Restaurants can't compel customers to pay service charge, says Delhi HC

The Delhi High Court on Friday held that restaurants and hotels cannot force customers to pay service charge or tips, as it violates consumer rights.

 

“Service charge or TIP, as it is colloquially referred to, 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,” Justice Pratibha M Singh said.

 

The HC decision came on a clutch of petitions moved by the Federation of Hotels and Restaurant Associations of India (FHRAI) and the National Restaurant Association of India (NRAI). The HC also imposed a cost of Rs 1 lakh each on the two petitioners. Restaurant bodies have said they are likely to challenge the order in the Supreme Court.

 

The court upheld the guidelines issued by the Central Consumer Protection Authority (CCPA) in 2022, prohibiting hotels and restaurants from levying service charges ‘automatically or by default’ on food bills. In its order, the Delhi HC also observed that the manner of enforcement of payment of service charge is coercive, and in some cases, customers might get confused between service tax or a mandatory tax imposed by the government, and service charge or tips levied by restaurants.

 

“In fact, for the consumers, the collection of service charge is proving to be a double whammy — 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.

 

The court said that the ‘camouflaged and coercive’ manner in which the service charge is being collected by restaurants shows its unlawful nature. It 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 complaints and bills of the restaurant establishments placed on record, the Court is convinced that service charge is being arbitrarily collected and coercively enforced,” the order said.

 

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

 

After the introduction of service tax, which is mandatory, levying service charge is misleading, 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,” Justice Singh said in her order.

 

It has asked the CCPA to consider permitting a change of name for service charge, and said that terminology such as ‘voluntary contribution’, ‘staff contribution’, ‘staff welfare fund’ or similar could be permitted so that it is not confused with service tax.

 

The court also said that service charge is not levied transparently, and the consumer’s right to know is affected. The court also rejected the justification of restaurant bodies that the service charge is part of labour settlements and agreements with staff. The court said that this argument was not supported by any material on record. It added that when the restaurant bodies were asked to produce any such agreements, nothing was produced by them.

 

“Consumer wins! The CCPA guidelines prohibiting mandatory imposition of service charges by hotels and restaurants has been upheld by the Delhi HC. The service charge on food and beverage bills is only voluntary in nature,” Pralhad Joshi, minister of consumer affairs, food and public distribution, said on Twitter.

 

“While we need more time to go over the order, it seems status quo for now. In all probability, we will be challenging the order in the Supreme Court, as the decision impacts employees and our kitchen staff,” a member of the National Restaurant Association of India told Business Standard on the condition of anonymity.

 

Talking about the often-floated suggestions of adding service charges to the retailing price of items served in hotels, the member said that is not viable.

 

“Restaurants most often work on a revenue share model with landlords, and adding those prices to the MRP will impact profitability and not allow for that money to go to the staff,” the member said.  "If any consumer is still being forced to do so(pay service charge), they can register their grievance at the National Consumer Helpline 1915," the Ministry of Consumer Affairs in its release said.