The National Restaurant Association of India (NRAI) recently informed the Delhi High Court that the service charge is an agreement between restaurant management and its staff and the labour courts have recognised service charge collected by the management for the benefit of the workmen. A single-judge bench of Justice Prathiba M Singh was told by the NRAI that no law in the country prohibits restaurants from imposing service charge along with the food bill.

According to the NRAI, the Department of Consumer Affairs did not have the jurisdiction to issue a directive banning restaurants from imposing service charge. Further, the NRAI said that it is governed by the labour law and can only be addressed by labour authorities. As long as the customer is made aware of the service charge at restaurants and hotels, there is nothing unfair in levying it, the NRAI clarified and added that it does not validate the addition of a hidden service charge on the bill without the customer’s knowledge.

The High Court was hearing petitions filed by the NRAI and Federation of Hotel and Restaurant Associations of India (FHRAI), challenging the July 4, 2022, guidelines of the Central Consumer Protection Authority (CCPA), directing hotels and restaurants not to levy service charge on food bills.

On September 5, in an interim order, the High Court had permitted members of the FHRAI to use the term “staff contribution” in place of “service charge”.

The High Court had further capped the levy of staff contribution at 10% of the bill and directed to mention the same in the menu cards. Earlier, on July 24, the High Court had imposed a cost of Rs 1 lakh on FHRAI and NRAI each for not complying with its order, dated April 12, 2023, and the following directions were issued by the High Court observing that the associations/federations ought to consider these aspects and place their stand before the High Court:

(a) The percentage of members of the petitioners (NRAI and FHRAI) who impose service charge as a mandatory condition in their bills.

(b) Whether the said members and the associations/federations would have any objection in the term “service charge” being replaced with alternative terminology so as to prevent confusion in the minds of the consumer that the same is not a government levy.

Some terminologies that could be considered are “staff welfare fund”, “staff welfare contribution”, “staff charges”, “staff welfare charges”, etc., or any other alternative terminology.

(c) The percentage of members who are willing to make service charge as voluntary and not mandatory, with the option being given to the consumers to make their contribution to the extent that they are voluntarily willing subject to a maximum percentage that may be charged.

According to the plea by the NRAI, the guidelines against service charge were “arbitrary, untenable and ought to be quashed” as it was imposed without an appreciation of the facts and circumstances.

It contended that levying service charge had been a standing practice in the hospitality industry for more than 80 years. Even the Supreme Court had taken notice of this concept in 1964. The plea pointed out the socio-economic angle in levying service charge.

It said the charge ensured that there was a systematic and logical distribution of service charge collection among the employees and not just the employee serving the customer in the restaurant.

This also ensured equal distribution of benefits among all staff workers, including utility workers and back staff, the petition added.

To prevent unfair trade practices and protect consumer interest with regard to levying of service charge, the CCPA had issued the following guidelines:

(i) No hotel or restaurant shall add service charge automatically or by default in the bill.

(ii) Service charge shall not be collected from consumers by any other name.

(iii) No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional and at consumer’s discretion.

(iv) No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers.

(v) Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

Earlier, both the Union government and the CCPA had apprised the High Court that hotels and restaurants were openly flouting the guidelines and collecting service charge on food bills even when consumers were dissatisfied with the services.

The authorities had submitted an application seeking vacation of the stay granted by the High Court on CCPA’s July 4 guidelines prohibiting hotels and restaurants from levying service charge on food bills.

On July 20 last year, the High Court stayed the CCPA guidelines prohibiting levying of service charge.

Justice Yashwant Varma issued a notice on the pleas filed by the NRAI and the FHRAI and sought a response from the Ministry of Consumer Affairs and the CCPA.

He noted that the issue of service charge levying by the hotel industry was noticed way back by the Dewan Chaman Lal Committee which had submitted its report in June 1958, recommending the implementation of the continental system of service charge both with regards to its collection as well as disbursement.

Raising doubt about whether the pricing and levy of service charge would fall within the ambit of Section 2(47) of the Consumer Protection Act, 2019, the High Court observed that the matter requires consideration and in lieu thereof, stayed the July 4 guidelines till the next date of listing.

The High Court referred to the decision taken by the National Consumer Disputes Redressal Commission (NCDRC), in Nitin Mittal vs Pind Balluchi Restaurant where while dealing with a challenge to the levy of service charge, the Commission had held as follows:

“ …. It is now well established that consumer courts on the issue of pricing do not interfere in such matter as it is the discretion of the concerned restaurant to charge the price of the items as they wish.

“In fact, it is the proposal from their side to the customers to accept the same or not. It is a contractual matter between the parties—one proposes and the other accepts. Consumer courts on both the counts cannot interfere in the business terms of the parties and the complaint cannot be admitted…”

An identical issue of whether the levy of a service charge would amount to a restricted or unfair trade practice came up for consideration before the erstwhile Monopolies and Restrictive Trade Practices Commission in SS Ahuja vs Pizza Express where after noticing the issues which arose, the Commission held: “Normally understood, service charges are levied for the service of food at the table in the restaurant.

“The choice rests with the customer either to take food in the restaurant bearing the service charges, as is also a practice in other restaurants, or to carry away the food avoiding the aforesaid levy. There could, however, be no tie up between the sale of food and service of it on the table as is in the present case. This goes along with it. These two cannot be separated.”

However, the stay is subject to the members of the petitioner Association ensuring that the service charge in addition to the price and taxes payable and the obligation of customers to pay them are prominently displayed on the menu or other places where it may deemed to be expedient.

Further, the members of the Association shall undertake not to levy or include service charge on any “take away” items, the Court said.

The order was challenged by the centre and CCPA which contended that adequate time and opportunity was not provided to them to present their case and the interim order was passed post haste.

The order caused grave hardship to consumers as they were made to pay the service charge mandatorily without there being any element of discretion on their part.

It added that after the July 4 guidelines, 1,105 more complaints were registered by consumers on the National Consumer Helpline regarding service charge.

The charge was being added automatically or by default to the food bill without allowing consumers the choice or discretion to decide on whether they wanted to pay or not, contended the plea.

The authorities said the guidelines did not interfere with the right of restaurants or hotels to set the prices at which they wanted to offer their food and services to consumers.

In its counter affidavit, the CCPA said the petitioners had failed to appreciate the rights of the consumers, whose hard-earned money was unjustly collected automatically or by default in the name of service charge.

It said the objective of collecting mandatory service charge from consumers over and above the price of food items and applicable taxes was “unlawful” as no proportionate service was separately provided to them.

The Union Ministry of Consumer Affairs, Food and Public Distribution in June 2022 had asked eatery associations to stop levying service charges in their bills compulsorily, calling it illegal. The Ministry had further said that it would come out with a legal framework to end this practice.

—By Shivam Sharma and India Legal Bureau

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