Facts of the Case:

In this case, the GST authorities initiated proceedings against Karnataka Vikas Grameena Bank after conducting an inspection under Section 67 of the CGST Act. Pursuant to the inspection, DRC-01A intimations and subsequent show cause notices were issued alleging that the Bank had failed to discharge GST under the reverse charge mechanism (Section 9(3)) on commission paid to pigmy (deposit collection) agents for various financial years. The Department sought to classify these agents as “business facilitators,” thereby treating their services as taxable supplies. 

The Bank challenged the notices before the Karnataka High Court, contending that pigmy agents work under its direct supervision and control, their commission constitutes wages, and their services fall within the employer–employee relationship, which is excluded from GST under Schedule III of the CGST Act.

Issue:

Whether commission paid by the Bank to pigmy agents is liable to GST under the reverse charge mechanism by treating them as independent “business facilitators,” or whether such agents are employees of the Bank, thereby excluding the transaction from the ambit of “supply” under Schedule III of the CGST Act.

Held That:

The High Court held that pigmy agents are employees of the Bank and not independent service providers. It observed that the Bank exercises pervasive control and supervision over their activities, and the agents are economically dependent on the Bank, thereby establishing a clear employer–employee relationship.

The Court ruled that the commission paid to such agents partakes the character of wages and cannot be treated as consideration for independent services. It further held that the Department’s attempt to classify pigmy agents as “business facilitators” was a mischaracterization and legally untenable, as their role does not align with RBI-recognized models.

Accordingly, the services rendered by pigmy agents fall under Entry 1 of Schedule III (services by an employee to employer), which are neither supply of goods nor services, and hence not liable to GST. On this basis, all show cause notices were quashed.

The judgment reinforces that the true nature of the relationship rather than nomenclature determines GST liability. It clarifies that commission paid to employees, even if termed differently, remains outside the GST ambit if it qualifies as wages. The ruling also restricts arbitrary classification of workers as “business facilitators” to impose GST under reverse charge. Importantly, it provides relief and certainty to the banking sector and similar institutions engaging deposit collection agents under structured employment-like arrangements.

Case Name: M/s. Karnataka Vikas Grameena Bank Belgaum Versus Deputy Commissioner of Commercial Taxes (Enforcement-2) Navanagar, Hubballi, Assistant Commissioner of Commercial Taxes (Audit-1) Navanagar, Union of India, State of Karnataka.

To read the complete judgement 2026 Taxo.online 856