely on the strength of a DRC-03 payment made under protest, completely ignoring the protest qualification and bypassing the essential legal requirement of establishing liability through proper adjudication.
Additionally, two grave infirmities in the proceedings emerge:
1-Penalty and Interest Without Valid Tax Demand:A notice issued solely demanding interest or penalty, without a corresponding tax demand, is inherently defective. Notably, in Central Excise (Section 11A of the Central Excise Act) and Service Tax (Section 73(1) of the Finance Act, 1994), the ‘deposit-demand-appropriation’ approach was upheld, and the same principle applies to GST. Any deviation, where only interest & penalty is demanded, would be unsustainable and legally flawed under the GST regime.
2-Summary of SCN (DRC-01) ≠ Proper Show Cause Notice:Proceeding with the adjudication based solely on DRC-01 (Summary of SCN) without the actual SCN is legally unsustainable and renders the demand invalid.
GST Case Law Shyama Power India Ltd. v. State of H.P. & Ors.
Citation-2025 TAXONATION 1526 (HIMACHAL PRADESH)
CA Ritesh Arora(Click here to read full case law)
SUBSCRIBE GST E-LIBRARY (INDIA'S HIGHEST GST CASE LAW DATA)
FOR MORE UPDATE ON GST/ IT JOIN OUR FREE WHATSAPP GROUP BY CLICKING ON THIS LINK https://chat.whatsapp.com/C8VB6F6VHme3A061UDQKhj
