Five Reasons Why Delhi High Court Held Restaurants Cannot Levy Mandatory Service Charge On Food Bills

In an important judgment, the Delhi High Court on Friday ruled that service charge or tip is a voluntary payment by the customer and cannot be charged compulsorily by restaurants or hotels on food bills.

Justice Prathiba M Singh thus upheld the guidelines issued by Central Consumer Protection Authority (CCPA) in 2022 prohibiting hotels and restaurants from levying service charges “automatically or by default” on food bills.

The Court dismissed two petitions filed by Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI).

Costs of Rs. 1 lakh each has been imposed on the two restaurant bodies which is to be deposited with CCPA to be utilized for consumer welfare.

Let us know five reasons why Justice Singh passed the ruling.

Reason 1: Service Charge being collected arbitrarily, coercively enforced

The Court observed that the manner of enforcement of payment of service charge is coercive in nature as in some cases, it is confused by the customers with service tax or a mandatory tax imposed by the government.

“In fact, for the consumers, the collection of service charge is proving to be a double whammy i.e., they are forced to pay service tax and GST on the service charge as well. This position cannot be ignored by the Court,” the Court said.

Justice Singh observed that the “camouflaged and coercive” manner in which the service charge is being collected by the restaurant establishments shows its unlawful nature.

The Court said that such a practice constitutes an unfair trade practice under Section 2(47) of the Consumer Protection Act, 2019 as collection of service charge misleads the consumer with respect to the price at which the food is being sold.

“On the basis of various consumer complains and bills of the restaurant establishments placed on record, the Court is convinced that service charge is being arbitrarily collected and coercively enforced,” the Court said.

It added: “Service charge or TIP as is colloquially referred, is a voluntary payment by the customer. It cannot be compulsory or mandatory. The practice undertaken by the restaurant establishments of collecting service charge that too on a mandatory basis, in a coercive manner, would be contrary to consumer interest and is violative of consumer rights.”

Reason 2: Service Charge- An Unfair Contract

The Court held that collecting a mandatory service charge as a matter of default without giving a choice to the consumer, cannot be contended to be contractually binding in nature.

Justice Singh said that any conditions which are unreasonable and impose undue burden on the consumers without their conscious choice would constitute unfair contract under Section 2 (46)(vi) of the Consumer Protection Act, 2019.

The Court said that restaurants, by mandatorily collecting service charge, are misleading the consumer about the actual price of products on the menu card. It added that when a large number of food items are ordered, most consumers may not even notice the levy of the service charge that too in small print and may land up paying a much higher amount than what is chargeable. This constitutes unfair trade practice, the Court said.

It added that even if an implied contract is deemed to exist between the consumer and the restaurants, upon the consumer placing an order after being informed about the service charge, it would be rendered void.

“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.

It held that an implied contract on the basis of so-called information cannot constitute a validly enforceable contract as the same would be an unfair contract as per the Consumer Protection Act itself.

It added that mandatory levy of service charge by the restaurants 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 the customers and distorts the principle of fair trade as the customer is mandatorily asked to pay the same, regardless of the consumer's satisfaction for the said service, the Court said.

Reason 3: Misleading Nomenclature of Service Charge Collected by Restaurants

The Court ruled that the nomenclature itself i.e., service charge, especially after the introduction of service tax, is confusing, deceiving and misleading in nature.

It noted that in various bills of restaurants, the service charges are not comprehensible as different abbreviated versions such as 'VSC', 'SER', 'SER CHGS', 'S.CHARGE', 'SRVCGH', etc. are used which results in confusion to the customers that the same may be a charge levied by the Government.

The Court said that when the bills of restaurants are generated, the service charge is added right below the total amount of the cost of the food, followed by GST and taxes.

For any consumer who does not examine the bill thoroughly, the impression given is that the service charge is a component of tax, the Court said.

“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 said.

It added that while restaurants are free to price their goods in the manner as they deem appropriate, a hidden cost such as service charge which cannot be deciphered from the menu card at the time of ordering the product, cannot be permitted.

On this, the Court asked the CCPA to consider permitting change in the nomenclature for Service Charge which is nothing but a 'Tip or a gratuity or a voluntary contribution'. It said that terminology such as 'voluntary contribution', 'staff contribution', 'staff welfare fund' or similar terminology can be permitted.

Reason 4: Service Charge not transparently made visible to consumers, affects their right to know

The Court said that the service charge is not transparently being made visible to the consumers thereby affecting the consumer's right to know.

“In fact, as soon as the restaurant establishments mandate the customers to pay service charge, there is an automatic increase of at least 10% - 15% of the 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,” the Court said.

The Court agreed with CCPA guidelines stipulating that service charge ought not to be collected as a mandatory form of payment for service rendered by the restaurant establishments.

“The said argument of establishments, therefore, that the component of service justifies or entitles them to mandatorily charge the customers for the service provided in the manner of a separate charge such as the service charge, is wholly baseless, inasmuch as products can be priced in a manner so as to include the charge for the services provided,” the Court said.

Reason 5: Restaurants' Justification for collecting Service Charge rejected

The Court rejected the justification of the petitioner restaurant bodies for collecting service charge that they are part of labour settlements and agreements with staff. It added that the same was not supported by any material on record.

It added that when the Petitioners were asked to produce any such agreements, nothing was produced by them and thus, there was not enough evidence to substantiate the said stand taken.

“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 inasmuch 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,” the Court said.

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