Delhi HC upholds guidelines prohibiting automatic levying of service charge

The Delhi high court on Friday upheld the Central Consumer Protection Authority (CCPA)’s guidelines prohibiting hotels and restaurants from automatically levying service charges, saying its mandatory imposition violated consumer rights and amounted to unfair trade practices. The CCPA issued the guidelines in July 2022 to prevent unfair trade practices and violations of consumer rights.

Justice Prathibha M Singh said that service charges and tips are voluntary payments and restaurants or hotels cannot make them compulsory. “The imposition of a service charge in a mandatory manner is violative of consumer rights. The collection of service charges under various names amounts to unfair trade practice. The amount ought not to be added and should be left to consumer discretion,” Justice Singh said.

The court said the rights of consumers prevail over those of restaurant establishments. It said the CCPA acts as a guardian of consumer rights and has the power to issue guidelines for the protection of consumers. The court said the CCPA is an expert body that acts as the guardian of consumer rights. It added that the CCPA is vested with the power to formulate guidelines. “The CCPA is not a mere recommendatory body, and it can issue guidelines for the protection of consumer rights,” Justice Singh said.

The National Restaurant Association of India and Federation of Hotels and Restaurant Associations (FHRAI) moved the court, claiming there was nothing illegal in levying a service charge. They argued the system was being followed worldwide and did not amount to unfair consumer practice.

The petitioners said that a service charge was a traditional charge. It added that it was sought after a due display of notice on menu cards and premises. The petitioners said the CCPA guidelines were arbitrary and untenable. They claimed that the CCPA had no power or jurisdiction to ban service charges without following the principles of natural justice. The petitioners said the guidelines could only be advisory. They added that the service charge was levied on customers for the benefit of the restaurant staff in line with the fundamental right of the owners to carry on any occupation, trade, or business.

The CCPA maintained mandatory service charge over and above the price of food items and applicable taxes was unlawful. It said no proportionate service was separately provided to consumers.

In July 2022, the high court stayed the guidelines but barred the restaurants and hotels from adding service charges automatically or by default. It had directed members of the restaurant associations to prominently display the levy of service charge in addition to the price and taxes, and obligations of the customers to pay.

In September 2023, the high court asked restaurants to use the term staff contribution for the amount they were claiming as a service charge. The court directed the FHRAI to specify the imposition in their menu cards and not charge more than 10% of the bill as a service charge.