Entry-Tax Interest & Penalty From Employer's Delay Cannot Be Shifted To Contractor In Arbitration: HP High Court

Justice Ajay Mohan Goel in an order dated December 29, 2025, dismissed a challenged filed by Himachal Pradesh State Electricity Board Ltd (HPSEBL) under Section 34 of the Arbitration Act, seeking to set aside an award passed in favour of HCL Infotech.

The dispute arose from a contract awarded on August 30, 2010, under which HCL was engaged to supply IT hardware, software and related services for data centres, disaster recovery centres and field offices of HPSEBL across multiple towns in Himachal Pradesh. The contractual terms and the letter of award stipulated that entry tax on goods supplied was to be deducted by HSPEBL from the supplier's invoices and deposited with the tax authorities under the state electricity board's registration.

HCL furnished details of the entry tax on February 23, 2015. Despite this, HPSEBL did not deduct and deposit tax within the prescribed time. The Deputy and Taxation Commissioner on April 8, 2015, held HPSEBL liable as the “dealer” responsible for payment of entry tax. This finding was later affirmed by the Excise and Taxation Commissioner in 2017.

HPSEBL ultimately deducted and deposited the principal entry tax amount of Rs. 2.28 crores on June 30, 2017. However, due to persistent delay, tax authorities-imposed interest and penalty aggregating to Rs. 3.55 crores. HPSEBL sought to recover this amount from HCL, prompting arbitration.

The sole arbitrator in an award dated October 10, 2018, rejected HCL's claim for reimbursement of the entry tax but restrained the state electricity board from recovering the interest and penalty. The arbitrator held that HPSEBL was contractually authorised to deduct the tax but failed to do so despite having all necessary information, and that consequences of such delay could not be shifted to the contractor.

Challenging the award, HPSEBL argued that the arbitrator ignored contractual clauses and that the award was contrary to public policy.

The court rejected these arguments and noted the tribunal had consciously examined the contract, correspondence and statutory orders. It emphasized that the arbitrator had not rewritten the contract, but had merely fixed responsibility for statutory consequences arising from delay. The court observed:

“Therefore, in light of the above observations, as this Court sees no reason to interfere with the findings returned by the learned Arbitrator and as the petitioner could not demonstrate that the Award was against the Public Policy of India, this petition is dismissed.”

The court made it clear that an arbitral award settles only those liabilities which are legally and contractually attributable to a party. Where interest and penalty arise solely due to the employer's own inaction, such liabilities cannot be imposed on the contractor through deductions from pending bills.

Holding that the award was not against public policy, the court upheld the award and concluded that HPSEBL could not offload the entry tax interest and penalty burden onto HCL Infotech.

Case Title: Himachal Pradesh State Electricity Board Ltd & another vs HCL Infotech Ltd

Case Number: CARBC No. 142 of 2025

Case Citation: 2026 LLBiz HC (HPH) 2

For Petitioners: Senior Advocate J.S. Bhogal with Advocates Stish Sharma, Srishti Verma

For Respondent: Senior Advocate Suneet Goel with Advocates Vivek Negi, Rajesh Kumar