a. Petitioner, Food Corporation of India (FCI), engaged Kailash Enterprises (KE) for handling wheat cargo. Services provided by KE were exempt from service tax being services in relation to agricultural produce. However, FCI paid service tax under mistaken belief which was not deposited by KE to Government.
b. There were multiple disputes between FCI and KE because of deficiency in service. Therefore, FCI recovered amount of Rs.3.5 crore by invoking bank guarantee. In the meanwhile, department issued notice against KE for recovery of service tax being collected by KE from FCI. It also issued notices under section 87 for recovery of amount due against FCI. The petitioner challenged garnishee proceedings before High Court.
The High Court of Gujarat held as under:
1. It is clear that FCI had no service tax liability on the cargo handling service received by it from KE for handling of wheat cargo. However, FCI already having paid such sum to KE, had no further liability to deposit any part thereof with the Government, particularly, when no service tax was ever payable by it on such service.
2. It is true that later on FCI also adjusted some amount through invoking bank guarantee provided by KE. However, the entire recovery was not relatable only to service tax, but also had element of deficiency in service by the service provider as alleged by FCI. No garnishee proceedings could be initiated against service recipient if it did not owe anything to service provider and therefore, recovery notices against FCI were liable to be set aside.  71 taxmann.com 70 (Gujarat)