Justice M. Nagaprasanna, Karnataka High Court, Dharwad Bench
Services Of Pigmy Agents Rendered In Course Of Employment Not ‘Supply’ Under GST: Karnataka High Court Quashes Notices
|The Court rejected the attempt by the State tax authorities to characterise pigmy agents as “business facilitators”.
The Karnataka High Court, Dharwad Bench has held that services rendered by pigmy agents engaged by a bank constitute services in the course of an employer–employee relationship, and are therefore, excluded from the ambit of “supply” under the GST framework. Consequently, the Court ruled that no GST can be levied on commission paid to such agents, setting aside multiple show cause notices issued by tax authorities seeking to impose liability under the reverse charge mechanism.
Clarifying the scope of Schedule III of the Central Goods and Services Tax Act, 2017, the Court noted that services provided by an employee to an employer are statutorily treated as neither a supply of goods nor services. It rejected the Revenue’s attempt to characterise pigmy agents as “business facilitators”, holding that such reclassification was inconsistent with both the factual matrix and the governing legal framework, thereby vitiating the foundation of the impugned proceedings.
Justice M. Nagaprasanna observed, “The relationship that thus emerges is not one of detached contractual engagement, but one imbued with the attributes of a master-servant nexus.…the essence of relationship is control, supervision and economic dependence. When these elements coalesce, the relationship assumes the character of employment. Once this conclusion is reached, the inevitable corollary follows, services rendered by such agents falls squarely within the exemption carved out under Sl.No.1 of Schedule III to the Act. Such services, being in the course of employment, are insulated from levy of GST”.
Senior Advocate V. Raghuraman appeared for the petitioner and G.M. Gangadhar, Additional Advocate General appeared for the respondent.
The petitioner, M/s. Karnataka Vikas Grameena Bank, a Regional Rural Bank, was subjected to an inspection in June 2022 by commercial tax authorities. Following the inspection, the respondents issued show-cause notices alleging short payment of GST. The primary contention of the department was that pigmy agents acted as business facilitators, making the bank liable to pay GST on the commissions paid to them under the reverse charge mechanism.
The bank initially replied to the tax department, contending that pigmy agents were employees and thus exempt. Finding the reply unsatisfactory, the Deputy and Assistant Commissioners of Commercial Taxes issued formal show-cause notices and Form DRC-01A between 2023 and 2024. The petitioner subsequently filed a writ petition under Articles 226 and 227 of the Constitution of India to quash these notices.
The Court relied on the "control test" established by the Supreme Court in Sushilaben Indravadan Gandhi v. New India Assurance Company Limited (2021) 7 SCC 151, noting that the bank exercised pervasive supervision over the agents’ daily functions, including mandatory daily deposits and clerical work. It observed that the agents were required to maintain security deposits, were assured minimum "fall-back wages", and were entitled to benefits like gratuity, all hallmarks of an employer-employee relationship.
“…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…”, the Bench noted .
“The legislative intent, in terms of sub-clause (1) of Schedule-III clearly holds that the services rendered by an employee to the employer in the course of, or in relation to, his employment are placed outside the ambit of ‘supply’ and, therefore, exempt from GST. Schedule III in unambiguous terms, renders this exemption. Although the GST enactments do not define the expressions employer and employee, their contours have been sculpted through judicial pronouncements…”, the Bench further noted.
Accordingly, the Court held that the services rendered fell squarely within Sl. No. 1 of Schedule III of the CGST Act, which excludes employee services from GST. The Court further rejected the state's classification of these agents as "business facilitators", noting they did not fit the regulatory definition of intermediaries under RBI guidelines.
Cause Title: M/s. Karnataka Vikas Grameena Bank v. Deputy Commissioner of Commercial Taxes (Enforcement-2) & Others Writ Petition No. 100806 OF 2024 (T - RES)
Appearances:
Petitioner: V. Raghuraman, Senior Advocate, Shashank S. Hegde, C.R. Raghavendra And Bhanu Murthy J.S., Advocates.
Respondents: G.M. Gangadhar, Additional Advocate General, M.B. Kanavi, Advocate.