If a law is incompatible with a convention right, the Supreme Court is able to declare the law incompatible with the human rights act. Parliament is then supposed to consider the law and fix it so it is compatible with human rights (they don't have to, but they usually do.) I have seen cases where the Supreme Court has said they can't do anything and it's up to parliament, like in assisted dying cases. But this case is different because it really is an interpretation of what the laws mean, and the words within the statutes. The court is able to say 'well this is what parliament must have intended, so this is what the law means and how it works.'
My prediction is FWS will win because the court is extremely reluctant to have flexible meanings of the same word in statutes. If a statute refers to 'woman' the presumption is that 'woman' means the same thing across the whole law. The Scottish government proposes that 'woman' means females with a GRC saying they are male sometimes, but sometimes 'woman' excludes females with a GRC saying they are male. If Parliament had meant this by the law, why didn't they just say so? And is it really conceivable that parliament , when it drafted the equality act, had in mind categories like 'females with a GRC' and 'females without a GRC"? Surely not.
The Court is also concerned about how this legislation works in practice. The equality act is wide ranging legislation that applies to all service providers, schools, charities, associations, businesses, etc. There is lots of guidance in very clear language to enable ordinary people to comply with the equality act. The Scottish government proposal turns the law into an unworkable mess. The intention of the legislation is to enable the woman who runs a waxing business from her home to legally refuse to wax male customers - she cannot be expected to know about GRCs, and males with GRCs, and males without.