Your question here is an important one and quite subtle. Regarding Dorje Shugden, there are two different ways of perceiving him. One is according to the ordinary appearance of Tibetan people, and the other is according to the appearance of the qualified practitioner. These two appearances came originally from the 5th Dalai Lama. First Dorje Shugden appeared to him as a harmful spirit which he tried to destroy, (albeit unsuccessfully), and because of this many people came to view Dorje Shugden as a harmful spirit. In this way the ordinary appearance of Dorje Shugden developed. Later, the 5th Dalai Lama realized that he had misunderstood the real nature of Dorje Shugden, and he then began to engage in the practice, and composed prayers to him. In these prayers he invites Dorje Shugden to come from Chöku, the Dharmakaya, clearly indicating that Dorje Shugden is an enlightened being. Since that time the appearance of the qualified practitioner developed.
Later Lamas such as Tagphu Dorje Chang and Je Phabongkhapa perceived Dorje Shugden as a manifestation of Buddha Manjushri. These Lamas realized that Dorje Shugden is the same mental continuum as Duldzin Dragpa Gyaltsen. Duldzin Dragpa Gyaltsen is the same mental continuum as Sakya Pandita who is a manifestation of Manjushri. For followers of Je Phabongkhapa and Trijang Rinpoche, including myself, it is impossible that Duldzin Dragpa Gyaltsen, the manifestation of Manjushri could be reborn in an uncontrolled way as a worldly spirit. Not only Gelugpa Lamas believe this, some Sakya Lamas also believe that Dorje Shugden is a holy being. In the book by Dhongtog Tulku Tenpai Gyaltsen he says that Dorje Shugden cannot be a worldly spirit because he is a Bodhisattva. He says that Dorje Shugden is a protector Deity of the Sakya tradition. Previously the Sakya monastery in Rajpur, India always used to practise Dorje Shugden puja, but maybe nowadays that has changed.
Although Je Phabongkhapa’s view is that Dorje Shugden is an enlightened being, the 13th Dalai Lama, using his political power, did not allow Je Phabongkhapa to publicize this view, so he had to accept the lower position of Dorje Shugden. Therefore, at that time Gelugpa practitioners lost their freedom to say publicly that Dorje Shugden is an enlightened being. To the majority of ordinary Tibetans Dorje Shugden appeared as a worldly spirit. At that time there were many stories and rumours about how Dorje Shugden would help some people, harm others and so forth, all according to the ordinary appearance of the majority of people, most of whom were very superstitious. The stories mentioned in Zemey Tulku’s ‘Yellow Book’ are just superstitions. He was not necessarily expressing his own view in this book, but telling about many different superstitions according to ordinary people’s appearance of Dorje Shugden. Of course the view of Dorje Shugden as a harmful spirit was neither Trijang Rinpoche’s view nor was it Je Phabongkapa’s. (Geshe Kelsang Gyatso, talk.religion.buddhism, 19 December 1997)
Some Nyingmapas have doubts about whether Dorje Shugden is harmful or not. They have reasons. The Fifth Dalai Lama (1617-1682) created this problem. At that time, in Drepung monastery there were two groups, called the Upper House and the Lower House. The Fifth Dalai Lama was in the Lower House, and a lama called (Ngatrul) Drakpa Gyaltsen, lived in the Upper House. Both these lamas were very famous, and there was rivalry between their followers. In particular, the Fifth Dalai Lama’s ministers opposed Drakpa Gyaltsen and according to many history books, and even some prayer books, they killed Drakpa Gyaltsen. The Fifth Dalai Lama then thought that Drakpa Gyaltsen had appeared as Dorje Shugden. Initially the Fifth Dalai Lama was afraid that Dorje Shugden was a harmful spirit trying to destroy him. Then he requested some Nyingma lamas to destroy Dorje Shugden. Then later, after realizing that he had made a mistake, the Fifth Dalai Lama wrote a special prayer to Dorje Shugden of apology and confession. Then, after Drakpa Gyaltsen passed away he appeared in the form of Dorje Shugden. Because the lamas in Drakpa Gyaltsen’s lineage of incarnations are manifestations of the wisdom Buddha Manjushri, and because Drakpa Gyaltsen appeared in the form of Dorje Shugden, we believe without doubt that the very nature of Dorje Shugden is that of a wisdom Buddha. (Geshe Kelsang Gyatso, An Interview With Geshe Kelsang Gyatso, Tricycle: the Buddhist Review, No. 27, Spring 1998, p. 72)