The composite supply test that decides your restaurant's GST rate on ice cream.

When is an ice cream not a dessert? The Gujarat AAR draws a line at the counter

M/s. HRPL Restaurants P Ltd. runs three kinds of eateries in Ahmedabad — '1944 the HOCCO Kitchen' (premium), 'HOCCO Eatery' (casual), and 'Huber and Holly' (fast food). They serve Punjabi food, pav bhaji, sandwiches, pizza, pasta, and ice cream. The ice cream, however, is not made in-house. The company sold its ice cream division to Lotte Confectionery in 2017. The product arrives pre-manufactured and is sold over the counter.

The question that landed before the Gujarat Authority for Advance Ruling (GST) was deceptively simple: does selling that ice cream from a restaurant outlet make it a restaurant service at 5% GST, or is it a supply of goods from an ice cream parlour at 18% GST? The answer, delivered on 22 February 2023, turned on one crucial fact — whether the ice cream was ordered as a standalone item or as a dessert alongside cooked food.

The stakes were significant. A wrong classification could mean either paying 18% GST on every scoop sold with a meal, or losing input tax credit on every standalone cone. For a chain with multiple formats, the difference runs into lakhs every quarter.

The three questions HRPL asked

HRPL filed an advance ruling application (Advance Ruling/SGST&CGST/2022/AR/31) before the Gujarat Authority for Advance Ruling. The Bench comprised Amit Kumar Mishra (Member-C) and a co-Member (S). The company wanted clarity on three specific scenarios:

• Whether ice cream sold from its outlets qualifies as 'restaurant service' under Sr. No. 7(ii) of Notification 11/2017-CT(Rate), attracting 5% CGST without input tax credit.
• Whether such supply should instead be treated as supply of goods from an ice cream parlour, attracting 18% GST.
• Whether the answer changes depending on how the ice cream is ordered — standalone or as part of a meal.

The Authority noted that the ice cream was not cooked or prepared at the outlet. It was pre-manufactured, stored, and handed over the counter. This factual distinction became the pivot of the entire ruling.

What the law actually says about restaurant service

The definition of 'restaurant service' under the amended Notification 11/2017-CT(Rate) is broad. It covers "supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises."

On its face, ice cream is food for human consumption. A restaurant is selling it. So why the confusion?

The answer lies in Entry 6(b) of Schedule II to the CGST Act, which treats as a service the "supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink." The key phrase is "by way of or as part of any service." The Authority reasoned that when a restaurant merely hands over a pre-packaged, pre-manufactured ice cream without any element of cooking, preparation, or service, the transaction loses its character as a service and reverts to being a supply of goods.

This is where the distinction between an ice cream parlour and a restaurant becomes critical. An ice cream parlour's principal supply is the ice cream itself. A restaurant's principal supply is the cooked food. The ice cream, when sold standalone, is no different from what a parlour does.

The composite supply argument that won the day

HRPL argued that its outlets are restaurants, and everything sold from them — including ice cream — should be treated as restaurant service. They cited M/s. Deepak & Co. (Order No. 2/DAAAR/22-23/2005-2010 dated 21.6.2022, Delhi Appellate AAR), which dealt with food supply on railway platforms and trains. The Authority distinguished that case, noting it was based on a specific CBIC clarification for railways and did not apply to standalone restaurant outlets.

The Authority then turned to the definitions under the CGST Act. Section 2(30) defines 'composite supply' as a supply consisting of two or more taxable supplies that are "naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply." Section 2(90) defines 'principal supply' as the supply that constitutes the "predominant element" of the composite supply.

Section 8 then provides the tax treatment: a composite supply is treated as a supply of the principal supply.

The Authority applied this framework to two distinct scenarios:

Scenario 1: A customer walks in, orders a plate of pav bhaji, and asks for a scoop of ice cream as dessert. The cooked food is the principal supply. The ice cream is ancillary, naturally bundled with the meal. This is a composite supply. The principal supply is restaurant service. GST at 5% without ITC applies.

Scenario 2: A customer walks in, goes to the counter, buys only a cone of ice cream, and leaves. There is no cooked food. No service element. The supply is of goods — ice cream — akin to what an ice cream parlour does. GST at 18% applies.

THE TEST: Ask whether the ice cream is ordered as part of a meal (composite supply, 5% GST) or as a standalone item (goods, 18% GST). The distinction turns on the customer's order, not the outlet's format.

Why the CBIC's cloud kitchen clarification mattered

In an obiter observation, the Authority noted that CBIC's clarification regarding cloud kitchens and central kitchens being covered under restaurant service demonstrates legislative intent. The observation was not strictly necessary for the decision, but it signals a broader principle: any entity engaged in the cooking and supply of food — even without a traditional brick-and-mortar restaurant — falls within the ambit of restaurant service. This could have future significance for disputes involving delivery-only kitchens, food trucks, or catering services.

What this means for restaurant chains in practice

For every CFO and founder running a multi-format restaurant chain, this ruling creates a compliance headache — and an opportunity. The headache is obvious: your point-of-sale system must now distinguish between standalone ice cream sales and dessert-with-meal sales. The GST rate changes depending on the customer's choice. Your billing software needs to capture this distinction in real time.

The opportunity is equally clear: if your outlet sells pre-manufactured ice cream or packaged beverages alongside cooked food, you can legally charge 5% GST when the item is ordered as part of a meal. But if you charge 5% on a standalone sale, you risk a demand for the differential 13% plus interest and penalty.

The ruling also clarifies that the nature of the outlet — whether it calls itself a restaurant, eatery, or fast food joint — is irrelevant. What matters is the nature of the supply. A premium restaurant that sells a packaged ice cream over the counter without any service element is, for that transaction, an ice cream parlour.

The bottom line for practitioners

For advocates advising restaurant clients, the key takeaway is this: audit your billing systems to ensure that standalone supplies of pre-manufactured food items (ice cream, packaged beverages, pre-packaged snacks) are taxed at 18% GST, while the same items when ordered as part of a meal are taxed at 5% GST as part of a composite supply. The distinction is factual, not legal, and the burden of proof lies on the taxpayer to demonstrate that the supply was part of a composite supply with cooked food as the principal supply.

For founders and CFOs, the message is simpler: if you sell ice cream that you didn't make, and a customer buys it without ordering a meal, you are running an ice cream parlour for that transaction. Charge 18%. Keep records. And make sure your billing software knows the difference.