MOD’s GST case next hearing on March 24, Rs 100 crore tax dispute could set precedent

The Bombay High Court is set to hear the Rs 100 crore tax dispute involving Mad Over Donuts (MOD) on March 24, a case that could set a precedent for how restaurant and bakery services are classified under the Goods and Services Tax (GST).

The case, which centres on whether the supply of donuts should be treated as a composite supply of services or a separate taxable product, could have far-reaching implications for the food and beverage industry.

The Directorate General of GST Intelligence (DGGI) had issued a consolidated show-cause notice (SCN) covering multiple financial years from 2017-18 to 2023-24, demanding approximately Rs 100 crore in taxes. The tax demand was based on the classification of MOD’s supply of donuts under the GST framework. While the company classified it as a composite supply of services, the tax authorities treated it as a supply of goods, leading to a dispute over the applicable GST rate.

Representing the petitioner, Mad Over Donuts (Himesh Foods), constitutional and tax expert Abhishek A Rastogi argued that under the Central Goods and Services Tax (CGST) Act, the supply of food or other edible articles qualifies as a composite supply of services. He cited Entry No. 6(a) of Schedule II of the CGST Act, which states that composite supplies such as works contracts will be treated as a supply of service. This implies that food supplied in restaurants, including takeaway items, should be taxed as a service rather than goods.

Rastogi highlighted that the relevant GST rate notifications explicitly define restaurant services to include food supplied at restaurants, eating joints, messes, and canteens, whether consumed on the premises or as takeaway. “The government-issued circular supports this interpretation, confirming that takeaway services should be classified as services and taxed at 5 percent,” Rastogi told Moneycontrol.

He further said that treating donuts and similar bakery products as goods rather than services creates ambiguity in tax compliance for the food and beverage industry. “The current tax structure creates unnecessary complexity for restaurant chains and bakery businesses. A clear classification under the composite supply framework would resolve this issue,” he added.

Another key issue raised before the court was the procedural validity of a single show-cause notice (SCN) covering multiple years and different GST registrations.

“Clarity is required on whether tax authorities can consolidate multiple years in a single SCN or if they are obligated to issue separate notices for each assessment period and GST registration,” Rastogi said. He emphasised that a streamlined process would improve compliance and reduce litigation.

Next Steps

During the proceedings, the Court recorded the respondents’ assurance that no coercive action would be taken by the tax authorities regarding the disputed classification issue until the case is resolved. The court also granted the petitioner the liberty to approach the bench if any recovery actions are initiated by the department.

The court has directed the respondents to file their response by March 17, with the next hearing scheduled for March 24.

Impact on the Industry
The outcome of this case could have a significant impact on the food and beverage industry, particularly for businesses involved in restaurant and bakery services. If the court rules in favour of MOD, it could establish a legal precedent for the classification of composite supplies under the GST framework, potentially influencing tax compliance strategies and business models across the sector.

Legal experts have highlighted that the case raises significant questions about the interpretation of GST provisions for food service models. “If the show-cause notice is upheld, tax authorities could claim higher tax liabilities for businesses that prepare food centrally but finalise and sell products at retail outlets. Conversely, if the notice is quashed, other establishments with similar business models could benefit from the 5 percent rate,” Alay Razvi, Managing Partner at Accord Juris, told Moneycontrol.

Kamal Aggarwal, Senior Advisor at Singhania & Co., highlighted that the root cause of the controversy lies in the complex GST structure and varying interpretations. “The debate here stems from whether the tax rate should be determined by the nature of the product (donuts as a food item) or the nature of the establishment (e.g., a bakery vs. a restaurant). A simpler, uniform GST structure could potentially reduce such controversies,” Aggarwal told Moneycontrol.

Source: money control