Restaurants cannot mandatorily levy service charge on food bills in a "camouflaged and coercive" manner as it is against public interest and amounts to unfair trade practice, the Delhi High Court on Friday held.
The high court said collection of service charge was proving to be a "double whammy" for consumers who were forced to pay Goods and Services Tax on top of the service tax.
"Service charge or TIP as is colloquially referred to, is a voluntary payment by the customer. It cannot be compulsory or mandatory. The practice undertaken by 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 (sic)," Justice Prathiba M Singh said in a 131-page judgment.
The high court, therefore, dismissed the petitions of the restaurant bodies challenging the Central Consumer Protection Authority guidelines prohibiting hotels and restaurants from mandatorily levying service charge on food bills.
The court upheld the guidelines and imposed Rs 1 lakh cost each on the petitioners to be deposited with the CCPA towards consumer welfare.
It said the mandatory levy of service charge by the restaurant establishments was against public interest and undermined the economic and 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," it said.
The verdict added, "Furthermore, such a charge creates an unfair pricing structure which lacks transparency and is therefore contrary to public interest."
Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI) had moved the court in 2022 filing two separate petitions.
According to the NRAI, it has 7,000 restaurants in India and 2,500 member outlets in Delhi NCR.
FHRAI claimed to represent the interests of 55,000 hotels and 5,00,000 restaurants across the country.
The court, while referring to consumer complaints and restaurant bills, said it was convinced that the service charge was being arbitrarily collected and coercively enforced and in such a situation it couldn't "be a mute spectator".
CCPA, the court said, was fully empowered to pass the guidelines under the Consumer Protection Act (CPA) and they would have to be mandatorily complied with.
The fundamental right to conduct business would permit the restaurants to charge for the food being sold and services being provided, it added.
"An establishment is free to price its products in the manner as it pleases taking into account the raw-materials, salaries, expenditure, capital expenses on premises, man and machinery, etc. However, once the pricing is done, to collect over and above the price, a prescribed rate of service charge – that too on a mandatory basis would not be justified," Justice Singh said.
Freedom under Article 19(1)(g) would be curtailed or hindered only if the establishment was barred from pricing its goods as it pleased and not if a step was taken in consumer interest, it said.
The court said collecting service charge and using different terminologies for it is "misleading and deceptive" and constituted an unfair trade practice under the CPA.
It rejected the justification given by restaurants bodies for collection of service charge, that they were part of labour settlements and agreements with staff.
The court said consumer rights couldn't be subjugated to an argument that a contract was 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.
The verdict, however, said if consumers wished to pay any voluntary tip for services, the same wasn't barred.
"The amount, however, ought not to be added by default in the bill or invoice and should be left to the customer's discretion," it added.
The court made it clear that all restaurant establishments would have to adhere to the guidelines passed by the CCPA and in case of any violation, action would be liable to be taken in accordance with law.
The court said service charge was not transparently being made visible to the consumers which affected the consumer's right to know.
"In fact, as soon as the restaurant establishments mandate the customers to pay service charge, there is an automatic increase of at least 10 per cent to 15 per cent of the price of food items, which the consumer would not be aware while perusing the menu card. This is contrary to the basic principles of fairness as the consumer has an unbridled right to know the exact cost of the food items that are being purchased,” the order said.
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