The Central Consumer Protection Authority (CCPA), citing numerous complaints from consumers, issued guidelines in July 2022 prohibiting the automatic collection of service charges by restaurants and hotels without informing customers that such charges are voluntary. The CCPA asserted that forcing consumers to pay a service charge without their consent constituted an unfair trade practice under the Consumer Protection Act, 2019 (CPA, 2019).
The National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) challenged these guidelines through writ petitions before the Delhi High Court.
Issues for Determination
The Court framed four key issues:
- Whether the CCPA could issue such guidelines to hotels and restaurants.
- Whether restaurants could levy a service charge on customers.
- Whether the service charge could be made compulsory.
- Whether the term “service charge” could continue to be used.
Arguments
Petitioners (NRAI and FHRAI):
Service charge practices have existed in India for over 80 years and are globally recognized.
Pricing freedom, including imposing a service charge, falls under the right to trade and business (Article 19(1)(g) of the Constitution).
Consumers are adequately informed about the service charge through menus and displays before ordering, making it part of a contract between the consumer and the restaurant.
The CCPA guidelines were issued without proper legislative procedure (i.e., not enacted via law, rule, or regulation) and thus are not binding.
Service charges fund staff welfare and are embedded in wage structures under labor law settlements.
Respondents (Union of India):
Service charge should remain voluntary, not compulsory.
CCPA has the power under Section 18(2)(l) of the CPA, 2019 to issue guidelines preventing unfair trade practices and protecting consumer rights.
Collection of a compulsory service charge without consumer consent is deceptive and restricts consumers’ free choice, constituting an unfair trade practice.
Several prior advisories had already clarified that service charge is voluntary.
Court’s Observations and Findings:
- Restaurants can levy a service charge, but it must be voluntary.
- Automatically adding a service charge without consumer consent is impermissible under consumer protection laws.
- There must be clear and prominent disclosure on menus and in premises about the voluntary nature of any additional service charge.
- Restaurants cannot deny service or discriminate against customers who choose not to pay the service charge.
- The Court accepted that “service charge” terminology could lead to confusion. FHRAI agreed to replace it with “staff contribution,” while NRAI resisted changing the terminology.
Outcome
The CCPA’s guidelines were upheld with minor clarifications.
Restaurants can still request a service charge but must clearly inform customers that it is voluntary.
FHRAI members must now use the term “Staff Contribution” instead of “Service Charge,” capped at 10% of the bill.
NRAI members can continue using “Service Charge” but under strict conditions of full transparency.
The Court emphasized consumer choice as paramount and reinforced the principle that pricing freedom cannot override consumer protection laws.
