Why ruling against service charge is a big win for consumers

The Delhi High Court’s landmark judgment, prohibiting the compulsory imposition of ‘service charge’ on food bills by the hospitality industry, is a big win for consumers in their battle against such charges, being fought for over a decade and a half. The ruling, denouncing the imposition of service charge by restaurants and hotels as unlawful and violative of consumer rights and an unfair trade practice, should finally force the industry to scrap the illegal charge, bringing relief to consumers in the form of reduced restaurant bills.

The detailed, well-reasoned judgment delivered on March 28 by Justice Prathiba M Singh expressed strong disapproval of the way in which service charge was being “arbitrarily collected and coercively enforced” by restaurant establishments. “If any particular practice is unfair towards a consumer or a class of consumers, the same cannot be permitted,” she said (National Restaurant Association of India vs Union of India).

The judgment came in response to two petitions filed by restaurant and hotel associations, challenging the guidelines issued by the consumer protection regulator, the Central Consumer Protection Authority (CCPA), on June 4, 2022, forbidding the practice of imposing service charge on consumers. The associations contended that the guidelines were “arbitrary and untenable” and impinged on their right guaranteed under Article 19(1)(g) of the Constitution to carry on any trade or business without restrictions from the State.

Dismissing all these contentions, the court endorsed the legal validity of the guidelines issued by the CCPA under provisions of the Consumer Protection Act, and the CCPA’s power to enforce them and said all restaurants and hotel establishments must adhere to the guidelines, and any violation would render them liable for action.

On the question of the guidelines impinging on Article 19(1)(g), the court said any law restricting such a right should satisfy two distinct tests — (a) whether it is in the interest of the public and (b) whether the restriction is reasonable. The guidelines issued by the CCPA satisfy both the tests, as they are issued in the interest of consumers as a class, the principle being that the larger interest of society prevails over individual interest, the court said. “The right to carry on business cannot result in exaction of an amount which the consumer had neither bargained for, nor agreed to,” the court added.

The court also dismissed the argument that when a consumer placed an order after seeing the menu card indicating the levy of service charge, he had a contractual obligation to pay. Reiterating that contracts that are against public interest or public welfare are contrary to public policy and are therefore unlawful and void, the court said even under the Consumer Protection Act of 2019, such contracts which are unreasonable and impose an undue burden on the consumers cannot be binding as they constitute an unfair contract.

It also rejected the argument that service charge was benefiting the staff and said no evidence to the effect was produced before the court. “Mandatory collections which are detrimental to customers cannot be justified on the basis of some hidden benefit to the staff of the establishments,” the court said.

The importance of the ruling is best understood from the fact that consumers have been fighting against this pernicious practice for over 15 years. In fact, the hospitality industry introduced this in such a surreptitious manner that most consumers initially believed that service charge of 10-20 per cent added to their bill was a government levy. As eating out became more costly, they began scrutinising the bill more closely and realised that eateries had begun to add an unwarranted, illegal charge on their total bill.

The clarification from the finance ministry that service charge was not a levy by them, further confirmed this. However, consumer protests and anger did not deter the eateries, and over the years, the practice became so widespread that service charge became a norm and consumers who protested were humiliated and even threatened!

As consumer complaints reached a crescendo, the Union Ministry of Consumer Affairs swung into action and on December 14, 2016, urged all states to ensure that eateries displayed boards saying service charge was discretionary. As that did not have the desired effect, it issued detailed guidelines against the practice in 2017. The industry countered it, saying levying service charge was a matter of policy and customers not happy with the charge had the discretion not to use the facility!

Exasperated and angry, many individual consumers got back their service charge and compensation ranging from Rs 5,000 to Rs 10,000 through the consumer courts. But that did not deter the industry, earning huge amounts through service charge.

After the Consumer Protection Act of 2019 replaced the 1986 Act and the CCPA was constituted, the regulatory authority issued on June 4, 2022, stringent guidelines prohibiting service charge and asked the district collectors to enforce the guidelines. The hospitality industry promptly challenged it before the Delhi High Court and on July 20, 2022, got an interim stay against the enforcement of the guidelines, subject to the condition that restaurants must inform consumers of the levy through menu cards and display boards.

Seeking vacation of the stay, the CCPA told the court that the restaurants were using the interim order to legitimise service charge. The court did not vacate the stay and on September 5, 2023, said restaurants shall not charge more than 10 per cent of the total bill as service charge. This again worked to the advantage of the industry.

By challenging the CCPA’s guidelines, the hospitality industry delayed its implementation by almost three years, but in the end, the final judgment has empowered consumers and further strengthened the guidelines issued by the CCPA. Levying service charge in any part of the country will now violate not only the CCPA’s guidelines, but also the Delhi High Court’s order.

So, consumers must check their bills while eating out and complain about any violation, along with a copy of the bill and the receipt, to the National Consumer Helpline (number 1915) or to the CCPA on the email id: com-ccpa@nic.in

— The writer is a consumer rights and safety expert