Bombay High Court Stays ₹57.29 Crore GST Demand Against Mad Over Donuts Operator in Restaurant Classification Dispute

Introduction

In a significant relief for the quick-service restaurant industry, the Bombay High Court has granted an interim stay on a ₹57.29 crore Goods and Services Tax (GST) demand, including penalties, imposed on Himesh Foods Pvt. Ltd., the operator of the popular Mad Over Donuts chain in India. The Division Bench, comprising Justices G.S. Kulkarni and Aarti Sathe, issued the order on January 20, 2026, in Writ Petition No. 718 of 2025, halting the operation of an adjudication order until the final disposal of the petition. This decision hinges on the classification of over-the-counter donut sales, which the tax authorities deemed taxable at 18% GST rather than the 5% rate applicable to restaurant services. The ruling draws parity from a similar interim protection granted to Hindustan Coca-Cola Beverages Pvt. Ltd. in a coordinate bench decision dated December 2, 2025, underscoring ongoing ambiguities in GST taxation for food retail sectors. The matter is now listed for final hearing on February 26, 2026, alongside companion cases, potentially setting a precedent for how quick-service outlets navigate GST compliance.

This development comes amid broader GST challenges in the hospitality and food sectors, where recent GST Council deliberations have aimed to rationalize rates and reduce classification disputes. For legal professionals advising clients in indirect taxation, this interim order highlights the judiciary's role in preserving the status quo pending resolution of interpretive issues under the Central Goods and Services Tax (CGST) Act, 2017.

Case Background

Himesh Foods Pvt. Ltd., a Delhi-based company operating over 100 Mad Over Donuts outlets across India, specializes in selling donuts and related confectionery through a mix of over-the-counter and potentially dine-in formats. The dispute traces back to a show-cause notice (SCN) issued by the Directorate General of Goods and Services Tax Intelligence (DGGI) on August 3, 2024, under Section 74 of the CGST Act, 2017, read with the corresponding provision of the Maharashtra Goods and Services Tax (MGST) Act, 2017. The SCN alleged that the company's over-the-counter sales of donuts did not qualify as "restaurant services" and were instead liable to 18% GST as standalone goods sales, rather than the concessional 5% rate for composite restaurant supplies without input tax credit.

This reclassification stemmed from an investigation into Himesh Foods' tax filings for the period in question, where the company had applied the 5% rate, arguing that its operations constituted restaurant services under Notification No. 11/2017-Central Tax (Rate). The DGGI's stance was that pure over-the-counter transactions lacked the service element required for the lower rate, potentially exposing the firm to a massive tax liability of ₹57.29 crore, plus equivalent penalties and interest.

Himesh Foods promptly challenged the SCN by filing the writ petition in the Bombay High Court. However, during the pendency of the proceedings, the GST Appellate Authority adjudicated the matter on January 4, 2025, upholding the demand and imposing penalties. The petitioner amended its plea to include this adjudication order, escalating the urgency for judicial intervention. The company's advocate, Abhishek A. Rastogi, emphasized the need for interim protection to prevent irreparable harm, including potential business disruptions from recovery proceedings.

The timeline underscores the protracted nature of GST litigation: from the initial SCN in mid-2024 to appellate upholding in early 2025, and now judicial scrutiny in 2026. This case is part of a wave of similar challenges in the Bombay High Court, including the Hindustan Coca-Cola matter, where comparable issues of itemized versus composite supply classification arose in the beverage sector. Broader context from GST Council meetings, as noted in reports from The Economic Times, reveals ongoing efforts to clarify restaurant taxation, with recent deliberations focusing on reducing ambiguities that fuel such disputes.

Arguments Presented

The petitioner's case, led by Advocate Abhishek A. Rastogi, centered on the harmonious interpretation of GST provisions to promote certainty and rationalization in the indirect tax regime. Rastogi argued that the DGGI's approach of dissecting sales into "itemized" components ignored the integrated nature of quick-service restaurant operations, where over-the-counter sales form part of the overall restaurant service ecosystem. He contended that classifying donuts as non-restaurant goods at 18% GST contradicted the intent of GST Council notifications, which aimed to simplify taxation for the food services industry at 5% without input tax credit. Drawing on recent GST Council discussions, Rastogi highlighted efforts to address restaurant taxation ambiguities, asserting that the authorities' rigid stance could stifle small and medium enterprises like Himesh Foods. He urged the court to grant interim stay, citing the balance of convenience and the precedent in the Hindustan Coca-Cola case, where similar interim relief was afforded against show-cause notices.

On the respondents' side, represented by Assistant Government Pleader Jitendra Mishra for the Union of India and other state authorities, the arguments focused on strict compliance with GST classification rules. The DGGI maintained that over-the-counter donut sales lacked the essential service component—such as preparation, serving, or ambiance—required for restaurant service eligibility under the GST regime. Mishra did not contest the similarity with the Coca-Cola proceedings but emphasized that the adjudication order was based on factual scrutiny of the company's business model, revealing predominant goods sales rather than services. The respondents argued against stay, warning that blanket interim relief could encourage non-compliance and revenue leakage, especially given the ₹57.29 crore scale. However, Mishra acknowledged the pendency of companion matters, suggesting that a coordinated hearing would resolve interpretive inconsistencies without immediate prejudice to revenue collection.

Both sides invoked the principle of judicial parity, with the petitioner leveraging it for relief and the respondents viewing it as a procedural tool rather than substantive merit. Key factual points included Himesh Foods' operational data—sales mix, outlet formats—and legal references to SAC codes for restaurant services (9963) versus goods (e.g., bakery items at 18%).

Legal Analysis

The Bombay High Court's reasoning pivoted on principles of judicial comity and the need for uniformity in interpreting GST provisions across similar factual matrices. The bench meticulously referenced the coordinate bench's order in Hindustan Coca-Cola Beverages Pvt. Ltd. v. Union of India (dated December 2, 2025), where interim stay was granted on show-cause notices involving analogous classification disputes for beverage sales. This precedent was pivotal, as it established that pending final adjudication, tax authorities should not enforce demands that hinge on unresolved interpretive questions, thereby preventing multiplicity of proceedings and ensuring consistency.

Under Section 74 of the CGST Act, which governs demands for taxes not paid or short-paid due to fraud or suppression, the court distinguished between substantive liability and procedural safeguards. Justices Kulkarni and Sathe observed that the controversy centered on whether over-the-counter sales qualify as "supply of food or drink" within restaurant services, a nuance amplified by GST Council's clarificatory circulars. The bench applied the doctrine of stare decisis at the high court level, holding that parity warranted identical interim measures, as denying relief would cause undue hardship without advancing revenue interests in the interim.

The analysis delved into GST rate notifications, particularly Entry 7 of Notification No. 11/2017, which caps restaurant services at 5% for composite supplies. The court critiqued the DGGI's "itemized sale" approach as potentially overreaching, echoing arguments that such dissection undermines the composite supply concept under Section 2(30) of the CGST Act (mix of goods and services treated as a single supply). Precedents like the Coca-Cola case were explained as relevant for their focus on prima facie case strength and irreparable injury, criteria met here due to the demand's magnitude relative to Himesh Foods' turnover.

Distinctions were drawn between restaurant services (involving human intervention in preparation/serving) and pure goods sales (e.g., packaged bakery items). The bench noted evolving GST jurisprudence, including AAR rulings on similar QSR models, which often favor 5% classification for integrated outlets. This ruling reinforces that interim stays under Article 226 of the Constitution are discretionary, balancing equities where statutory ambiguities persist, as evidenced by GST Council's recent pushes for rate rationalization in the 2025-2026 meetings.

Key Observations

The judgment extracts several pivotal observations that illuminate the court's cautious approach to GST enforcement:

• "Considering the nature of the controversy and the issue involved... similar orders ought to be passed in the present case." This underscores the bench's reliance on coordinate bench parity to admit the petition and grant stay.

• "The authorities could not have adopted an approach of itemised sale of the products so as to classify the same at 18% for the period in question." Here, the court critiques the tax authorities' fragmented classification, advocating for a holistic view of business operations.

• "There shall be interim relief in the nature of a stay of the impugned order till the final disposal of the Petition." This direct quote encapsulates the operative relief, emphasizing temporary suspension pending merits adjudication.

• From Advocate Rastogi's submissions, integrated via sources: "The GST Council’s consistent endeavour has been to bring certainty and rationalisation of rates under the indirect tax regime... even in recent GST Council deliberations, the issue of restaurant taxation had been addressed with the objective of reducing ambiguity." This highlights policy intent influencing judicial leniency.

These observations, drawn verbatim from the order and supporting reports, emphasize procedural fairness and interpretive harmony in GST disputes.

Court's Decision

The Bombay High Court unequivocally stayed the operation of the January 4, 2025, adjudication order, which upheld the ₹57.29 crore GST demand and penalties against Himesh Foods Pvt. Ltd., until the petition's final disposal. The bench directed listing for hearing on February 26, 2026, alongside companion matters like the Hindustan Coca-Cola case, to expedite resolution of the core issue: whether over-the-counter donut sales constitute restaurant services eligible for 5% GST.

Practically, this decision halts immediate recovery actions, averting cash flow crises for Himesh Foods and allowing continued operations under the status quo. For the broader legal landscape, it signals judicial restraint against aggressive tax interpretations in nascent GST areas, potentially benefiting other QSR chains like Domino's or Café Coffee Day facing similar SCNs. Implications extend to encouraging petitioners to seek Article 226 relief early, leveraging precedents for interim stays.

Future cases may see increased reliance on this parity principle, prompting the GST Council to issue binding clarifications on restaurant classifications to curb litigation. As reported in The Economic Times on January 23, 2026, this order aligns with a parallel stay on ₹10,000 crore GST claims against insurers, illustrating a pattern of high court interventions in high-stake indirect tax matters. For legal practitioners, it reinforces the strategic value of highlighting policy rationalization in arguments, ensuring clients navigate ambiguities without existential threats.

In sum, while not a final merits ruling, this interim order preserves equilibrium in GST enforcement, fostering a more predictable tax environment for the food services sector amid evolving jurisprudence.