Pigmy Agents Are Employees, Commission Paid Them Not Subject To GST: Karnataka High Court

The Karnataka High Court on 8 April, held that banks engage pigmy (deposit collection) agents as employees, not independent service providers. Therefore, the commission paid to them does not attract Goods and Services Tax (GST).

A Bench comprising Justice M. Nagaprasanna allowed Karnataka Vikas Grameena Bank's writ petition and quashed all show cause notices issued by GST authorities under the reverse charge mechanism. He held:

“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…. 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.”

Karnataka Vikas Grameena Bank challenged the show cause notices that proposed GST under reverse charge on commission paid to pigmy agents. These proceedings arose after authorities conducted an inspection under Section 67 of the CGST Act, issued DRC-01A intimations, and issued show cause notices alleging that the bank had failed to discharge tax on commission for the relevant financial years.

The Department tried to classify pigmy agents as “business facilitators” and argued that Section 9(3) of the CGST Act made their services taxable. The bank countered that pigmy agents work under its supervision, the commission it pays constitutes wages, and their services fall outside GST under Schedule III.

The Court agreed with the bank, holding that the commission constitutes wages and does not serve as consideration for independent services. Justice Nagaprasanna noted that the bank exercises pervasive control over pigmy agents, who remain economically dependent on it, establishing a clear employer–employee relationship. He held that services rendered by pigmy agents fall squarely within Schedule III as services by an employee to an employer and therefore do not constitute a “supply” liable to GST.

The Bench further observed:

“The pigmy agents, in the present case, do not answer to the afore-quoted description. They are not intermediaries appointed under the Reserve Bank of India–sanctioned model. Their role is confined to collection of deposits under the Bank's pigmy deposit scheme and they do not undertake activities envisaged under the business facilitator or correspondent models. The attempt to artificially transpose pigmy agents into the category of business facilitators is, therefore, fundamentally flawed. It is a mischaracterization that cannot withstand judicial scrutiny.”

Accordingly, the Court rejected the Department's attempt to classify pigmy agents as business facilitators and allowed the petition.

For Petitioner: Senior Advocate, V. Raghuraman and Advocates, Shashank S. Hegde, C.R. Raghavendra and Bhanu Murthy J.S. 

For Respondent: AAG, G.M. Gangadhar and Advocate, M.B. Kanavi