1

Reserved on : 09.01.2026

Pronounced on : 08.04.2026

IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH

DATED THIS THE 08

TH

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,

R

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) ISS UE A

WRIT OF CERTIORARI OR ANY OTHER WRIT OR DIRECTION T O

QUASH IMPUGNED SCN NO. DCCT (ENF-2)/HBL/SCN- 03/202 3-24

DATED 27.12.2023, ISSUED BY RESPONDENT NO. 1, ENCLO SED 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 A S

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 A S

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 A S

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. 9/20 23-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 GROUND S; (F)

ISSUE A WRIT OF CERTIORARI OR ANY OTHER WRIT OR

DIRECTION OR ORDER TO DECLARE NOTIFICATION NO. 06/2 023

DATED 06.04.2023, ISSUED BY RESPONDENT NO. 4, ENCLO SED AS

ANNEXURE F, AS ULTRA-VIRES SECTION 168A KGST ACT, 2 017

FOR THE REASONS STATED IN THE GROUNDS.

THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED

FOR ORDERS ON 09.01.2026, COMING ON FOR PRONOUNCEME NT

THIS DAY, THE COURT MADE THE FOLLOWING:-

CORAM: THE HON'BLE MR JUSTICE M.NAGAPRASANNA

CAV ORDER

The petitioner/Karnataka Vikas Grameena Bank is be fore 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 31

st

March,

2023, issued by respondent No.3, enclosed as Annexu re-

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 estab lished under

the provisions of the Regional Rural Banks Act, 197 6. The

respondents are the State and the Union of India. T he contesting

respondents are respondents 1 and 2, the Commercial Taxes

Department of the State Government. It would suffic e if the

narration would commence from 17-06-2022, the date on which an

inspection is conducted by the 1

st

respondent/Deputy Commissioner

of Commercial Taxes in the premises of the petition er/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 und er 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 iss ued 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 1

st

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 br anches.

Similarly, Form DRC-01A is issued by the 2

nd

respondent for the

financial year 2019-20 and 2021-22. To this, the petitioner replied

contending that pigmy agents are employees of the B ank 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 1

st

7

respondent. The petitioner also replies to the 2

nd

respondent on the

same lines.

3.3. Finding the reply to be unsatisfactory, the 1

st

and 2

nd

respondents issued show cause notices to the Bank b etween

27-12-2023 and 28-12-2023. The petitioner now chall enges 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 petitione r, 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 S ri

V.Raghuraman would vehemently contend that pigmy ag ents are

employees of the Bank and, therefore, their service s cannot be

charged under the GST. He would seek to place reli ance 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 circumstanc e 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 appoi nted by the

banking company under the guidelines issued by the Reserve Bank

of India. They are employees of the Bank. The impug ned show

cause notices thus suffer from want of jurisdiction when the Bank

has exemption to pay tax. The time limit extended f or issuing

notices and passing orders is contrary to Section 168A of the KGST

Act. The demand made in the show cause notices cann ot 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 Gen eral Sri

G.M. Gangadhar would vehemently refute the submissi ons 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 i s in

consonance with the provisions of the CGST Act. The pigmy agents

are paid commission and not salary in the case befo re the Court.

Therefore, the petitioner would be liable to pay GS T 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 th e 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 su bmissions

made by the respective learned counsel and have per used the

material on record. In furtherance whereof, the only issue that falls

for consideration is:

THE ISSUE

:

“Whether the petitioner is liable to discharge Good s

and Services Tax, on the services rendered and comm ission

paid to the pigmy agents?”

CONSIDERATION:

Nature of employment of pigmy agents:

7. The learned senior counsel with considerable em phasis

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 ag ents,

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 BANK

1

wherein it is held as follows:

“…. …. ….

25. Further, as seen from Section 2(rr) of the Industrial

Disputes Act, the commission received by Deposit Co llectors 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 reg ulate

their own hours of work, but that is because of the nature

of the work itself. It would be impossible to fix w orking

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 th e

collections and deposit the same in the banks by th e very

next day. They have then to fill in various forms,

accounts, registers and passbooks. They also have t o do

such other clerical work as the Bank may direct. The y are,

therefore, accountable to the Bank and under the co ntrol

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 Ban k. The

relationship that thus emerges is not one of detach ed

contractual engagement, but one imbued with the att ributes

of a master-servant nexus. The pigmy agents operat e under

the command, control and disciplinary framework of the

Bank, their remuneration though termed as commissio n, is

in substance, akin to wages, further evidenced by d eduction

of tax at source. The issue, therefore no longer r emains 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 i n conjunction

with Section 7(2)(a) and schedule III forms statuto ry 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 separ ate

persons and the supply of activities or transactions inter

se shall be deemed to take place from one such person t o

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-secti on

(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 recommendation s 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 c ourse

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 Parliam ent,

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 p ost 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 Ce ntral

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 render ed by an

employee to the employer in the course of, or in re lation to,

his employment are placed outside the ambit of ‘sup ply’ and,

therefore, exempt from GST. Schedule III in unambi guous

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 natur e of duties

performed by pigmy agents, as evidenced through the terms of

their engagement unmistakably reflects employer-emp loyee

relationship.

9. In the case at hand, the petitioner/Bank exercis es

complete control over the agents as per the terms a nd conditions

laid down in the agreements of their employment. Me morandum of

agreement is appended to the petition. Certain clauses of the said

agreement are necessary to be noticed. One Kiran T oggi is

appointed as a pigmy agent and certain clauses of t he

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 branc h

office and / or at any other of their branch or bra nch

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 accou nt 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 branc h

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 t he

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 agen t

build up cash security deposit of Rs.20000/-. 1

The agent binds himself to deposit every month, a s um

equivalent to 10% of the fall back wages and incent ive

remuneration payable by the Bank to him as incentiv e

rentmeration for Vikas Nirantara Deposit Collection s

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. Th e

agent hereby agrees that the Bank shall hold the sa id

amounts so long as the Agent continues as Vikas

Nirantara Deposit Agent and so long as the Bank des ires

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 wit h

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 fr aud

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 t he

security deposit or any other moneys available to t he

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 b e

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 t he

Manager or any other person placed in charge of the Bank

at the above said Branch and/or at any other of the ir

branch.

20

7. The Agent hereby agrees to give a month's notic e 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 t o

such person appointed by the Bank and from him he s hall

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 per son

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 whatsoev er

reason.”

The agreement governing the engagement of these pig my

agents reveal several telling features: The bank ex ercises

pervasive control over their functioning; the agent s are

required to maintain security deposits; they are as sured

minimum remuneration; they are entitled to benefits such

as, gratuity; and their disengagement is regulated by notice

requirements. These are not indicia of an independ ent

contractor, but hallmarks of employment .

21

10.1. The aforesaid kind of characteristics, whethe r could

become an employer-employee relationship, is consid ered by the

Apex Court in DHARANGADHARA CHEMICAL WORKS LIMITED

v. STATE OF SAURASHTRA

2

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 t he

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 an d

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 serva nt 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 UNION

3

has held as follows:

“…. …. ….

5. The true test may, with brevity, be indicated once

again. Where a worker or group of workers labours t o

produce goods or services and these goods or servic es

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, l aid 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 fa ctors

governing employment, we discern the naked truth,

though draped in different perfect paper arrangemen t,

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 we lfare

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 LIMITED

4

holds as follows: “…. …. ….

32. A conspectus of all the aforesaid judgments

would show that in a society which has moved away f rom

being a simple agrarian society to a complex modern

society in the computer age, the earlier simple tes t of

control, whether or not actually exercised, has now

yielded more complex tests in order to decide compl ex

matters which would have factors both for and again st

the contract being a contract of service as against a

contract for service. The early “control of the emp loyer”

test in the sense of controlling not just the work that is

given but the manner in which it is to be done obvi ously

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 coul d 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 exercis e

control, is one in a series of factors which may le ad to an

answer on the facts of a case slotting such case ei ther as

a contract of service or a contract for service. Th e test as

to whether the person employed is integrated into t he

employer's business or is a mere accessory thereof is

another important test in order to determine on whi ch

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, whet her

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 co ntinued

employment can also be applied when it comes to whe ther 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 himse lf 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 th e 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 i s control,

supervision and economic dependence. When these

elements coalesce, the relationship assumes the cha racter of

employment. Once this conclusion is reached, the i nevitable

corollary follows, services rendered by such agents falls

squarely within the exemption carved out under Sl.N o.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 t hem as

26

“business facilitators” and places reliance upon a notification

dated 28-06-2017 issued under Section 11 of the CGS T Act. The

contention though ingeniously projected falters upo n closer

scrutiny. It, therefore, becomes necessary to refer to the

notification issued by the Government of India. Cl ause 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 contai ned in the

afore-quoted clause, contemplates an intermediary

appointed under the models recognized and regulated by the

Reserved Bank of India. Such facilitators are expe cted to

perform specified functions, within the defined reg ulatory

architecture.

27

13. What is a business facilitator model or a busi ness

correspondent model bears definition in a subsequen t official

memorandum. The business facilitator model and busi ness

correspondent model read as follows:

“2. Business Facilitator Model: Eligible Entities and Scope

of Activities

2.1 Under the "Business Facilitator" model, banks m ay use

intermediaries, such as, NGOs/Farmers' Clubs, coope ratives,

community based organisations, IT enabled rural out lets of

corperate entities, Post Offices, insurance agents, well

functioning Panchayats, Village Knowledge Centres, Agri Clinics/

Agri Business Centers, Krishi Vigyan Kendras and KV IC/ 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) collec tion and

preliminary processing of loan applications including verification

of primary information/data; (iii) creating awarene ss about

savings and other products and education and advice on

managing money and debt counselling; (iv) processin g 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 appro val is

required from RBI for using the above intermediarie s 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 registere d under

Mutually Aided Cooperative Societies Acts or the Co operative

28

Societies Acts of States, section 25 companies, reg istered

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 indi cative

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 s uch

intermediaries as Business Correspondents, banks sh ould

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 answe r to the

afore-quoted description. They are not intermediar ies

appointed under the Reserve Bank of India – sanctio ned

model. Their role is confined to collection of dep osits under

the Bank’s pigmy deposit scheme and they do not und ertake

activities envisaged under the business facilitator or

correspondent models. The attempt to artificially transpose

pigmy agents into the category of business facilita tors is,

therefore, fundamentally flawed. It is a mischarac terization,

that cannot withstand judicial scrutiny .

29

14. In the teeth of the aforesaid narration, it bec omes

necessary to notice one of the show cause notices issued by the 1

st

respondent. The reason behind issue of show cause n otice 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 knowle dge

Centers, Agri Clinics/ Agri Business Centers, Krishi Vigyan

Kendra sans KVIC/KVIB units, depending on the compo rt

level of the bank, for proving facilitation services, Such

services may include (i) identification of barrows and

fitment of activities; (ii) collection and prelimin ary

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 t he

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 includin g

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 withi n

the meaning of the term as defined in the Industria l

Dispute Act. But as per the provisions of the GST A ct-

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)), "Suppl ier"

(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 whatev er

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 o ut

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 vari ous

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 Pa ge-

10). Further, the payment of minimum wages,

conveyance and gratuity is in accordance with the

Judgment of Hon'ble Supreme Court of India in India n

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 a s

per the provisions of Income Tax Act. But the Tax payer

not submitted any such documents to substantiate th eir

submission. In the absence of classified turnover o f

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 th e

entire amount paid as commission to pigmy agents.

C. Pigmy agents were appointed to collect small de posits

(pigmy deposits) from the customers of the bank. Th e

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 25.08.20 14.

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 til l

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 f or

Penalty U/s 122 of the Act.

(Emphasis added)

The show cause notices issued by the respondent pro ceed on an

erroneous premise, making an attempt to describe th e Pigmy

agents as business facilitators. The foundation of the show

cause notice, in the light of the aforesaid narrati on, 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 pi gmy 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 rendere d 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: -

O R D E R

(i) Writ Petition is allowed.

(ii) Impugned show cause notices in (i) No. DCCT (E nf-

2)/HBL/SCN-03/2023-24 dated 27-12-2023 issued by

the 1

st

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 dispose d.

Sd/-

(M.NAGAPRASANNA)

JUDGE

Bkp/

CT:MJ