Mandatory restaurant service charge misleads customer to think its government levy: Delhi High Court

The Delhi High Court has observed that since the power to levy taxation charges is a sovereign function, restaurants that ask for mandatory "service charges" in food bills would mislead customers into thinking these charges are being imposed by the government. .Justice Prathiba Singh made the observation in a judgment prohibiting mandatory service charges by restaurants in food bills."The nomenclature used by restaurant establishments to impose mandatory charges for the services they render i.e., the term ‘levy’ and ‘service charge’ is not permissible in law as it is misleading and deceptive, apart from the mandatory collection of the charge itself being contrary to law," the Court said. .The Court, therefore, upheld guidelines issued by the Central Consumer Protection Authority (CCPA) stipulating that hotels and restaurants should not add service charges automatically or by default to food bills.The CCPA issued these guidelines in July 2022, following numerous consumer complaints about restaurants forcibly collecting service charges (typically 5-20 per cent) in addition to food bills. The guidelines were challenged before the High Court by the National Restaurants Association of India (NRAI) and the Federation of Hotel and Restaurant Association of India (FHRAI).The NRAI and FHRAI argued that the practice was an 80-year-old industry norm and part of labour agreements. However, the Court found no evidence that service charges directly benefited staff..Key Highlights of the Judgment.Service charge must be voluntary: The Court ruled that service charges cannot be imposed compulsorily and must be left to the discretion of the customer. Any attempt to force customers to pay it would amount to an unfair trade practice under the Consumer Protection Act, 2019."Mandatory levy of service charge by the 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 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. Furthermore, such charge creates an unfair pricing structure which lacks transparency and therefore is contrary to public interest. Hence, the stand of the Petitioners that an implied contract is entered into by a customer and the restaurant establishment, does not stand and is legally untenable," the Court said. .CCPA has authority to issue guidelinesThe Court held that the CCPA is empowered under the Consumer Protection Act to regulate unfair trade practices and protect consumer rights. The guidelines issued by the CCPA are legally binding and not merely advisory, the Court held.The ruling emphasized that regulations issued under a valid statute have the force of law under Article 13 of the Constitution. Citing past Supreme Court judgments, the Court reiterated that statutory regulations, once framed under an Act, carry legal authority and are binding. "The impugned guidelines clearly recite the source of powers of the CCPA, as is required, and thus have the force of law ... The nomenclature `Guidelines’ does not take away the character of guidelines being statutory stipulations that are binding and enforceable," the Court said. .Misleading nomenclature bannedThe Court ruled that the term "service charge" is misleading as it creates confusion with government-imposed taxes. Restaurants may use alternative terms like "staff contribution" or "voluntary tip", but such a charge cannot be pre-added to bills.“The nomenclature itself i.e., service charge, especially after the introduction of service tax, is confusing, deceiving and misleading in nature; In the various bills of restaurant establishments placed on record, the charges are not comprehensible as different abbreviated versions such as ‘VSC’, ‘SER’, ‘SER CHGS’, ‘S.CHARGE’, ‘SRVCGH’, etc. are being used which results in confusion to the customers that the same may be a charge levied by the Government. The said nomenclature is also not being made visible in the bills which are generated by the establishments," the Court said. .No automatic addition of such charges to billsThe Court ruled that restaurants cannot add service charges by default in the food bill. Customers must be clearly informed that payment is optional.“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,” the judgment said. .Court’s conclusions in a nutshell:1. CCPA’s authority: The Central Consumer Protection Authority (CCPA) is fully empowered to issue guidelines under the Consumer Protection Act (CPA), 2019, and compliance with them is mandatory.2. No violation of fundamental rights: The guidelines do not infringe on Article 19(1)(g) as they serve consumer interests and align with the law.3. Service charge is voluntary: Service charge (or "Tip") cannot be mandatory; compulsory collection by restaurants violates consumer rights.4. Misleading and unfair trade practice: Imposing service charge under different names is deceptive and constitutes an unfair trade practice under CPA, 2019.5. No justification to set aside CCPA guidelines: Claims that a service charge is part of labour agreements are unsubstantiated and rejected.6. Unfair contractual condition: Arguing that consumers agree to service charges by entering a restaurant is invalid, as such a condition is burdensome and unfair.7. Consumer rights take priority: Consumers cannot be forced into a contract to pay service charges, as its collection is against the law.8. Voluntary tipping allowed: Customers can voluntarily tip, but it should not be added to the bill by default and must be left to their discretion.9. Change in terminology suggested: CCPA may allow terms like ‘voluntary contribution’ or ‘staff welfare fund’ instead of ‘service charge’ to avoid confusion with government taxes.10. Guidelines upheld: The CCPA guidelines are valid and in consumer interest; restaurants must comply, and violations will be acted upon.11. Dismissal of petitions by restaurant associations: The writ petitions were dismissed with a penalty of ₹1 lakh each, payable to CCPA for consumer welfare..[Read Judgment]