To avoid the impression that it is a government-imposed charge, the Delhi High Court on April 12 asked restaurants and hotel associations to consider changing the term “service charge” to “staff welfare fund” or “staff welfare contribution”. The Court observed that the term service charge gives the impression that it is a government-imposed charge.
A single bench of Justice Prathiba Singh was hearing two petitions filed by the National Restaurant Association of India (NRAI) and The Federation of Hotel and Restaurant Associations of India (FHRAI) challenging the July 4, 2022, guidelines issued by the Central Consumer Protection Authority (CCPA), stating that service charge will not be collected by consumers by any other name.
The Court directed the petitioners to file an affidavit indicating the percentage of members who impose service charge as a mandatory condition and listed the matter for further hearing on July 24.
The Court further asked the petitioners to inform it about the number of hotels and restaurants imposing service charges and also asked the petitioners to carry out discussions and state in the affidavit whether the members have any objection to changing the service charge to some “alternative terminology” such as “staff welfare fund/contribution/charge to avoid confusion in the minds of the consumers that the charge is being levied by the government”.
The Court further directed the petitioner associations to hold a meeting of their members and inform the Court how many of their members are willing to inform the consumers that service charge is not mandatory and is a voluntary contribution. “For a long time, many of us thought that service charge is collected by the government. A consumer does not know the difference…people think it is being paid to the government,” said Justice Singh.
Additional Solicitor General (ASG) Chetan Sharma, appearing on behalf of the CCPA, while referring to photographs of boards put up by certain restaurants referring to the July 20, 2022, interim order of the Court staying the guidelines, submitted that hotels and restaurants were misinterpreting the Court’s order; in fact, using the order to give legitimacy to service charge.
The Court thereafter directed: “the interim order shall not be shown on the display board or menu card in a manner to mislead the consumer that the service charge has been approved by the Court”.
Advocate Lalit Bhasin, appearing for federation of hotels, said that the practice of service charge is universal and it has been in existence for the last 80 years. He further said that the practice of service charge is for the equal distribution of tip amounts among the staff of the hotel or restaurant.
Sameer Parekh, the advocate appearing for the restaurant association, said that the guidelines interfere with the right of the restaurants to trade under the Constitution. He further said that as long as the consumer is informed that the payment of service charge is compulsory, it is a contract between the establishment and the consumer. He also said that the service charge is part of the wage negotiation of the establishment’s employees, and therefore, ought not to be interfered with. He stated that the guidelines were issued under Section 18 of the Consumer Protection Act without affording a hearing to the petitioners’ members.
The ASG, on the other hand, said that the guidelines were developed following extensive stakeholder engagements. The service charge, once included, becomes a component on which GST is levied, according to the ASG. In fact, the buyer pays a significantly greater amount, he argued.
The CCPA established under the Consumer Protection Act, 2019, issued guidelines to prevent unfair trade practices and protect consumer interest with regard to levy of service charge in hotels and restaurants on July 4, 2022. Under Section 18(2)(1) of the Act, the CCPA is empowered to issue necessary guidelines to prevent unfair trade practices and protect consumer interest. These include:
- It has come to the notice of the CCPA through many grievances registered on the National Consumer Helpline that restaurants and hotels are levying service charge in the bill by default, without informing consumers that paying such charge is voluntary and optional. Further, service charge is being levied in addition to the total price of the food items mentioned in the menu and applicable taxes, often in the guise of some other fee or charge.
- It may be mentioned that a component of service is inherent in the price of food and beverages offered by the restaurant or hotel. Pricing of the product thus covers both the goods and services component. There is no restriction on hotels or restaurants to set the prices at which they want to offer food or beverages to consumers. Thus, placing an order involves consent to pay the prices of food items displayed in the menu along with applicable taxes. Charging anything other than the said amount would amount to unfair trade practice under the Act.
- It is understood that a tip or gratuity is towards hospitality received beyond basic minimum service contracted between the consumer and the hotel management, and constitutes a separate transaction between the consumer and staff of the hotel or restaurant at the consumer’s discretion. Only after completing the meal, a consumer is in a position to assess the quality and service and decide whether or not to pay tip or gratuity and if so, how much. The decision to pay tip or gratuity by a consumer does not arise merely by entering the restaurant or placing an order. Therefore, service charge cannot be added in the bill involuntarily, without allowing consumers the choice or discretion to decide whether they want to pay such charge or not.
- Further, any restriction of entry based on collection of service charge amounts to a trade practice which imposes an unjustified cost on the customer by way of forcing him/her to pay service charge as a condition precedent to placing order of food and beverages, and falls under restrictive trade practice as defined under Section 2(41) of the Act.
- To prevent unfair trade practices and protect consumer interest with regard to levying of service charge, the CCPA issues 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.
- If a consumer finds that a hotel or restaurant is levying service charge in violation of the above-mentioned guidelines, he/she can make a request to the concerned hotel or restaurant to remove the service charge from the bill amount. The consumer can also lodge a complaint on the National Consumer Helpline, which works as an alternate dispute redressal mechanism at the pre-litigation level, by calling 1915 or through the Helpline’s mobile app. The consumer can also file a complaint against unfair trade practice with the Consumer Commission. A complaint can also be filed electronically through e-daakhil portal www.edaakhil.nic. in. Alternatively, the consumer can submit a complaint to the district collector of the concerned district for investigation and subsequent proceeding by the CCPA.
—By Adarsh Kumar and India Legal Bureau