The High Court of Karnataka ruled that services provided by pigmy agents to M/s. Karnataka Vikas Grameena Bank are akin to employment, and thus not subject to GST under Schedule III of the CGST Act. The court examined whether the commission paid to these agents should be treated as taxable under the reverse charge mechanism. Tax authorities had issued show cause notices, arguing that pigmy agents acted as business facilitators, thus making their services taxable.
The bank contended that pigmy agents were employees, as they operated under the bank's control, received remuneration similar to wages, and were subject to employment terms. The court found that these agents worked under the bank's supervision and economic dependence, with their commission comparable to wages, indicating an employer-employee relationship. Agreements showed elements such as fixed duties, security deposits, and disciplinary control, reinforcing the employment classification.
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The court referred to Section 7 and Schedule III of the CGST Act, which state that services by an employee to an employer are neither a supply of goods nor services, exempting them from GST. Furthermore, the court determined that pigmy agents did not meet the Reserve Bank of India's definition of business facilitators, rendering the tax authorities' classification incorrect and the show cause notices legally unsustainable.
Order Date - 08 April 2026
Parties: M/s. Karnataka Vikas Grameena Bank Vs Deputy Commissioner of Commercial Taxes, Assistant Commissioner of Commercial Taxes, Union of India and State of Karnataka
Facts -
- M/s. Karnataka Vikas Grameena Bank, a regional rural bank, was inspected by tax authorities, who alleged that GST was payable on commission paid to pigmy agents under reverse charge.
- The department issued multiple show cause notices claiming that pigmy agents act as business facilitators, making their services taxable.
- The Bank argued that pigmy agents are actually employees, as they work under control of the bank, receive wages-like remuneration, and are governed by employment terms.
- The Bank also challenged the validity of time-extension notifications for issuing such notices, along with denying GST liability altogether.
Issue -
- Whether GST is payable on commission paid to pigmy agents or whether they qualify as employees exempt under Schedule III?
Order -
- The Court relied on Supreme Court rulings to conclude that pigmy agents function under control, supervision, and economic dependence of the bank. Their commission is akin to wages and they perform duties integral to the bank’s business, establishing a clear employer-employee relationship.
- Agreements revealed features like fixed duties, security deposits, disciplinary control, minimum remuneration, and gratuity. These are classic indicators of employment rather than an independent contractor or business facilitator arrangement.
- As per Section 7 read with Schedule III of CGST Act, services by an employee to employer are neither supply of goods nor services. Hence, once classified as employees, GST cannot be levied on such payments.
- The Court held that pigmy agents do not fit RBI’s definition of business facilitators. Labeling them as such was incorrect, making the foundation of the show cause notices legally flawed and unsustainable.
