Debate on levying of service charge by restaurants in Chandigarh

  • Hitender Rao, Hindustan Times, Chandigarh
  • Updated: Oct 12, 2015 10:55 IST

Service charge is not a government levy. Some eating joints charge it, while others don’t. It is seen as a mandatory tip. Also, restaurants do not state upfront that they are taking service charge. The customer finds that service charge has been levied only when the bill arrives. The charge varies between 5-10% of the total bill amount.

Customers in the tricity say they want to pay for their food but object to the cost being hidden, disguised or misrepresented. Charging more for the food than the price shown on the menu card is a dishonest practice, according to them. They say a tiny footnote at the end of the menu card is not a good practice either. There are doubts over whether the restaurant distributes the collected service charge amongst the staff? In isolated cases consumer courts have ordered compensation that do not have a blanket bearing on similar disputes. In fact the UT State Consumer Disputes Redressal Commission overturned such an order of the district forum. Amid this wrangle, Hindustan Times attempts to understand the legal position on the levy of service charge.

Service charge defined

The revenue department, under the Union finance ministry, in its February 28, 2011, circular defined scope of new services. Two new services by air-conditioned restaurants having licence to serve liquor; and short-term accommodation in hotels/inns, etc were brought in the ambit of service tax and defined in the “scope of new services”.

The scope of services reads

Restaurants provide a number of services normally in combination with the meal or beverage for a consolidated charge. These services relate to use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, a dance floor. The customer also has the benefit of personalised service by indicating his preference for ingredients such as salt, chillies, onion, garlic or oil. The extent and quality of services available at a restaurant are directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the maximum retail price (MRP).

Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared among the staff members who attend to the customers. Though this amount is exclusively for the services, it does not represent the full of value of all services rendered by the restaurants, reads the circular issued by joint secretary, tax research unit, the ministry of revenue.

Law justifies levying of service charge

Judgments have been quoted to justify the levy of service charge.

While examining the entitlement of the states to levy tax on the sale of food and drink, a constitutional bench of the Supreme Court said in the K Damodarasamy Naidu and bros v/s State of Tamil Nadu case that the tax is on the supply of food or drink, and it is not of relevance that the supply is by way of a service or as part of a service.

Clause (29A) (f) of Article 366 of Constitution permits the states to impose a tax on the supply of food and drink. The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. In our view, therefore, the price that the customer pays for the supply of food in a restaurant cannot be split up.

“The supply of food by the restaurant owner to the customer, though it may be a part of the service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor and a floor show, is what the subject of the levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be `50 on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs 50 for its supply and it is on `50 that the restaurant owner must be taxed,” the Supreme Court said.

Why restaurants charge above MRP

The Delhi high court in the Federation of Hotels and Restaurants Association v/s Union of India case, while examining whether hotels or restaurants can charge any price above the maximum retail price (MRP) mentioned on mineral water packaged and bottled by third parties, ruled that charging prices for mineral water in excess of MRP printed on the packaging, during the service of customers in hotels and restaurants does not violate any of the provisions of the Standard Weight and Measure Act, as this does not constitute a sale or transfer of these commodities by the hotelier or restaurateur to customers.

“The customer does not enter a restaurant to make a simple purchase of these commodities. A client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would clearly travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption. Can there be any justifiable reason for the court to interdict the sale of bottled mineral water other than at a certain price and ignore the relatively exorbitant charge for a cup of tea or coffee?” the Delhi high court said.

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