Recently, the Karnataka High Court held that services rendered by pigmy agents of a bank are not liable to GST, quashing multiple show cause notices issued under the CGST and KGST regimes. The Court made a significant observation that once an employer-employee relationship is established, such services fall outside the ambit of “supply,” emphasising that mischaracterisation of employees as business facilitators cannot be used to impose tax liability.
Brief facts:
The case arose from an inspection conducted under Section 67 of the CGST Act, 2017, at the Petitioner bank’s premises, leading to initiation of proceedings under Section 73 of the CGST Act, 2017, for alleged non-payment of GST on commissions paid to pigmy agents. Show cause notices were issued through Form DRC-01 for multiple financial years, alleging that such payments attracted tax under the reverse charge mechanism in terms of Section 9(3) of the CGST Act, 2017. The Petitioner challenged these notices along with notifications extending the limitation under Section 168A of the CGST Act, 2017, contending that pigmy agents were employees and not independent service providers. The dispute thus crystallised into a core issue: whether commission paid to pigmy agents constitutes a taxable supply or falls within the exclusion under Schedule III of the CGST Act.
Contentions of the Petitioner:
The Petitioner bank argued that pigmy agents are, in substance, employees, and therefore, services rendered by them are exempt from GST under Section 7(2)(a) read with Schedule III of the CGST Act. The Counsel contended that the agents satisfy the test of “workmen” under the Industrial Disputes Act, as recognised by the Supreme Court in Indian Banks Association v. Workmen of Syndicate Bank. The bank highlighted elements such as control, supervision, fixed remuneration, gratuity, and deduction of TDS to establish an employer-employee relationship. The Petitioner further argued that pigmy agents do not fall within the definition of “business facilitators” under the relevant notification, and therefore, the reverse charge mechanism is inapplicable.
Contentions of the Respondent:
The State contended that pigmy agents function as independent intermediaries or business facilitators, rendering services to the bank for consideration in the form of commission. The Counsel argued that GST is payable under Section 9(3) of the CGST Act, 2017. On a reverse charge basis, as the relationship is one of principal-agent rather than employer-employee. The State further submitted that the agents facilitate banking operations, including deposit collection and recovery activities, thereby falling within the scope of taxable services. The Respondent contended that the Petitioner had an alternative remedy under Section 107 of the CGST Act and that the show cause notices were validly issued.
Observation of the Court:
Justice M. Nagaprasanna observed that “The show cause notices issued by the respondent proceed on an erroneous premise, making an attempt to describe the Pigmy agents as business facilitators. The foundation of the show cause notice, in the light of the aforesaid narration, is itself infirm, the superstructure in the form of the show cause notice, built upon it, would tumble down. Pigmy agents employed by the petitioner, in the light of the aforesaid reasons, can never be treated as business facilitators for them to be coming under the GST and the services rendered by these pigmy agents are in the course of their employment with the Bank as pigmy agents, which is clearly exempt from levy of GST in terms of Sl.No.1 of Schedule III quoted supra.”
The Court observed that the determination of the true nature of engagement of pigmy agents cannot rest merely on nomenclature such as “agent” or “commission-based worker,” but must be assessed through established legal tests governing employer-employee relationships. It emphasised that the presence of control, supervision, and accountability are decisive indicator. The Bench noted that pigmy agents operate under the directions of the bank, are required to follow prescribed procedures, and remain answerable for collections and compliance. Such features, in its view, are incompatible with an independent contractual relationship and instead point unmistakably towards a master-servant nexus.
The Bench held that the jurisprudence laid down by the Supreme Court consistently recognises that economic dependence and integration into the business of the employer are crucial factors in identifying employment. It highlighted that pigmy agents are not running independent businesses but are integrally linked to the functioning of the bank. Their remuneration, though termed as commission, is structured and regulated in a manner akin to wages. The Court thus concluded that the relationship is one of employment, not of principal-agent or independent service provider.
The Court emphasised that once the existence of an employer-employee relationship is established, the statutory scheme under Section 7(2)(a) read with Schedule III of the CGST Act becomes determinative. It clarified that services rendered by an employee in the course of employment are expressly excluded from the definition of “supply” and therefore fall outside the purview of GST. The Bench emphasised that this exclusion is absolute and leaves no scope for reinterpretation based on administrative convenience or revenue considerations.
The Bench observed that the attempt of the tax authorities to classify pigmy agents as “business facilitators” is fundamentally misconceived. It noted that such classification must strictly conform to the regulatory framework prescribed by the Reserve Bank of India, which contemplates specific categories of intermediaries. The Court found that pigmy agents do not satisfy these criteria and are engaged solely for deposit collection under the bank’s internal schemes. It held that the recharacterisation of such employees as facilitators was an artificial construct devised to bring them within the tax net.
The Court held that the show cause notices issued to the petitioner were vitiated at their very foundation, as they proceeded on an incorrect legal premise regarding the nature of the relationship. It observed that when the foundational assumption is flawed, the entire proceeding built upon it cannot survive. The Bench further clarified that such jurisdictional errors cannot be cured through adjudication and warrant immediate interference under writ jurisdiction.
The decision of the Court:
In light of the foregoing discussion, the Court allowed the writ petition and quashed all impugned show cause notices, holding that the petitioner bank is not liable to pay GST on payments made to pigmy agents. It ruled that where the relationship between parties is one of employer and employee, services rendered fall outside the scope of “supply” under the CGST Act by virtue of Schedule III.
Case Title: M/S. Karnataka Vikas Grameena Bank Belgaum Road Vs. Deputy Commissioner of Commercial Taxes (Enforcement-2) Navanagar, & Ors
Case No.: Writ Petition No.100806 Of 2024
Coram: Hon'ble Mr. Justice M. Nagaprasanna
Advocate for the Petitioner: Sr.Adv. V.Raghuraman, Adv. Shashank S.Hegde, Adv. C.R.Raghavendra, Adv. Bhanu Murthy J.S.
Advocate for the Respondent: AAG G.M.Gangadhar, Adv. M.B.Kanavi
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