“Misleads The Consumer”- Delhi High Court Holds Mandatory Service Charge Collected By Restaurants As Unlawful
The Delhi High Court dismissed Writ Petitions of the National Restaurants Association of India (NRAI) and the Federation of Hotels and Restaurants Association of India (FHRAI).
The Delhi High Court held that the mandatory service charge collected by the restaurant establishments is unlawful as per the Consumer Protection Act, 2019 (CPA).
The Court held thus in Writ Petitions filed by the National Restaurants Association of India (NRAI) and the Federation of Hotels and Restaurants Association of India (FHRAI), challenging the guidelines issued by the Central Consumer Protection Authority (CCPA) dated July 4, 2022.
A Single Bench of Justice Prathiba M. Singh observed, “The camouflaged and coercive manner in which service charge is being collected by the restaurant establishments itself shows the unlawful nature of the charge. This would clearly constitute an unfair trade practice under Section 2(47) of the CPA, 2019 as the collection of service charge materially 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 Bench said that the lack of clarity of the price of the product or the misleading nature of the price of the product by charging compulsory and mandatory service charge, results in an unfair trade practice under Section 2(47)(i) of the CPA, 2019.
Advocates Lalit Bhasin and Sameer Parekh appeared on behalf of the Petitioners while ASG Chetan Sharma, CGSC Sandeep Mahapatra, and Senior Advocate Kirtiman Singh appeared on behalf of the Respondents.
Brief Facts
The CCPA received several complaints regarding restaurants and hotels charging ‘Service Charge’ over and above the cost of the food items. This Charge in the range of 5-20% in lieu of ‘Tip’ or ‘Gratuity’, was being collected from consumers on a compulsory basis. In addition, Goods and Services Tax (GST) was charged on the said service charge, resulting in substantial burden consumers. The CCPA then issued guidelines to prevent unfair trade practices and protect consumer interest regarding levying of service charge on July 4, 2022. Such guidelines were under challenge in the Petitions before the High Court. The Petitioners i.e., NRAI and FHRAI sought issuance of an appropriate Writ under Article 226 of the Constitution for quashing or setting aside the said guidelines.
Issue for Consideration
The issue for consideration before the Court was whether restaurant establishments can levy and collect service charge mandatorily, by simply displaying the same on its menu card and whether this amounts to unfair trade practice and be violative of rights of consumers.
Reasoning
The High Court after going through the submissions made by the parties, noted, “The CCPA is, thus, not merely a recommendatory or advisory body. Under Section 18(2)(l) of the CPA, 2019, it has the power to issue guidelines and such guidelines ought to be for preventing unfair trade practices and for protecting consumers’ interests.”
The Court remarked that the argument of the Petitioners i.e., the present being a contractual issue thereby barring the jurisdiction of the CCPA, is completely fallacious and that the same does not take into consideration the conduct of a customer who after entering a restaurant establishment, focuses primarily on ordering the food.
“On most occasions, the customer may not have even noticed the display of collection of service charge which may be printed on the menu card. Moreover, the collection of service charge is nothing but a collection of payment of tips/gratuity, for services which are rendered – but in a mandatory fashion, mostly without the knowledge of the customer. The collection of service charge over and above the price of the product consumed, is not merely a charge which is levied but is an extraordinary burden that is placed on the consumer that too on most occasions unknowingly”, it further said.
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, inasmuch as 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 CPA as well.
“A perusal of the definition provided in Section 2(46) of the CPA, 2019 shows that any practice which misleads the customer regarding price of the product, by imposing an unreasonable mandatory charge, would be an unfair contract. The restaurant establishments, by mandatorily collecting service charge, are in fact misleading the consumer about the actual price of products on the menu card”, it added.
The Court emphasised that the contracts which are against public interest or public welfare are contrary to public policy and the same are therefore, unlawful and void.
“In the present case, 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”, it also observed.
The Court was of the view that in some cases, service charge is being confused with service tax or a mandatory tax imposed by the Government and 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.
“Mandatory collections which are detrimental to customers cannot be justified on the basis of some hidden benefit to staff of the establishments. … A compulsory mandatory levy is a sovereign function. … 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”, it held.
Furthermore, the Court said that it cannot be a mute spectator. It remarked that the mere display of collection of service charge in a small display board or in hardly readable font on the menu or on the bill does not obviate the responsibility of the establishments to properly inform the consumer.
“The consumer's right to obtain information is absolutely paramount when it comes to such matters. Any argument that the same is a contractual agreement is also liable to be rejected as such conditions would constitute `unfair contract’ under Section 2(46) of the CPA, 2019. Such contractual conditions would not be enforceable”, it added.
The Court observed that the global nature of the practice of collecting service charge by restaurant establishments would not provide a defence to the Petitioners inasmuch as the practices in other countries cannot form the basis of quashing of Guidelines issued in India in accordance with law.
Conclusion
The Court, therefore, concluded the following points –
(i) The CCPA is the authority fully empowered and has the jurisdiction to pass the guidelines under the CPA, 2019.
(ii) The guidelines issued by the CCPA would not curtail fundamental rights under Article 19(1)(g) in any manner as the guidelines are in the larger interest of the consumers and have been issued in accordance with law.
(iii) 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.
(iv) The collection of service charge and use of different terminologies for the said charge is misleading and deceptive in nature. The same constitutes an unfair trade practice under Section 2(47) of the CPA, 2019.
(v) Consumer rights cannot be subjugated to an argument that a contract is being entered into by the consumer while entering the establishment to pay service charge as the payment and collection of service charge is itself contrary to law.
(vi) The CCPA may consider permitting change in the nomenclature for Service Charge which is nothing but a ‘Tip or a gratuity or a voluntary contribution’. Terminology such as ‘voluntary contribution’, ‘staff contribution’, ‘staff welfare fund’ or similar terminology can be permitted.
Moreover, the Court ordered that all restaurant establishments would have to adhere to the CCPA guidelines and if there is any violation of the same, action would be liable to be taken in accordance with law.
Accordingly, the High Court dismissed the Writ Petitions, imposed a cost of Rs. 1 lakh each on the Petitioners, and upheld the CCPA guidelines.
Cause Title- National Restaurant Association of India & Ors. v. Union of India & Anr. (Neutral Citation: 2025:DHC:2084)
Appearance:
Petitioners: Advocates Lalit Bhasin, Sameer Parekh, Nina Gupta, Ananya Marwah, Devvrat Tiwari, Ajay Pratap Singh, Sumit Goel, Sonal Gupta, Swati Bhardwaj, and Abhishek Thakral.
Respondents: ASG Chetan Sharma, CGSCs Sandeep Mahapatra, Ashish Dixit, Senior Advocate Kirtiman Singh, Advocates Abinav Bansal, Vikramaditya Singh, Tribhuvan, Shubham Sharma, Saurabh Tripathi, Amit Gupta, Ishan Malhotra, Chandan, Deepak Tanwar, and Shivam Tiwari.
