The Karnataka High Court has held that ‘pigmy agents’ (deposit collectors) are employees of banks and no GST can be levied on the salary paid to them.
Making the observation, a single-judge bench of the high court Wednesday quashed the show cause notices issued to Karnataka Vikas Grameena Bank by the State Deputy Commissioner of the Commercial Taxes Department.
In its order, the court said, “The bank exercises pervasive control over their functioning; the agents are required to maintain security deposits; they are assured minimum remuneration. They are also 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.”
The order added, “The 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.”
The Karnataka Vikas Grameena Bank had approached the court questioning the show-cause notices issued by the state GST authorities. These notices sought to levy GST under the reverse charge mechanism on commissions paid to pigmy agents.
Senior Advocate V Raghuraman, appearing for the bank, argued that pigmy agents are employees of the Bank and, therefore, their services cannot be charged under the GST. Also, they cannot be considered as business facilitators, since they are not intermediaries appointed by the bank under the guidelines issued by Reserve Bank of India.
Additional Advocate General G M Gangadhar opposed the petition, saying that the pigmy agents are paid commission and not salary by the bank. Therefore, the bank would be liable to pay GST on the commission so paid in terms of Section 9(3) of the CGST Act.
The single-judge bench of Justice Nagaprasanna referred to the terms of engagement entered by the bank with the agents and said, “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 court added, “The nature of duties performed by pigmy agents, as evidenced through the terms of their engagement, unmistakably reflects an employer-employee relationship.”
In its order, the bench referred to the notification dated June 28, 2017, issued under Section 11 of the CGST Act, which contemplates an intermediary appointed under the deposit scheme models recognized and regulated by the Reserve Bank of India.
Justice Nagaprasanna said, “The pigmy agents 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.”
Thereafter, the court observed, “The attempt to artificially transpose pigmy agents into the category of business facilitators is fundamentally flawed. It is a mischaracterization that cannot withstand judicial scrutiny.”
