The Karnataka High Court (Dharwad Bench) has held that services rendered by pigmy agents are in the course of their employment with the Bank as pigmy agents, which is clearly exempt from the levy of GST in terms of Sl.No.1 of Schedule III of the CGST Act. The Court clarified that pigmy agents employed by the petitioner bank can never be treated as business facilitators for them to be coming under the GST. Hence, the impugned show cause notices are rendered devoid of jurisdiction and are to be obliterated.
A Single Judge Bench of Justice M. Nagaprasanna observed that the question as to the true nature of engagement of deposit collectors/pigmy agents is settled by the Apex Court in Indian Banks Association v. Workmen of Syndicate Bank, which held that the commission earned by deposit collectors partakes the character of ‘wages’ under Section 2(rr) of the Industrial Disputes Act, 1947. Such collectors were held to be workmen subject to the pervasive control and supervision of the Bank, establishing a relationship imbued with the attributes of a master-servant nexus rather than a detached contractual engagement.
The Bench pointed out that Section 7(2)(a) read with Schedule III of the CGST Act mandates that services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services, and are exempt from GST. The agreement governing the engagement of pigmy agents reveals pervasive control by the bank, maintenance of security deposits, assured minimum remuneration, entitlement to gratuity, and disengagement regulated by notice requirements, which are hallmarks of employment.
Emphasising that the essence of the relationship is control, supervision, and economic dependence, the Bench opined that the State’s attempt to cloak pigmy agents as ‘business facilitators’ under the Notification dated 28-06-2017 is fundamentally flawed, as a business facilitator contemplates an intermediary appointed under models recognized and regulated by the Reserve Bank of India.
Pigmy agents do not answer to this description as their role is confined to the collection of deposits under the Bank’s pigmy deposit scheme and they do not undertake activities envisaged under the business facilitator or correspondent models. Thus, the show cause notices proceed on an erroneous premise, making an attempt to describe the pigmy agents as business facilitators, rendering the foundation infirm, added the Bench.
Briefly, the petitioner is a Regional Rural Bank established under the provisions of the Regional Rural Banks Act, 1976. An inspection was conducted by the 1st respondent in 2022 in the premises of the petitioner invoking power under Section 67 of the Central Goods and Services Tax Act, 2017 to verify tax compliance. A report of the inspection was drawn and placed before the Joint Commissioner of Commercial Taxes to initiate proceedings under Section 73 of the CGST Act for short payment or no payment of tax.
Thereafter in 2023, Form DRC-01A was issued for the financial year 2018-19 alleging that the petitioner failed to deposit tax under the reverse charge mechanism on the commission paid to the pigmy agents. Similar forms were issued for the financial years 2019-20 and 2021-22.
The petitioner replied contending that pigmy agents are employees of the Bank, no GST can be levied on the salary paid to them, and they do not come under the ambit of business facilitators to attract reverse charge levy. Finding the reply unsatisfactory, the respondents issued show cause notices to the Bank. The petitioner challenged these notices and the notification extending the time limit for issuing show cause notices under Section 73 of the KGST or CGST Acts as ultra vires of Section 168A of the CGST Act.
Appearances:
Senior Advocate V. Raghuraman, along with Advocates Shashank S. Hegde, C.R. Raghavendra, and Bhanu Murthy J.S., for the Petitioner/ Taxpayer
AAG G.M. Gangadhar and Advocate M.B. Kanavi, for the Respondent/ Revenue
