Eateries can’t impose service charge, rules Delhi high court

The Delhi high court on Friday prohibited hotels and restaurants from automatically adding a “service charge” to food bills, affirming the Central Consumer Protection Authority (CCPA)’s 2022 guidelines and holding that such a levy infringes upon consumer rights.

The ruling, delivered by justice Prathiba M Singh, entitles customers to pay only for the price of the food, without paying charges for services offered by restaurants, and prohibits establishments from adding such charges to bills by default.

In her 131-page ruling, the judge opined that service charge or “tip” is a voluntary payment by customers and cannot be compulsory or mandatory. Such a charge, she said, created an unfair pricing structure lacking transparency.

“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,” justice Singh said.

She added, “ Service charge or TIP, as is colloquially referred to, is a voluntary payment by the customer. It cannot be compulsory or mandatory.”

Though the court upheld CCPA’s guidelines, it granted the authority liberty to change the nomenclature for service charge by naming it “voluntary contribution” or “staff contribution.” “The use of word service charge is misleading as consumers tend to confuse the same with service tax or GST, imposed or collected by the government,” the court said.

The ruling arose from pleas filed by the National Restaurant Association of India (NRAI) and Federation of Hotel and Restaurant Associations of India (FHRAI) challenging the guidelines. The petitioners, represented by advocates Lalit Bhasin and Sameer Parekh, argued that service charges had been prevalent in the hospitality industry for more than 80 years and were valid since no law prohibited such charges. The Union ministry of consumer affairs was represented by additional solicitor general Chetan Sharma along with advocate Ashish Dixit.

The court dismissed the petitions, imposing a cost of ₹1 lakh on each of the petitioners, to be deposited to the CCPA.

Justice Singh also rejected NRAI and FHRAI’s submissions that the guidelines did not have a mandate of law and that the CCPA had no authority to publish them. She held that CCPA was empowered to frame guidelines under the Consumer Protection Act and was not merely a recommendatory or advisory body.

Bhasin had argued that the guidelines impinged upon the right to trade conferred upon establishment owners and that they should have freedom to price goods as they choose. Stressing the prevalence of consumer rights as a class over the rights of restaurant establishments, justice Singh opined that the right to carry on business cannot result in exacting an amount not agreed to by consumers.

“The principle that the benefit of larger interest of society prevails over individual interest fully applies to this case to reach the conclusion that the rights of consumers as a class would prevail over the right of restaurant establishments,” the order noted.

Justice Singh also rejected the industry’s argument that customers entered an “implied contract” by choosing to dine at establishments that displayed service charges on menus. She held that collecting mandatory service charges without consumer choice constitutes an unfair contract and an extraordinary burden placed unknowingly on customers.

Radhika Khandelwal, chef-owner at Fig & Maple, Delhi, told HT, “The service charge is anyway optional. It’s not mandatory. We notice that once restaurants reopened in post-Covid lockdown, people opted to pay service charge but it’s reduced. What this does is dampen the spirit of the staff... This money doesn’t go to the owner or the business. Changing nomenclature too will ensure that fewer people opt to pay this.”