Consumer rights: Delhi HC verdict on 'no mandatory service charge' explained

A mandatory service charge means customers end up paying even more because such a charge attracts Goods and Services Tax.

In a significant victory for consumer rights, the Delhi high court has upheld a consumer body’s directive against the automatic levy of service charge in restaurants and hotels, holding that allowing such a practice would impose an “extraordinary burden” on consumers without their explicit consent.

A key argument advanced by the restaurant association was that levying service charge is a globally accepted practice. (Sonu Mehta/HT Photo)

The verdict, delivered by justice Prathiba M Singh on March 28, reinforces the guidelines issued by the Central Consumer Protection Authority (CCPA) in 2022, affirming that consumers have the right to refuse payment of service charges, irrespective of the quality of service . “A mandatory levy of service charge by restaurant establishments is against public interest and undermines the economic as well as social fabric of consumers as a class. It imposes an additional financial burden on customers and distorts the principle of fair trade as the customer is mandatorily asked to pay the same, regardless of the consumer’s satisfaction,” that verdict said.

A mandatory service charge means customers end up paying even more because such a charge attracts Goods and Services Tax.

Judicial scrutiny and CCPA guidelines

The high court’s judgment arose from legal challenges filed by the National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) against CCPA’s 2022 guidelines. The petitioners argued that prohibiting service charges infringed upon their fundamental right to conduct business under Article 19(1)(g) of the Indian Constitution. However, Justice Singh emphasized that business rights must be balanced with consumer protection and social justice, thereby upholding CCPA’s authority to regulate unfair trade practices under the Consumer Protection Act, 2019.

CCPA, under Section 18 of the Consumer Protection Act, issued its guidelines on July 4, 2022, following numerous consumer complaints received through the National Consumer Helpline. Consumers reported that restaurants were charging service fees ranging from 5% to 20% of the bill amount, often without their explicit knowledge or consent. Prior attempts to regulate this practice date back to December 2016, when the Union Ministry of Consumer Affairs instructed state and union territory authorities to inform consumers that service charges were discretionary. Despite this, restaurants continued to impose mandatory charges, prompting CCPA to intervene with stricter enforcement measures.

The guidelines explicitly prohibit the automatic addition of service charges to bills and prevent restaurants from making a customer’s entry conditional upon agreeing to pay such charges. Additionally, the guidelines bar restaurants from collecting service charges under any other name and prohibit the imposition of GST on these charges. District Collectors were also directed to ensure compliance and take necessary action against establishments violating these rules under the Consumer Protection Act.

Authority of the CCPA

A pivotal contention raised by the NRAI and FHRAI was whether CCPA overstepped its jurisdiction by issuing binding guidelines. The petitioners argued that CCPA lacked the authority to declare service charges as an unfair trade practice through a mere notification. However, Justice Singh upheld CCPA’s mandate under Section 10 of the Consumer Protection Act, which empowers it to regulate violations of consumer rights, misleading advertisements, and unfair trade practices.

She said: “ CCPA is, thus, not merely a recommendatory or advisory body. Under Section 18(2)(l) of the CPA, 2019, it has the power to issue guidelines, and such guidelines ought to be for preventing unfair trade practices and for protecting consumers’ interests. The nomenclature ‘Guidelines’ does not take away the character of guidelines being statutory stipulations that are binding and enforceable.”

She added, “ CCPA is the authority fully empowered and has the jurisdiction to pass the guidelines under the CPA, 2019. In fact, issuing guidelines in consumer interest is an essential function of CCPA under Section 18(2)(l) of the CPA, 2019. The said guidelines would have to be mandatorily complied with as the scheme of the Act clearly provides for enforcement of guidelines.”

Service charges and unfair trade practices

One of the key arguments advanced by restaurant associations was that if service charges were clearly mentioned on the menu, customers implicitly agreed to pay them by choosing to dine at the establishment. Justice Singh rejected this argument, ruling that the practice amounted to an unfair trade practice under Section 2(47) of the Consumer Protection Act. She highlighted that most consumers are unaware of such charges due to their inconspicuous placement in fine print, making the practice “onerous” and misleading.

The judge stated: “The camouflaged and coercive manner in which service charge is being collected by the restaurant establishments itself shows the unlawful nature of the charge. This would clearly constitute an unfair trade practice under Section 2(47) of the CPA, 2019, as the collection of service charge materially misleads the consumer with respect to the price at which the food is being sold. The mere display of collection of service charge in a small display board or in hardly readable font on the menu or on the bill does not obviate the responsibility of the establishments to properly inform the consumer. The consumer’s right to obtain information is absolutely paramount when it comes to such matters”.

She added: “Consumer rights cannot be subjugated to an argument that a contract is being entered into by the consumer while entering the establishment to pay service charge as the payment and collection of service charge is itself contrary to law. In the opinion of this Court, every business has to be run in accordance with law. If any particular practice is unfair towards a consumer or a class of consumers, the same cannot be permitted.”

Comparative global practices

A key argument advanced by the restaurant association was that levying service charge is a globally accepted practice, while the union ministry of consumer affairs had argued that tip or gratuity was a voluntary service fee in at least three countries including Mexico, Switzerland and US.

In her ruling, justice Singh opined that the “global nature of practice of collecting service charge by restaurant establishments would not provide them with the defence, since the practices in other countries could not form the basis of quashing the guidelines issued in India, as per law. “The global nature of the practice of collecting service charge by restaurant establishments would not provide a defence to the Petitioners inasmuch as the practices in other countries cannot form the basis of quashing of Guidelines issued in India in accordance with law,” the judge held.

The ruling aligns India with several jurisdictions that protect consumers from automatic service charges. In the UK , service charges are voluntary, and customers have the legal right to refuse payment. In Switzerland, service charges are typically included in menu prices, ensuring transparency, while in the US, service charges are generally optional unless mandated by state law or clearly disclosed by the establishment. France has a 15% service charge that is legally included in menu prices, preventing hidden costs. In Italy, restaurants may charge a cover charge ranging from 10% to 15%, but this must be clearly stated upfront.

This global comparison underscores the importance of consumer awareness and transparency in service charges, reinforcing the Delhi high court’s view that such charges should not be imposed in a “camouflaged and coercive” manner.

This verdict echoes past rulings where courts have intervened to protect consumer rights against unfair trade practices. In Indian Medical Association Vs VP Shantha (1995), the Supreme Court held that even essential services must comply with consumer protection laws. Similarly, in Rameshwar Prasad Vs Union of India (2006), the apex court reiterated that economic policies must align with the larger public interest, a principle echoed in this ruling, which prioritizes consumer rights over business interests.

The Delhi high court’s ruling has far-reaching consequences and is likely to usher in business transparency, mandating restaurants to explicitly state their pricing policies upfront, fostering fairer business practices.

The ruling also reinforces CCPA’s authority, setting a precedent for stricter enforcement of consumer rights. With this ruling, the hospitality sector may need to reconsider pricing strategies, shifting toward transparent pricing models that eliminate hidden charges, even as they reserve the right to challenge the high court judgment in the Supreme Court .

The Delhi high court’s decision serves as a landmark moment in consumer protection jurisprudence, reaffirming that businesses cannot impose additional costs on consumers without their explicit consent.