‘Pigmy agents not intermediaries’, Karnataka Hight Court quashes GST notices

Bengaluru: The pigmy agents employed by Regional Rural Banks are not intermediaries appointed under the Reserve Bank of India-sanctioned model and hence cannot be called business facilitators, the High Court of Karnataka has ruled in a recent judgment.

Justice M Nagaprasanna said this while setting aside the show cause notices issued to Karnataka Vikas Grameena Bank, Belagavi, for payment of tax on commission amounts paid to the pigmy agents in urban branches.

The notice was issued alleging that the 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. The bank contended that pigmy agents are its employees 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.

On the other hand, it was submitted on behalf of the tax authorities that 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 this case and therefore, the bank would be liable to pay GST in terms of section 9(3) of the CGST Act on the commission paid, the authorities argued.

The court cited the Apex Court judgement and said that the pigmy agents operate under the command, control and disciplinary framework of the bank, their remuneration though termed as commission, is akin to wages, which is further evidenced by deduction of tax at source.

“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,” Justice Nagaprasanna said.

The court further said, “Their (pigmy agents) 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.”