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Here's why Delhi high court said restaurants cannot levy mandatory service charge
The Delhi HC observed that levying mandatory service charge on food bill is “violative of consumer rights”.
The Delhi high court on Friday held that service charge and tips are payments made voluntarily by customers, barring restaurants and hotels from making it a mandatory factor on food bills.
Justice Prathiba M Singh dismissed two petitions filed by the Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India, challenging the 2022 guidelines of the Central Consumer Protection Authority (CCPA) prohibiting hotels and restaurants from automatically or by default levying service charges on food bills.
The high court observed that the imposition of a service charge in a compulsory manner is "violative of consumer rights and the collection of service charge in various names amounts to unfair trade practices".
Justice Singh stated that the charge must be left to the "consumer's discretion". In addition, the HC also imposed a cost of ₹1 lakh each on the two restaurant bodies, as per a Live Law report. This amount is to be deposited with the CCPA, which then will be used for consumer welfare.
Why did the HC rule so?
1. 'Camouflaged, coercive' imposition
In its ruling, the high court observed that the way in which service charge is being imposed on customers is coercive in nature because some consumers confuse it for service tax or a mandatory tax, applicable from the government's side.
"In fact, for the consumers, the collective of service charge is proving to be a double whammy as they are forced to pay service tax and GST on the service charge as well. This position cannot be ignored by the Court," Justice Singh stated.
She observed that the "camouflaged and coercive" manner in which restaurants collect service charge show its unlawful nature, adding that such acts are counted under unfair trade practice under Section 2(47) of the Consumer Protection Act, 2019.
2. Unfair contract
The Delhi HC held that not giving any choice to the consumer over a service charge and collecting it as a mandatory payment, does not make it contractually binding in nature.
Justice Singh noted that any conditions which impose undue burden on the customers without their conscious choice, constitutes unfair contract under Section 2(46)(vi) of the Consumer Protection Act, 2019.
It also observed how when large quantity of food is ordered, it might so happen that the service charge gets buried under fine print, resulting in the consumer paying a much higher price than what is actually chargeable.
And even if there is a contract said to exist between the restaurants and consumers, once the customer places an order after being informed about the service charge, it would be considered void, the Live Law report mentioned.
“This is because consumers, at this scale, have little bargaining power against restaurant establishments as a class. The Court is of the opinion that the said class requires to be protected with the intent to secure social and economic justice. Such a view is also in consonance with Article 14 of the Constitution of India,” the court said.
"This is because consumers, at this scale, have little bargaining power against restaurant establishments as a class. The court is of the option that the said class requires to be protected with the intent to secure social and economic justice. Such a view is also in consonance with Article 14 of the Constitution of India," the HC observed.
It added that mandatory implication of service charge is against public interest and undermines the economic and social fabric of consumers as a class.
3. Misleading naming of service charge
The high court ruled that the nomenclature of service charge itself, especially after the introduction of service tax, is deceiving and misleading in nature.
In various restaurants, Justice Singh noted, the service charges are not comprehensible as different abbreviations are used -- ranging from VSV to S.Charge to SRVCGH. This might lead to a confusion between a charge imposed by the restaurant and the one levied by the government.
"The service charge which ought to be in the form of a tip or a gratuity to the staff after enjoying satisfactory services, has now been adapted and converted into some sort of levy. Private establishments do not have the power to impose such levies or even collect such levies. A compulsory mandatory levy is a sovereign function," the court added.
While restaurants are free to price their products in the way they deem fit, a hidden cost like service charge, which cannot be decoded from the menu card, cannot be permitted.
4. Contrary to basic principles of fairness
The high court observed that the service charge is not transparent for the consumers and thus affects their basic right to know. Justice Singh said, "In fact, as soon as the restaurant establishments mandate the customers to pay service charge, there is an automatic increase of at least 10 to 15 per cent price of food items, which the consumer would not be aware while perusing the menu card. This is contrary to the basic principles of fairness as the consumer has an unbridled right to know the exact cost of the food items that are being purchased."
5. Restaurants' reasoning rejected
Justice Singh also rejected the justification given by the restaurant bodies for collecting service charge, wherein they said that it was a part of labour settlements and agreements with staff.
The court, however, said that the petitioners could not produce any such agreements and thus left a space for a lack of evidence to substantiate their arguments.
"The submission that collection of service charge is part of agreements and settlements entered into with the work force and labour, is also bereft of any merit in as much as when the court had directed the establishments to place on record any documents to support this argument, hardly anything was forthcoming. Moreover, settlements with labour and work force have to be on the basis of the revenues generated by the establishments and service charge cannot be justified on the ground that salaries or bonuses of staff have to be paid," Justice Singh's observation was cited by Live Law.
