The Delhi High Court recently expounded that, "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".
Justice Pratibha M Singh further stated, "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".
While rejecting the petitions filed by Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI), challenging CCPA 2022 Guidelines which prohibits hotels and restaurants from levying service charges, a Single Judge Bench of Justice Pratibha M Singh explained that collecting a mandatory service charge as matter of default without giving choice to consumer, cannot be contended to be contractually binding in nature.
The Bench clarified that even if implied contract is deemed to exist between consumer and restaurants, upon consumer placing order after being informed about service charge, it would be rendered void.
Going by the background of the case in a nutshell, the petitions were filed by Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI), challenging CCPA (Central Consumer Protection Authority) guidelines of 2022 prohibiting hotels and restaurants from levying service charges “automatically or by default” on food bills. Petitioners took a stand that service charge, applicable in last several years, was traditional charge and was sought by restaurants after due display of notice on menu cards and premises. The Petitioners therefore submitted that CCPA Guidelines were illegal and arbitrary and must be quashed.
Opposing the same, the CCPA had defended its guidelines by submitting that mandatory levy of service charge by hotels and restaurants is "directly in teeth of the rights of consumers" as well as provisions on unfair contract, unfair trade practices and restrictive trade practice under the Consumer Protection Act. The authority had further said that by paying such a service charge, a consumer is not buying a distinct good or availing a separate service from the restaurant or hotel.
Considering the submissions from both the parties, the High Court observed that mandatory collection of service charge on food bills is contrary to law and if consumers wish to pay any voluntary tip, same is not barred. The amount however, ought not to be added by default in the bill/invoice and should be left to the customer's discretion.
The Court went on to explain that CCPA is not merely an advisory body, but it has the power to issue guidelines for prevention of unfair trade practices and for protecting consumer interest. Rights of consumers as a class prevail over the rights of restaurants, emphasising that the society's interest is paramount, and hence, guidelines issued by the CCPA would not curtail fundamental rights under Article 19(1)(g) in any manner in view of the discussion above as the guidelines are in the larger interest of the consumers and have been issued in accordance with law.
Furthermore, the Bench observed that mandatory collection of service charge on food bills is misleading as the same puts the consumers under the impression that they are imposed in the form of service tax or GST, and such a practice amounts to unfair trade practice.
The Bench added 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.
The “camouflaged and coercive” manner in which the service charge is being collected by the restaurant establishments shows its unlawful nature. 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, emphasized the Bench.
The Single Judge also explained 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. 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 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, whereas the private establishments do not have the power to impose such levies or even collect such levies, added the Bench.
The High Court finally concluded that a compulsory mandatory levy is a sovereign function, and while restaurants are free to price their goods in the manner as they deem appropriate, a hidden cost such as service charge which cannot be deciphered from the menu card at the time of ordering the product, cannot be permitted.
Thus, the petitions filed by FHRAI and NRAI are dismissed with cost of Rs. 1 lakh each, imposed on the two restaurant bodies which is to be deposited with CCPA to be utilized for consumer welfare.
The author of this case analysis is Kunal Sharma, Final Year Law Student, Modern College of Law.
Case Title: National Restaurant Association vs. Union of India
Case Number: W.P.(C) 10683/2022 dated March 28, 2025
Counsel for Petitioners: Advocates Lalit Bhasin, Sameer Parekh, Nina Gupta, Ananya Marwah, Devvrat Tiwari, Ajay Pratap Singh, Sumit Goel, Sonal Gupta, Swati Bhardwaj, and Abhishek Thakral
Counsel for Respondent: Additional Solicitor General Chetan Sharma, Senior Advocate Kirtiman Singh, and Advocates Sandeep Mahapatra, Ashish Dixit, Abinav Bansal, Vikramaditya Singh, Tribhuvan, Shubham Sharma, Saurabh Tripathi, Amit Gupta, Ishan Malhotra, Chandan, Deepak Tanwar, and Shivam Tiwari
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