Delhi High Court: A petition was filed by National Restaurant Association of India (petitioner) to consider whether the collection of mandatory Service Charge by restaurants and other establishments is permissible under the Consumer Protection Act, 2019. Prathiba M Singh, J., held that the guidelines framed by the CCPA are valid and are in the interest of the consumers and the same are upheld.
The Central Consumer Protection Authority (CCPA) issued guidelines on 04-07-2022, prohibiting restaurants and hotels from automatically adding a “service charge” to consumer bills. This charge, typically 5-20%, was often presented as a mandatory tip, further attracting GST, increasing the financial burden on consumers. The guidelines clarified that service charges must be optional, cannot be a condition for entry, and cannot be collected under any other name. However, these guidelines were challenged in two writ petitions, one by the National Restaurants Association of India (NRAI) and another by the Federation of Hotels and Restaurants Association of India (FHRAI) seeking their quashing on the grounds that service charges had been a standard industry practice for decades and that CCPA lacked the authority to issue such directives.
The petitioners argued that levying service charges was a business decision, benefiting staff and operational expenses, and was protected under Articles 14 and 19 of the Constitution. The case saw multiple interim orders and submissions, with the Court examining whether restaurants were using prior rulings to justify compulsory service charges. The proceedings also involved discussions on whether alternative terminology could be used instead of “service charge.”
The Court noted that CCPA is the authority fully empowered and has the jurisdiction to pass the guidelines under the CPA, 2019. In fact, issuing guidelines in consumer interest is an essential function of CCPA under Section 18(2)(l) of the CPA, 2019. The said guidelines would have to be mandatorily complied with as the scheme of the Act clearly provides for enforcement of guidelines. The guidelines issued by the CCPA would not curtail fundamental rights under Article 19(1)(g) in any manner as the guidelines are in the larger interest of the consumers and have been issued in accordance with law.
The Court further noted 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. 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.
The Court observed that the justification being given on behalf of the petitioners for collection of service charge, that they are part of labour settlements and agreements with staff, is not supported by any material on record and the same is accordingly rejected. The fact that service charge can be collected as it is part of a voluntary contract/agreement made by the consumer who enters the establishment and avails of the services after seeing the chargeability of service charge on the menu card is an argument which is not tenable as such a condition is onerous and constitutes an unfair contractual condition under Section 2(46) of the CPA, 2019.
The Court further observed that the consumer rights cannot be subjugated to an argument that a contract is 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 Court concluded that the mandatory collection of service charge is contrary to law and violates the guidelines, it is also of the opinion that if consumers wish to pay any voluntary Tip for services which they had enjoyed, the same would obviously not be 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 remarked that CCPA may consider permitting change in the nomenclature for Service Charge which is nothing but a ‘Tip or a gratuity or a voluntary contribution’. Terminology such as ‘voluntary contribution’, ‘staff contribution’, ‘staff welfare fund’ or similar terminology can be permitted. The use of the word ‘service charge’ is misleading as consumers tend to confuse the same with service tax or GST or some other tax which is imposed and collected by the government.
The Court held that all restaurant establishments would have to adhere to the guidelines passed by the CCPA. If there is any violation of the same, action would be liable to be taken in accordance with law. CCPA is free to enforce its guidelines in accordance with law. Thus, the Court dismissed the writ petitions with costs of Rs.1 lakh each to be deposited with Central Consumer Protection Authority to be utilized for consumer welfare.
[National Restaurant Association of India v UOI, W.P.(C) 10683/2022, decided on 28-03-2025]
Advocates who appeared in this case :
Dr. Lalit Bhasin, Ms. Nina Gupta, Ms. Ananya Marwah, Mr. Devvrat Tiwari and Mr. Ajay Pratap Singh, Advocates for petitioner
Mr. Chetan Sharma, ASG with Mr. Sandeep Mahapatra, CGSC, Mr. Ashish Dixit, CGSC with Mr. Abhinav Bansal, Mr. Vikramaditya Singh, Tribhuvan, Mr. Shubham Sharma, Mr. Saurabh Tripathi, Mr. Amit Gupta, Mr. Ishan Malhotra, Mr. Chandan, Advs. Mr. Deepak Tanwar, G.P. & Mr. Shivam Tiwari, Advs. Mr. Kiritman Singh, Sr. Adv. for UOI.
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