NATIONAL RESTAURANT ASSOCIATION OF INDIA & ORS. [Petitioners]  Vs. UNION OF INDIA & ANR. [Respondents]

W.P.(C) 10683/2022 & CM APPLs.31033/2022, 45891/2023

(CORAM: JUSTICE PRATHIBA M. SINGH)

The Delhi High Court has ruled that the mandatory service charge collected by restaurant establishments is unlawful under the Consumer Protection Act, 2019 (CPA). The decision came in response to writ petitions filed by the National Restaurants Association of India (NRAI) and the Federation of Hotels and Restaurants Association of India (FHRAI), challenging the guidelines issued by the Central Consumer Protection Authority (CCPA) on July 4, 2022.

Justice Prathiba M. Singh, presiding over the case, stated that the manner in which service charges were collected was misleading and coercive, making it an unfair trade practice under Section 2(47) of the CPA, 2019. The Court observed that mandatory service charges misled consumers about the actual price of food, thus violating consumer rights.

The Bench further highlighted that restaurants often fail to provide clear pricing, leading to consumers unknowingly paying additional charges. This practice, coupled with the imposition of Goods and Services Tax (GST) on service charges, placed an undue financial burden on consumers.

The CCPA had received numerous complaints from consumers about restaurants charging service fees of 5-20% over and above the cost of food. Consumers were misled into believing this charge was a government-imposed tax or a compulsory tip. In response, the CCPA issued guidelines prohibiting mandatory service charges, which were subsequently challenged by NRAI and FHRAI in the Delhi High Court.

The petitioners argued that service charges were part of a contractual agreement between restaurants and customers, thus falling outside the jurisdiction of the CCPA. However, the Court rejected this argument, affirming the CCPA’s authority under Section 18(2)(l) of the CPA to issue guidelines preventing unfair trade practices.

Service Charge as a Misleading Practice: The Court ruled that imposing a service charge by default and without consumer consent was misleading. Customers often ordered food without noticing the additional charge on the menu or bill.

Violation of Consumer Rights: The mandatory service charge imposed an additional financial burden on consumers and distorted fair pricing principles. The Court emphasized that contracts that impose undue burdens on consumers without their explicit consent are legally untenable.

Difference Between Service Charge and Taxes: The Court pointed out that many consumers confused service charges with government-imposed service tax, leading to double taxation, as GST was also applied to the service charge.

Service Charge Cannot Be a Sovereign Levy: The Bench declared that mandatory service charges functioned as an arbitrary levy imposed by private establishments, which was not permissible under the law.

Consumer Right to Information: The Court stressed that displaying service charge details in small print on menus or bills was insufficient. Consumers had an absolute right to be informed about any additional charges before making a purchase. The Court upheld the CCPA’s guidelines and ruled that:

• The CCPA has full jurisdiction to regulate unfair trade practices.
• The guidelines do not infringe upon restaurants’ fundamental rights under Article 19(1)(g) of the Constitution.
• Service charge must remain voluntary and cannot be imposed mandatorily.
• The use of misleading terms for service charge violates consumer protection laws.
• Consumers cannot be contractually bound to pay service charge by simply entering a restaurant.

The Court suggested that the CCPA may permit restaurants to rename service charges as “voluntary contribution” or “staff welfare fund” to ensure clarity. All restaurant establishments were ordered to comply with the CCPA guidelines, and any violations would be subject to legal action. As a penalty, the Court dismissed the petitions and imposed a fine of ₹1 lakh each on NRAI and FHRAI, reaffirming its commitment to protecting consumer rights.