I think it sounds fair, to an extent. Of course grandparents spoil their grandkids (I know mine did!), but they should realise when it's getting excessive. It's a shame your Mum won't be reasonable and just cut back a little on the sugar - maybe she was just calling your bluff? Of course maybe the amount of time spent at the grandparents' would make a difference - if she only saw them, say, once a month, then I probably would consider just letting it happen, seeing as she's clearly getting a healthy diet for the rest of the time. Plus, if she's aware that eating all that crap may have made her ill, she might be more likely to say no to some of the treats that come her way round there. But then I'm not a parent (and more to the point, not hers), so it's your choice to make, and you've clearly got her best interests at heart.
Sadly, this isn't the first time I've had to revoke grandparent privileges. My mom has a LONG history of interfering with my parental choices, literally doing everything she can to do the exact opposite of what I want to happen. The last time, I kept Kiara from my mom for nearly a month. She didn't break down the last time(well, not entirely, she was upset, but she didn't back down from her viewpoint), and rather then continue to see my daughter upset that she couldn't see her grandmother, I ended up caving in. This time, I absolutely, 100% refuse to back down. If it takes 2 months, 3, 6, a year, so be it. My family has a major history of A: Obesity. There is only 1 uncle, and 2 aunts in my family(My dad comes from a family of 12) that were not overweight. My grandparents were overweight, my dad is overweight. B: Cancer. Both grandparents died from it, and I've had an aunt diagnosed with it as well. C: Heart Disease. On my biological mothers side(Not the one involved in this), Obesity isn't quite as bad, but Heart Disease and Diabetes and strokes are all very common(both grandparents on that side of the family died from Heart related issues). So, in the end, I have to weigh the benefits of keeping the peace and letting Kiara go over there, versus the benefits of keeping my daughter healthy. I choose my daughters health, pure and simple.
Also, to another poster who mentioned that "You SHOULD be able to have a rational discussion about this with your parents". I laughed, so hard. Then I told that to my wife, who also laughed, even harder. Rational, and my mom, don't go together anymore. She will do things purely out of spite, logic be damned. I tried the rational approach last night. I didn't raise my voice, I wasn't outright mean about it, I was respectful. And In turn I get the "So" remark, and then she tried to turn it around me by accusing me of calling her a bad parent, because what she's doing with Kiara is what she did with me. There, I may have messed up, because I basically said "Yes, You did get it wrong with me. I'm a great person on the inside mom, but all my life I was vastly overweight because you bought and fed me oodles of junk food. I'm diabetic now and I take insulin for it(I'm no longer overweight though, and haven't been for 4 years. Lost 110lbs(293 to 185). She got mad at that, and it broke down after that completely.
Edit: Also, @Manuel. I've tried the heart to heart talk, SEVERAL TIMES in the last 3 years. Every time, My mom agrees to try to withhold all the unwanted opinions on every single thing I do involving my children, and she does...for a week. Then it starts all over again >< Hell, at one point in time, she [censored]ed me out and called me a terrible parent because me and my wife couldn't afford to buy clothes for our daughter for summer time, so we withdrew money that WE OURSELVES put into a bank account for Kiara, and used that to buy her clothes. Yeah...I was pissed on that one. Didn't speak to her for 2 weeks.