Five Reasons Why Delhi High Court Held Restaurants Cannot Levy Mandatory Service Charge On Food Bills

In an important judgment, the Delhi High Court on Friday ruled that service charge or tip is a voluntary payment by the customer and cannot be charged compulsorily by restaurants or hotels on food bills.Justice Prathiba M Singh thus upheld the guidelines issued by Central Consumer Protection Authority (CCPA) in 2022 prohibiting hotels and restaurants from levying service charges “automatically or by default” on food bills.The Court dismissed two petitions filed by Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI). Costs of Rs. 1 lakh each has been imposed on the two restaurant bodies which is to be deposited with CCPA to be utilized for consumer welfare.Let us know five reasons why Justice Singh passed the ruling.Reason 1: Service Charge being collected arbitrarily, coercively enforcedThe Court observed that the manner of enforcement of payment of service charge is coercive in nature as in some cases, it is confused by the customers with service tax or a mandatory tax imposed by the government.“In fact, 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. This position cannot be ignored by the Court,” the Court said. Justice Singh observed that the “camouflaged and coercive” manner in which the service charge is being collected by the restaurant establishments shows its unlawful nature. The Court 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 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 Court said.It added: “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.”Reason 2: Service Charge- An Unfair ContractThe 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. Justice Singh said that 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 Consumer Protection Act, 2019.The Court said that restaurants, by mandatorily collecting service charge, are misleading the consumer about the actual price of products on the menu card. It added that when a large number of food items are ordered, most consumers may not even notice the levy of the service charge that too in small print and may land up paying a much higher amount than what is chargeable. This constitutes unfair trade practice, the Court said.It added that even if an implied contract is deemed to exist between the consumer and the restaurants, upon the consumer placing an order after being informed about the service charge, it would be rendered void. “This is because consumers, at this scale, have little bargaining power against restaurant establishments as a class. The Court is of the opinion that the said class requires to be protected with the intent to secure social and economic justice. Such a view is also in consonance with Article 14 of the Constitution of India,” the Court said. It held that an implied contract on the basis of so-called information cannot constitute a validly enforceable contract as the same would be an unfair contract as per the Consumer Protection Act itself.It added that mandatory levy of service charge by the restaurants 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, the Court said. Reason 3: Misleading Nomenclature of Service Charge Collected by RestaurantsThe Court ruled that the nomenclature itself i.e., service charge, especially after the introduction of service tax, is confusing, deceiving and misleading in nature. It noted that in various bills of restaurants, the service charges are not comprehensible as different abbreviated versions such as 'VSC', 'SER', 'SER CHGS', 'S.CHARGE', 'SRVCGH', etc. are used which results in confusion to the customers that the same may be a charge levied by the Government.The Court said that when the bills of restaurants are generated, the service charge is added right below the...

Five Reasons Why Delhi High Court Held Restaurants Cannot Levy Mandatory Service Charge On Food Bills

Nupur Thapliyal

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