Delhi High Court rules restaurants cannot levy mandatory service charge: What this means for consumers

The court said that mandatory levy of service charge by restaurants was against public interest and undermined the economic and social fabric of consumers as a class (Image for representation)

In a big win for consumers, the Delhi High Court on Friday ruled that restaurants cannot impose service charge on food bills in a "camouflaged and coercive" manner, stating that it is against public interest and constitutes unfair trade practices.

The court upheld the Central Consumer Protection Authority (CCPA) guidelines prohibiting hotels and restaurants from mandatorily levying service charge on food bills and accordingly dismissed two petitions by restaurant associations challenging these directives.

“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 Prathiba M Singh said in her ruling.

-Hotels and restaurants cannot include a service charge on food bills automatically or by default. It must be made clear to customers that paying the service charge is optional.

-Service charge shall not be collected from consumers under any other name.

-Consumers cannot be obligated to pay a service charge, and businesses must explicitly state that it is voluntary and based on the customer’s decision.

-Customers cannot be denied entry or service based on collection of service charge.

-Service charge shall not be added in the food bill and subjected to GST on the total amount.

The court said that mandatory levy of service charge by restaurants 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 Court observed that the way service charges are enforced is coercive, with customers in some cases confusing it with a service tax or a mandatory government levy.

“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,” it ruled.

The high court, therefore, dismissed the petitions of Federation of Hotels and Restaurant Associations of India (FHRAI) and National Restaurant Association of India (NRAI) challenging the CCPA guidelines prohibiting hotels and restaurants from mandatorily levying service charge on food bills.

It upheld the directives and imposed Rs 1 lakh cost each on the petitioners to be deposited with the CCPA towards consumer welfare.

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.

It said service charge was not transparently being made visible to the consumers which affected the consumer's right to know.