Karnataka High Court
M/S. Karnataka Vikas Grameena Bank vs Deputy Commissioner Of Commercial on 8 April, 2026
Author: M.Nagaprasanna
Bench: M.Nagaprasanna
1
Reserved on : 09.01.2026
Pronounced on : 08.04.2026
R
IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH
DATED THIS THE 08TH DAY OF APRIL, 2026
BEFORE
THE HON'BLE MR. JUSTICE M. NAGAPRASANNA
WRIT PETITION No.100806 OF 2024 (T - RES)
BETWEEN:
M/S. KARNATAKA VIKAS GRAMEENA BANK
BELGAUM ROAD,
DHARWAD - 580 008
(REPRESENTED BY
RAMACHANDRA KAMBLE
AGED ABOUT 56 YEARS,
S/O. TUKARAM)
... PETITIONER
(BY SRI V.RAGHURAMAN, SR.ADVOCATE FOR
SRI SHASHANK S.HEGDE,
SRI C.R.RAGHAVENDRA AND
SRI BHANU MURTHY J.S., ADVOCATES)
AND:
1. DEPUTY COMMISSIONER OF COMMERCIAL
TAXES (ENFORCEMENT-2)
NAVANAGAR,
HUBBALLI - 580 025.
2. ASSISTANT COMMISSIONER OF
COMMERCIAL TAXES (AUDIT-1)
NAVANAGAR,
2
HUBBALLI.
3. UNION OF INDIA
MINISTRY OF FINANCE
REPRESENTED BY SECRETARY
NORTH BLOCK,
NEW DELHI - 110 001.
4. STATE OF KARNATAKA
REPRESENTED BY SECRETARY
FINANCE DEPARTMENT
VIDHANA SOUDHA,
BENGALURU - 560 001.
... RESPONDENTS
(BY SRI G.M.GANGADHAR, AAG FOR R-1, R-2 AND R-4;
SRI M.B.KANAVI, ADVOCATE FOR R-3)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND
227 OF THE CONSTITUTION OF INDIA PRAYING TO (A) ISSUE A
WRIT OF CERTIORARI OR ANY OTHER WRIT OR DIRECTION TO
QUASH IMPUGNED SCN NO. DCCT (ENF-2)/HBL/SCN- 03/2023-24
DATED 27.12.2023, ISSUED BY RESPONDENT NO. 1, ENCLOSED AS
ANNEXURE A, FOR THE REASONS STATED IN THE GROUNDS; (B)
ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR
DIRECTION TO QUASH IMPUGNED SCN NO. ACCT/AUDIT-
1/HBL/GST/DRC-1/23-24/B-337 DATED 28.12.2023 ALONG WITH
FORM DRC-01, ISSUED BY RESPONDENT NO. 2, ENCLOSED AS
ANNEXURE B, FOR THE REASONS STATED IN THE GROUNDS. (C)
ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR
DIRECTION TO QUASH IMPUGNED SCN NO. ACCT/AUDIT-
1/HBL/GST/DRC-1/23-24/B-338 DATED 28.12.2023 ALONG WITH
FORM DRC-01, ISSUED BY RESPONDENT NO. 2, ENCLOSED AS
ANNEXURE C, FOR THE REASONS STATED IN THE GROUNDS. (D)
ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR
DIRECTION TO QUASH IMPUGNED SCN ACCT/AUDIT-
1/HBL/GST/DRC- 1/23-24/B-339 DATED 28.12.2023 ALONG WITH
3
FORM DRC-01, ISSUED BY RESPONDENT NO. 2, ENCLOSED AS
ANNEXURE D, FOR THE REASONS STATED IN THE GROUNDS. (E)
ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR
DIRECTION OR ORDER TO DECLARE NOTIFICATION NO. 9/2023-CT
DATED 31 MARCH 2023, ISSUED BY RESPONDENT NO. 3,
ENCLOSED AS ANNEXURE E, AS ULTRA-VIRES SECTION 168A OF
CGST ACT, 2017 FOR THE REASONS STATED IN THE GROUNDS; (F)
ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR
DIRECTION OR ORDER TO DECLARE NOTIFICATION NO. 06/2023
DATED 06.04.2023, ISSUED BY RESPONDENT NO. 4, ENCLOSED AS
ANNEXURE F, AS ULTRA-VIRES SECTION 168A KGST ACT, 2017
FOR THE REASONS STATED IN THE GROUNDS.
THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED
FOR ORDERS ON 09.01.2026, COMING ON FOR PRONOUNCEMENT
THIS DAY, THE COURT MADE THE FOLLOWING:-
CORAM: THE HON'BLE MR JUSTICE M.NAGAPRASANNA
CAV ORDER
The petitioner/Karnataka Vikas Grameena Bank is before this
Court seeking the following prayers:
"(A) Issue a writ of certiorari or any other writ or direction to
quash impugned SCN No. DCCT (Enf-2)/HBL/SCN-
03/2023-24 dated 27-12-2023 issued by respondent
No.1, enclosed as Annexure-A, for the reasons stated in
the grounds.
(B) Issue a writ of certiorari or any other writ or direction to
quash impugned SCN No. ACCT/Audit-1/HBL/GST/DRC-
1/23-24/B-337 dated 28-12-2023 along with Form DRC-
4
1, issued by respondent No.2, enclosed as Annexure-B,
for the reasons stated in the grounds.
(C) Issue a writ of certiorari or any other writ or direction to
quash impugned SCN No. ACCT/Audit-1/HBL/GST/DRC-
1/23-24/B-338 dated 28-12-2023 along with Form DRC-
1, issued by respondent No.2, enclosed as Annexure-C,
for the reasons stated in the grounds.
(D) Issue a writ of certiorari or any other writ or direction to
quash impugned SCN No. ACCT/Audit-1/HBL/GST/DRC-
1/23-24/B-339 dated 28-12-2023 along with Form DRC-
1, issued by respondent No.2, enclosed as Annexure-D,
for the reasons stated in the grounds.
(E) Issue a writ of certiorari or any other writ or direction or
order to declare Notification 9/2023-CT dated 31st March,
2023, issued by respondent No.3, enclosed as Annexure-
E, as ultra vires Section 168A of CGST Act, 2017 for the
reasons stated in the grounds.
(F) Issue a writ of certiorari or any other writ or direction or
order to declare Notification No.06/2023 dated
06.04.2023, issued by respondent No.4, enclosed as
Annexure-F as ultra-vires Section 168A of KGST Act,
2017 for the reasons stated in the grounds.
And
(G) Grant such other consequential reliefs as this Honourable
High Court may think fit including the cost of this writ
petition."
2. Heard Sri V.Raghuraman, learned senior counsel appearing
for the petitioner, Sri G.M.Gangadhar, learned Additional Advocate
General appearing for respondents 1, 2 and 4 and Sri M.B. Kanavi,
learned counsel appearing for respondent No.3.
5
3. Facts, in brief, germane are as follows: -
3.1. The petitioner is a Regional Rural Bank established under
the provisions of the Regional Rural Banks Act, 1976. The
respondents are the State and the Union of India. The contesting
respondents are respondents 1 and 2, the Commercial Taxes
Department of the State Government. It would suffice if the
narration would commence from 17-06-2022, the date on which an
inspection is conducted by the 1st respondent/Deputy Commissioner
of Commercial Taxes in the premises of the petitioner/Bank
invoking power under Section 67 of the Central Goods and Services
Tax Act, 2017 ('CGST Act') to verify tax compliance by the Bank.
After the said inspection, a notification comes to be issued by the
Central Board of Indirect Taxes and Customs under Section 168A of
the CGST Act extending the time limit specified under Section
73(10) of the CGST Act for issuance of order under Section 73(9) of
the CGST Act for recovery of tax not paid or short paid or input tax
created wrongly shown for the financial years 2017-18, 2018-19
and 2019-20. The corresponding notification is issued by the
6
Government of Karnataka on the same lines for the same period on
06-04-2023.
3.2. A report of inspection so conducted on 17-06-2022 is
drawn on 20-07-2023 and is placed before the Joint Commissioner
of Commercial Taxes (Enforcement) to initiate proceedings against
the Bank under Section 73 of the CGST Act for short payment of tax
and or no payment of tax rather under the Karnataka Goods and
Services Tax Act, 2017 ('KGST Act'). On 09-08-2023,Form
DRC-01A is issued by the 1st respondent for the financial year
2018-19 alleging that the petitioner Bank has failed to deposit tax
amount under reverse charge mechanism, which would be on the
commission paid to the pigmy agents in the urban branches.
Similarly, Form DRC-01A is issued by the 2nd respondent for the
financial year 2019-20 and 2021-22. To this, the petitioner replied
contending that pigmy agents are employees of the Bank and
hence, no GST can be levied on the salary paid to them. It was also
contended by the Bank that pigmy agents do not come under the
ambit of business facilitators to attract reverse charge levy. The
aforesaid was the reply submitted by the petitioner to the 1st
7
respondent. The petitioner also replies to the 2nd respondent on the
same lines.
3.3. Finding the reply to be unsatisfactory, the 1st and 2nd
respondents issued show cause notices to the Bank between
27-12-2023 and 28-12-2023. The petitioner now challenges these
notices issued to the Bank, on the score that it is not liable to pay
any CGST for any regime or the KGST. The petitioner, apart from
challenging the show cause notices so issued, also challenges the
notification which extended 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. The aforesaid is the broad contours
of challenge in the case at hand.
SUBMISSIONS:
PETITIONER:
4. The learned senior counsel for the petitioner Sri
V.Raghuraman would vehemently contend that pigmy agents are
employees of the Bank and, therefore, their services cannot be
charged under the GST. He would seek to place reliance upon
8
Section 7(2)(a) r/w Sl.No.1 of Schedule III which exempts services
by an employee to the employer in the course of or in relation to
his employment. He would contend that pigmy agents are workmen
under the Industrial Disputes Act, 1947 as held by the Apex Court
in INDIAN BANK'S ASSOCIATION's case. TDS deducted on
payments made to pigmy agents is enough circumstance to
consider the commission that they receive as salary. The learned
senior counsel would further contend that pigmy agents are not to
be considered as business facilitators as defined in the Notification
dated 28-06-2017. They are not intermediaries appointed by the
banking company under the guidelines issued by the Reserve Bank
of India. They are employees of the Bank. The impugned show
cause notices thus suffer from want of jurisdiction when the Bank
has exemption to pay tax. The time limit extended for issuing
notices and passing orders is contrary to Section 168A of the KGST
Act. The demand made in the show cause notices cannot be
sustained as per the principle of revenue neutrality. The learned
senior counsel seeks the prayers that are sought to be granted at
the hands of this Court on the aforesaid score.
9
AAG - STATE:
5. Per contra, the learned Additional Advocate General Sri
G.M. Gangadhar would vehemently refute the submissions in
contending that the petitioner has an alternative and efficacious
remedy of filing an appeal under Section 107 of the CGST Act. The
basis for issuing show cause notices is legal and valid. The GST
charged on the commission payable to pigmy agents is in
consonance with the provisions of the CGST Act. The pigmy agents
are paid commission and not salary in the case before the Court.
Therefore, the petitioner would be liable to pay GST on the
commission so paid in terms of Section 9(3) of the CGST Act. The
petitioner/Bank has not furnished documents to show that there
exists an employer-employee relationship between the petitioner
bank and pigmy agents. The Reserve Bank of India Circular referred
to by the petitioner does not restrict the definition of business
facilitator as intermediary. The pigmy agents are used for financial
facilitation or as business facilitator providing financial services. As
a rule, pigmy agent is not restricted only to collection of deposits
for one particular scheme of deposits. It can be extended to other
10
services. They are akin to business correspondents. Therefore, the
charge of GST is valid and legal.
6. I have given my anxious consideration to the submissions
made by the respective learned counsel and have perused the
material on record. In furtherance whereof, the only issue that falls
for consideration is:
THE ISSUE:
"Whether the petitioner is liable to discharge Goods
and Services Tax, on the services rendered and commission
paid to the pigmy agents?"
CONSIDERATION:
Nature of employment of pigmy agents:
7. The learned senior counsel with considerable emphasis
contends that pigmy agents are in essence and in law, employees
of the Bank. Consequently, the services rendered by them cannot
be brought within the taxable net of GST. It is further urged that
such agents fall within the definition of 'workmen' under the
11
Industrial Disputes Act, 1947 thereby fortifying the existence of
employer-employee relationship. The question as to the true
nature of engagement of deposit collectors/pigmy agents,
whether they are workmen within the meaning of the
Industrial Disputes Act, 1947 or independent agents, has not
remained in the realm of ambiguity. The issue comes to be
decided by the Apex Court in INDIAN BANKS ASSOCIATION v.
WORKMEN OF SYNDICATE BANK1 wherein it is held as follows:
".... .... ....
25. Further, as seen from Section 2(rr) of the Industrial
Disputes Act, the commission received by Deposit Collectors is
nothing else but wage, which is dependent on the productivity.
This commission is paid for promoting the business of the
various banks.
26. We also cannot accept the submission that the
banks have no control over the Deposit Collectors.
Undoubtedly, the Deposit Collectors are free to regulate
their own hours of work, but that is because of the nature
of the work itself. It would be impossible to fix working
hours for such Deposit Collectors because they have to go
to various depositors. This would have to be done at the
convenience of the depositors and at such times as
required by the depositors. If this is so, then no time can
be fixed for such work. However, there is control
1
(2001) 3 SCC 36
12
inasmuch as the Deposit Collectors have to bring the
collections and deposit the same in the banks by the very
next day. They have then to fill in various forms,
accounts, registers and passbooks. They also have to do
such other clerical work as the Bank may direct. They are,
therefore, accountable to the Bank and under the control
of the Bank."
The Apex Court holds that the commission earned by deposit
collectors/pigmy agents partakes the character of 'wages' under
Section 2(rr) of the Industrial Disputes Act, 1947. More
importantly, such collectors were held to be workmen being subject
to the pervasive control and supervision of the Bank. The
relationship that thus emerges is not one of detached
contractual engagement, but one imbued with the attributes
of a master-servant nexus. The pigmy agents operate under
the command, control and disciplinary framework of the
Bank, their remuneration though termed as commission, is
in substance, akin to wages, further evidenced by deduction
of tax at source. The issue, therefore no longer remains res
integra. It has travelled beyond the pale of controversy and
stands settled as on date.
13
Applicability of GST to pigmy agents:
8. The next facet that requires consideration is, whether the
services rendered by such employees - pigmy agents - can be
subjected to GST. Section 7 of the CGST Act, read in conjunction
with Section 7(2)(a) and schedule III forms statutory edifice
governing the issue in the lis. It reads as follows:
"7. Scope of supply.--(1) For the purposes of this Act,
the expression "supply" includes--
(a) all forms of supply of goods or services or both such
as sale, transfer, barter, exchange, licence, rental, lease or
disposal made or agreed to be made for a consideration by a
person in the course or furtherance of business;
[(aa) the activities or transactions, by a person, other
than an individual, to its members or constituents or vice-
versa, for cash, deferred payment or other valuable
consideration.
Explanation.--For the purposes of this clause, it is
hereby clarified that, notwithstanding anything contained in any
other law for the time being in force or any judgment, decree
or order of any Court, tribunal or authority, the person and its
members or constituents shall be deemed to be two separate
persons and the supply of activities or transactions inter
se shall be deemed to take place from one such person to
another;]
(b) import of services for a consideration whether or not
in the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed
to be made without a consideration; [* * *]
[* * *]
[(1-A) where certain activities or transactions constitute
a supply in accordance with the provisions of sub-section (1),
they shall be treated either as supply of goods or supply of
services as referred to in Schedule II.]
14
(2) Notwithstanding anything contained in sub-section
(1),--
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central
Government, a State Government or any local authority
in which they are engaged as public authorities, as may
be notified by the Government on the recommendations
of the Council,
shall be treated neither as a supply of goods nor a supply
of services.
(3) Subject to the provisions of 28[sub-sections (1), (1-A)
and (2)], the Government may, on the recommendations of the
Council, specify, by notification, the transactions that are to be
treated as--
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
Section 7(2)(a) supra mandates that service by an employee to the
employer in the course of or in relation to his employment cannot
be charged under the GST. Schedule III mandates so. Schedule-III
reads as follows:
"SCHEDULE III
[See Section 7]
ACTIVITIES OR TRANSACTIONS WHICH SHALL BE
TREATED NEITHER AS A SUPPLY OF GOODS NOR A
SUPPLY OF SERVICES
1. Services by an employee to the employer in the course
of or in relation to his employment.
2. Services by any court or Tribunal established under any law
for the time being in force.
15
3. (a) the functions performed by the Members of Parliament,
Members of State Legislature, Members of Panchayats, Members
of Municipalities and Members of other local authorities;
(b) the duties performed by any person who holds any post in
pursuance of the provisions of the Constitution in that capacity;
or
(c) the duties performed by any person as a Chairperson or a
Member or a Director in a body established by the Central
Government or a State Government or local authority and who
is not deemed as an employee before the commencement of
this clause.
4. Services of funeral, burial, crematorium or mortuary including
transportation of the deceased.
5. Sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building.
6. Actionable claims, other than [specified actionable claims].
7. Supply of goods from a place in the non-taxable territory to
another place in the non-taxable territory without such goods
entering into India.
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. It
becomes necessary therefore to draw upon the jurisprudence that is
16
replete, as laid down by the Apex Court. The nature of duties
performed by pigmy agents, as evidenced through the terms of
their engagement unmistakably reflects employer-employee
relationship.
9. In the case at hand, the petitioner/Bank exercises
complete control over the agents as per the terms and conditions
laid down in the agreements of their employment. Memorandum of
agreement is appended to the petition. Certain clauses of the said
agreement are necessary to be noticed. One Kiran Toggi is
appointed as a pigmy agent and certain clauses of the
memorandum of agreement read as follows:
"1. The Agent shall on behalf of the Bank receive the
collections from the customers of the Bank at branch
office and / or at any other of their branch or branch
offices regularly in terms of the rules of business relating
to the Vikas Nirantara Daily Deposits scheme 2009
and enter the said collections Daily in the machines. The
Vikas Nirantara Daily Deposit accounts shall be opened by
the customer in the manner prescribed.
2. The Agent shall render a true and correct account in the
prescribed manner of the Vikas Nirantara Daily
Deposits collected by him to the Bank's branch at Head
Office and/or at any other of their branch or branch
offices as required by the Bank.
.... .... ....
17
5. *The Agent has deposited a sum of Rs.20000/- as Vikas
Nirantara Deposit Agents Security deposit for faithful
and sincere discharge of his duties.
OR
*The agent has offered a surety for Rs.40000/- to the
Bank in lieu of the security deposit of Rs.20000/- and the
agent further agrees that the surety will be
discharged/released by the Bank only after the agent
build up cash security deposit of Rs.20000/-. 1
The agent binds himself to deposit every month, a sum
equivalent to 10% of the fall back wages and incentive
remuneration payable by the Bank to him as incentive
rentmeration for Vikas Nirantara Deposit Collections
towards his security deposit to be maintained separately
and further agrees to furnish such other or more security
as may be desired by the Bank from time to time. The
agent hereby agrees that the Bank shall hold the said
amounts so long as the Agent continues as Vikas
Nirantara Deposit Agent and so long as the Bank desires
or so long as any claim against the Agent with regard to
any money or securities or other valuables of any
description entrusted to the Agent or Agent's care
including the cost of machine is pending and so long as
there is any dispute between the Agent and Bank with
respect to any loss or damage that the Bank may or
might have suffered, is pending. If at any time any
liability is incurred by the Bank in respect of any loss or
damage or other injury sustained, incurred for
whatsoever reason or occasioned by dishonesty or fraud
or cheating or any act of commission or omission or
negligence in relation to the duties as Vikas Nirantara
Deposit Agent, the Bank shall be at liberty to adjust and
appropriate in part or full, the amount either of the
security deposit or any other moneys available to the
credit of the agent with it, now or hereafter without any
reference to the agent in this behalf.
*Select whichever is applicable.
18
The right of the Bank over these securities shall be
absolute and the Agent may be entitled to the refund of
the same only upon his full acquiescence by the Bank.
The bank will pay interest to this deposit at the highest
rate applicable to term deposits of public, prevailing at
the relevant time. The deposit rates are subject to change
from time to time.
6. (A) The Agent has agreed to be a Vikas Nirantara Deposit
Agent on the commission at rates determined by the
Bank, and as laid down by the final Award of the
industrial Tribunal, Hyderabad in ID 14/1980 dated
22.12.1988 as modified by the Judgment dated
28.3.1997 of the High Court of Andhra Pradesh in WP,
No.9793 of 1989 and affirmed by the Judgment dated
13.2.2001 of the Supreme Court of India in Civil
Appeal No. 3355 of 1998.
(B) The agent is entitled to the following as per the said
Final Award:
(i) Fall back wages of Rs.750/- per month linked
with minimum collection of Rs.7500/- per month
and incentive remuneration at 2% for collection
of amounts over and above Rs.7500/- per month.
(ii) Uniform conveyance allowance of Rs.50/- per
month for deposits of less than Rs. 10000/- per
month and Rs.100/- per month for deposits of
more than Rs. 10000/- per month.
(iii) Gratuity of 15 days commission for each year of
agency.
PAYMENT OF GRATUITY IS AS A PART OF THE
AWARD GRANTED BY THE INDUSTRIAL
TRIBUNAL, HYDERABAD IN ID 14/1980
DATED 22.12.1988 AND NOT UNDER THE
PAYMENT OF GRATUITY ACT 1972.
Notwithstanding this,
19
(i) In case his agency is terminated for any act
of willful omission or negligence causing any
damage or loss or destruction of property
belonging to the Bank, gratuity shall be
forfeited to the extent of the damage or loss
caused;
(ii) No Gratuity is payable in case Agency has
been terminated for-
a) Commission of fraud/misappropriation.
b) Riotous or disorderly conduct or any
other act of violence on his part.
c) Conviction in a criminal case involving
moral turpitude,
d) Abandoning the Agency or non-
collection for thirty days without
intimation.
C) The agent is not entitled to the following:
i) Weekly holidays, annual leave etc.
ii) Bonus, pension and provident fund
iii) Medical and hospitalization charges and risk
insurance as Agent is not a regular employee.
iv) Any other allowance or claim or other benefits
available and applicable to regular employees of the
Bank whatsoever that are beyond the terms of the
final Award mentioned above.
D) The Agent has agreed to discharge functions as Agent
honestly, sincerely and dili-gently and he has agreed to
obey and carry out the orders and instructions of the
Manager or any other person placed in charge of the Bank
at the above said Branch and/or at any other of their
branch.
20
7. The Agent hereby agrees to give a month's notice in
writing before renouncing his agency to the Branch of the
Bank. He also agrees to keep the Bank informed in
writing, of his inability to make collections of deposits on
any day or days. On getting such information the Bank is
at liberty to make alternate arrangements for the
collections of Vikas Nirantara deposit in respect of the
cards dealt with by the Agent, during the period of his
inability to collect the same, without reference to him.
When such other Stationery as desired by the Bank to
such person appointed by the Bank and from him he shall
obtain the cards back after he is able to make the
collections. It is made clear that the Agent is not entitled
to for any fall back wages / commission for the amounts
not collected by him and the agent should not entrust the
work of collection to any other agent of this or any other
branch of the Bank or to any other unauthorized person
on his own. The agent shall have no right whatsoever to
appoint a Sub-Agent. He shall deposit the Machine at the
branch on the days he is not able to collect contributions
towards Vikas Nirantara deposit scheme for whatsoever
reason."
The agreement governing the engagement of these pigmy
agents reveal several telling features: The bank exercises
pervasive control over their functioning; the agents are
required to maintain security deposits; they are assured
minimum remuneration; they are entitled to benefits such
as, gratuity; and their disengagement is regulated by notice
requirements. These are not indicia of an independent
contractor, but hallmarks of employment.
21
10.1. The aforesaid kind of characteristics, whether could
become an employer-employee relationship, is considered by the
Apex Court in DHARANGADHARA CHEMICAL WORKS LIMITED
v. STATE OF SAURASHTRA2 wherein it is held as follows:
".... .... ....
13. The position in law is thus summarised in Halsbury's
Laws of England, Hailsham Edn., Vol. 22, p. 112, para 191:
"Whether or not, in any given case, the relation of
master and servant, exists is a question of fact; but in all cases
the relation imports the existence of power in the employer not
only to direct what work the servant is to do, but also the
manner in which the work is to be done.";
and until the position is restated as contemplated
in Short v. J.W. Henderson Ltd. [Short v. J.W. Henderson Ltd.,
(1946) 62 TLR 427 at p. 429 (HL)] we may take it as the prima
facie test for determining the relationship between master and
servant.
14. The principle which emerges from these
authorities is that the prima facie test for the
determination of the relationship between master and
servant is the existence of the right in the master to
supervise and control the work done by the servant not
only in the matter of directing what work the servant is
to do but also the manner in which he shall do his work,
or to borrow the words of Lord Uthwatt at AC p. 23
in Mersey Docks & Harbour Board v. Coggins & Griffith
(Liverpool) Ltd. [Mersey Docks & Harbour
Board v. Coggins & Griffith (Liverpool) Ltd., 1947 AC 1 at
p. 23 (HL)] :
2
1956 SCC OnLine SC 11
22
"... The proper test is whether or not the hirer had
authority to control the manner of execution of the act in
question."
10.2. The Apex Court later in HUSSAINBHAI v. ALATH
FACTORY THEZHILALI UNION3 has held as follows:
".... .... ....
5. The true test may, with brevity, be indicated once
again. Where a worker or group of workers labours to
produce goods or services and these goods or services
are for the business of another, that other is, in fact, the
employer. He has economic control over the workers'
subsistence, skill, and continued employment. If he, for
any reason, chokes off, the worker is, virtually, laid off.
The presence of intermediate contractors with whom
alone the workers have immediate or direct
relationship ex contractu is of no consequence when, on
lifting the veil or looking at the conspectus of factors
governing employment, we discern the naked truth,
though draped in different perfect paper arrangement,
that the real employer is the Management, not the
immediate contractor. Myriad devices, half-hidden in fold
after fold of legal form depending on the degree of concealment
needed, the type of industry, the local conditions and the like
may be resorted to when labour legislation casts welfare
obligations on the real employer, based on Articles 38, 39, 42,
43 and 43-A of the Constitution. The court must be astute to
avoid the mischief and achieve the purpose of the law and not
be misled by the maya of legal appearances."
3
(1978) 4 SCC 257
23
10.3. The Apex Court, in SUSHILABEN INDRAVADAN
GANDHI v. NEW INDIA ASSURANCE COMPANY LIMITED4
holds as follows:
".... .... ....
32. A conspectus of all the aforesaid judgments
would show that in a society which has moved away from
being a simple agrarian society to a complex modern
society in the computer age, the earlier simple test of
control, whether or not actually exercised, has now
yielded more complex tests in order to decide complex
matters which would have factors both for and against
the contract being a contract of service as against a
contract for service. The early "control of the employer"
test in the sense of controlling not just the work that is
given but the manner in which it is to be done obviously
breaks down when it comes to professionals who may be
employed. A variety of cases come in between cases
which are crystal clear -- for example, a master in a
school who is employed like other employees of the
school and who gives music lessons as part of his
employment, as against an independent professional
piano player who gives music lessons to persons who
visit her premises. Equally, a variety of cases arise between a
ship's master, a chauffeur and a staff reporter, as against a
ship's pilot, a taxi driver and a contributor to a newspaper, in
order to determine whether the person employed could be said
to be an employee or an independent professional. The control
test, after moving away from actual control of when and
how work is to be performed to the right to exercise
control, is one in a series of factors which may lead to an
answer on the facts of a case slotting such case either as
a contract of service or a contract for service. The test as
to whether the person employed is integrated into the
employer's business or is a mere accessory thereof is
another important test in order to determine on which
side of the line the contract falls. The three-tier test laid
4
(2021) 7 SCC 151
24
down by some of the English judgments, namely, whether
wage or other remuneration is paid by the employer;
whether there is a sufficient degree of control by the
employer and other factors would be a test elastic
enough to apply to a large variety of cases. The test of who
owns the assets with which the work is to be done and/or who
ultimately makes a profit or a loss so that one may determine
whether a business is being run for the employer or on one's
own account, is another important test when it comes to work to
be performed by independent contractors as against piece-rated
labourers. Also, the economic reality test laid down by the US
decisions and the test of whether the employer has economic
control over the workers' subsistence, skill and continued
employment can also be applied when it comes to whether a
particular worker works for himself or for his employer. The test
laid down by the Privy Council in Lee Ting Sang v. Chung Chi-
keung [Lee Ting Sang v. Chung Chi-keung, (1990) 2 AC 374
(PC)] , namely, is the person who has engaged himself to
perform services performing them as a person in business on his
own account, is also an important test, this time from the point
of view of the person employed, in order to arrive at the correct
solution. No one test of universal application can ever yield the
correct result. It is a conglomerate of all applicable tests taken
on the totality of the fact situation in a given case that would
ultimately yield, particularly in a complex hybrid situation,
whether the contract to be construed is a contract of service or
a contract for service. Depending on the fact situation of each
case, all the aforesaid factors would not necessarily be relevant,
or, if relevant, be given the same weight. Ultimately, the Court
can only perform a balancing act weighing all relevant factors
which point in one direction as against those which point in the
opposite direction to arrive at the correct conclusion on the facts
of each case.
(Emphasis supplied at each instance)
The Apex Court, in DHARANGADHARA supra has held that the
degree of control exercised by the employer over the manner in
25
which the work is performed is a decisive test of employment. The
principle was further elaborated in HUSSAINBHAI where the Apex
Court emphasizes the real test lies whether the worker is engaged
in the business of another and is economically dependant upon that
enterprise. The Apex Court later in SUSHILABEN supra reiterates
that the determinative factor remains the degree of control
exercised by the employer.
11. The jurisprudential thread, running through these
decisions, is clear - 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.
12. The State, however, seeks to cloak these pigmy
agents under a different nomenclature, describing them as
26
"business facilitators" and places reliance upon a notification
dated 28-06-2017 issued under Section 11 of the CGST Act. The
contention though ingeniously projected falters upon closer
scrutiny. It, therefore, becomes necessary to refer to the
notification issued by the Government of India. Clause 2 of
Notification defines a business facilitator. Clause 2(o) reads as
follows:
"2. Definitions.-
Xxxx xxxx xxxx
(o) "business facilitator or business correspondent" means
intermediary appointed under the business facilitator
model or the business correspondent model by a
banking company or an insurance company under the
guidelines issued by the Reserve Bank of India;"
The definition of a business facilitator, as contained in the
afore-quoted clause, contemplates an intermediary
appointed under the models recognized and regulated by the
Reserved Bank of India. Such facilitators are expected to
perform specified functions, within the defined regulatory
architecture.
27
13. What is a business facilitator model or a business
correspondent model bears definition in a subsequent official
memorandum. The business facilitator model and business
correspondent model read as follows:
"2. Business Facilitator Model: Eligible Entities and Scope
of Activities
2.1 Under the "Business Facilitator" model, banks may use
intermediaries, such as, NGOs/Farmers' Clubs, cooperatives,
community based organisations, IT enabled rural outlets of
corperate entities, Post Offices, insurance agents, well
functioning Panchayats, Village Knowledge Centres, Agri Clinics/
Agri Business Centers, Krishi Vigyan Kendras and KVIC/ KVIB
units, depending on the comfort level of the bank, for providing
facilitation services. Such services may include (i) identification
of borrowers and fitment of activities; (ii) collection and
preliminary processing of loan applications including verification
of primary information/data; (iii) creating awareness about
savings and other products and education and advice on
managing money and debt counselling; (iv) processing and
submission of applications to banks; (v) promotion and
nurturing Self Help Groups/ Joint Liability Groups; (vi) post-
sanction monitoring; (vii) monitoring and handholding of Self
Help Groups/ Joint Liability Groups/ Credit Groups/ others; and
(vii) follow-up for recovery.
2.2 As these services are not intended to involve the conduct of
banking business by Business Facilitators, no approval is
required from RBI for using the above intermediaries for
facilitation of the services indicated above.
3. Business Correspondent Model: Eligible Entities and
Scope of Activities
3.1 Under the "Business Correspondent" Model, NGOs/ MFIs set
up under Societies/ Trust Acts, Societies registered under
Mutually Aided Cooperative Societies Acts or the Cooperative
28
Societies Acts of States, section 25 companies, registered
NBFCs not accepting public deposits and Post Offices may act as
Business Correspondents. Banks may conduct thorough due
diligence on such entities keeping in view the indicative
parameters given in Annex 3.2 of the Report of the Internal
Group appointed by Reserve Bank of India (available on RBI
website: www.rbi.org.in) to examine issues relating to Rural
Credit and Micro-Finance (July 2005). In engaging such
intermediaries as Business Correspondents, banks should
ensure that they are well established, enjoying good reputation
and having the confidence of the local people. Banks may give
wide publicity in the locality about the intermediary engaged by
them as Business Correspondent and take measures to avoid
being misrepresented.
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.
29
14. In the teeth of the aforesaid narration, it becomes
necessary to notice one of the show cause notices issued by the 1st
respondent. The reason behind issue of show cause notice dated
27-12-2023 is as follows:
".... .... ....
A. The Tax payer submitted that; the definition of Business
Facilitator (BF) in GST Act is borrowed from the RBI
Circular No. 58/22-01-001/2005-06 Dated: 25-01-2006.
As per the RBI Circular, mentioned above in Para 2.
Business Facilitator Model: Eligible entities and Scope of
activities:
2.1 Under the Business Facilitator model, banks may use
intermediaries, such as, NGOs/Farmers' clubs,
Cooperatives, community based organizations, IT enabled
rural outlets of cooperate entities, Post officer, insurance
agents, well-functioning Panchayats, Village knowledge
Centers, Agri Clinics/ Agri Business Centers, Krishi Vigyan
Kendra sans KVIC/KVIB units, depending on the comport
level of the bank, for proving facilitation services, Such
services may include (i) identification of barrows and
fitment of activities; (ii) collection and preliminary
processing of loan application including verification of
primary information/data/; (iii) creating awareness about
savings and other products and education and advice on
managing money and debt counselling; (iv) post-sanction
monitoring; (vii) monitoring and handholding of self-help
Groups/ Joint liability Groups/Credit Groups/ others; and
(viii) follow up recovery.
2.2 As these services are not intended to involve the
conduct of banking business by Business Facilitators, no
approval is required from RBI for using the above
intermediaries for facilitation of the services indicated
above,
30
From plane reading of above RBI's guidelines, it is
noticed that, under" BF model" the bank may use
intermediaries, such as, NGOs/ Farmers clubs,
Cooperatives, community-based organizations, IT enabled
rural outlets of cooperate entities, Post officer, insurance
agents, well-functioning Panchayats etc., there is no
restrictions from RBI that banks must use the above
persons/entities only as intermediaries, here the RBI in its
circular used a non-restrictive clause (may and such
as). Further, the RBI has said that depending on the
comfort level of the bank, they may use any other
individual (including pigmy agents) or groups for
providing finanacial facilitation services i.e., creating
awareness about savings and other products including
pigmy deposit accounts.
Further, in terms of business, business facilitation
is the combination of arrangements that ease the doing of
business. The people or the organizations which provide
such facilities to the businesses are known as 'Business
Facilitators'. The pigmy agents are nothing but "Business
Facilitators" for bank. Because they help the bank to ease
the doing of business by making the arrangements in
daily deposit collection from doorstep of customers. By
doing so they are helping the bank to increase its CASA
ratio.
Further, the contention of the taxpayer regarding
"pigmy agents" is workmen are acceptable term within
the meaning of the term as defined in the Industrial
Dispute Act. But as per the provisions of the GST Act-
2017, the terms like "Agent" (U/s.2(5)), "Business"
(2(17)(a)(b)) "Person"(2(84)), "Principal" (2(88)),
"Recipient" (2(93)), "Intermediaries"(2(13) of IGST)
"Reverse charge"(2(98)), "Services"(2(102)), "Supplier"
(2(105)) and "Consideration" (2(31)) are all well-defined
Under KGST/CGST/IGST Act-2017. The definitions of
Agent and Principal are reproduced for reference as
under:
S.2(5) "agent" means a person, including a factor,
broker, commission agent, arhatia, del credere agent, an
auctioneer or any other mercantile agent, by whatever
31
name called, who carries on the business of supply or
receipt of goods or services or both on behalf of another,
S. 2(88) "principal" means a person on whose behalf an
agent carries on the business of supply or receipt of
goods or services or both;
The person for whom such act is done, or who is so
represented, is called the "principal". As delineated in the
definition, an agent can be appointed for performing any
act on behalf of the principal which may or may not have
the potential for representation on behalf of the principal.
So, the crucial element here is the representative
character of the agent which enables him to carry out
activities on behalf of the principal.
3. The following two key elements emerge from the
above definition of agent: Circular No. 57/31/2018-GST
a) the term "agent" is defined in terms of the various
activities being carried out by the person concerned in the
principal-agent relationship; and
b) the supply or receipt of goods or services has to be
undertaken by the agent on behalf of the principal.
Therefore, as per the provisions of the GST Act, the
service rendered by the pigmy agents to bank is taxable
service, it is clearly Principal-Agent relationship and
the same falls under "business facilitator model" and
by virtue of notification no 13/2017-central tax (rate) &
notification no 29/2018-central tax (rate) dated:31-12-
2018, the GST payable on the said taxable services of
pigmy agents as business facilitator shall be paid on
reverse charge basis by the recipients of such services
w.e.f., 01-01-2019.
B. The Tax payer accepted that, commission has been paid
to the Pigmy agents for the service they rendered to the
bank based on the deposits collected (in Para-03 Page-
10). Further, the payment of minimum wages,
conveyance and gratuity is in accordance with the
Judgment of Hon'ble Supreme Court of India in Indian
Banks Association Vs Workmen of Syndicate Bank and
32
Ors on 13-Feb-2001. However, it is to be noted here that,
the Tax payer though in their reply submitted that, they
have deducted TDS on payment made to Pigmy Agents as
per the provisions of Income Tax Act. But the Tax payer
not submitted any such documents to substantiate their
submission. In the absence of classified turnover of
commission, the entire amount paid to pigmy agents are
considered as commission and the taxpayer is liable to
pay tax @18% U/s.9(3) of the Act as RCM basis on the
entire amount paid as commission to pigmy agents.
C. Pigmy agents were appointed to collect small deposits
(pigmy deposits) from the customers of the bank. The
terms of the agreement made with such Pigmy agents as
far as wages, incentive remuneration, conveyance
allowance are all related to collection of small deposits.
The Tax payer utilising the services of Business
Facilitators/ Business Correspondents for loan
disbursement, loan recovery and other activities. For such
services the Tax payer is charged with GST by such
Business Facilitators. It is further to be noted that, in
Annual Audit Report for the year 2018-19 in Para (7)
under Recovery of Loan Head, the Tax payer declared
that, they have formulated a special scheme for recovery
of bad debts, written off accounts through Business
Correspondents and Nirantara (Pigmy) Deposit agents
and Ex-staff. The scheme is effective from 25.08.2014.
Under this scheme, the BCs and Pigmy agents are eligible
for commission of 10% on actual recoveries.
From the above it is induced that, apart from
paying wages, remuneration, conveyance to such
Pigmy agents for collection of small deposits they
are also paying them commission at 10% on
recovery of bad debts. The Tax payer is utilising the
services of the Pigmy agents on par with Business
Correspondents/ Facilitators. Therefore, the Tax
payer is liable for payment under the provisions of
GST Act in case of Pigmy agents also, as the Pigmy
agents are providing their services on par with
Business Facilitators apart from terms of agreement
made with the Tax payer.
33
In view of the above discussions, you are
hereby given an opportunity to show cause as to
why you should not pay the amount of Tax specified
as below along with applicable interest thereon till
the date of payment of tax U/s 50 within 7 days
from the receipt of this notice. Failing to comply
with this Show cause Notice, action as deemed fit
under the provisions of KGST/CGST Act, 2017 will
be initiated.
Further, it is to be noted that, if you fail to pay the
amount as ascertained by the undersigned within 30 days
of issue of Show Cause Notice, you will be liable for
Penalty U/s 122 of the Act.
(Emphasis added)
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
34
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.
15. In the teeth of this fundamental flaw, forming the
fulcrum of the show cause notices, they are rendered devoid
of jurisdiction and are to be obliterated. Certain other prayers
are also sought with regard to extension of time by issuance of a
notification and contending that those notifications are ultra vires
the Act and need not be considered, as the taxation regime i.e.,
CGST and KGST itself is not applicable to the petitioner qua pigmy
agents. Therefore, those prayers need not bear consideration. It is
at best left to be decided in an appropriate case. Therefore, the
impugned show cause notices which form the prayers in (A) to (D)
are to be granted and (E) and (F) are to be abandoned for the time
being to be decided in an appropriate case.
35
16. For the aforesaid reasons, the following: -
ORDER
(i) Writ Petition is allowed.
(ii) Impugned show cause notices in (i) No. DCCT (Enf-
2)/HBL/SCN-03/2023-24 dated 27-12-2023 issued by the 1st respondent; (ii) No. ACCT/Audit-1/HBL/GST/ DRC-1/23-24/B-337 dated 28-12-2023 along with Form DRC-01 issued by respondent No.2; (iii) No. ACCT/Audit-1/HBL/GST/DRC-1/23-24/B-338 dated 28- 12-2023 along with Form DRC-01 issued by respondent No.2; and (iv) No.ACCT/Audit-1/HBL/GST/ DRC-1/23- 24/B-339 dated 28-12-2023 along with Form DRC-01 issued by respondent No.2 stand obliterated.
(iii) The petitioner is entitled to all consequential benefits that would flow from quashment of afore-mentioned show cause notices.
Consequently, I.A.No.1 of 2025 also stands disposed.
Sd/-
(M.NAGAPRASANNA) JUDGE Bkp/CT:MJ