The National Restaurant Association of India (NRAI) and the Federation of Hotels and Restaurant Association of India (FHRAI) in a legal battle over restaurant service charges issue came up when Central Consumer Protection Authority (CCPA) issued guidelines in 2022 to prevent hotels and restaurants from automatically adding a service charge to protect the consumer from what may be considered unfair trade practice.
The ongoing legal proceedings, including a recent hearing at the Delhi High Court, highlighted a fundamental conflict between a consumer’s right to transparent pricing and a business’s right to set its own charges for the dining experience.
The Court’s critical stance on what it calls “Double Charging” – once through inflated prices and again through service charge – underscores the complexity of this issue and its potential to reshape the restaurant industry’s business model.
Main Arguments of the Bench
A restaurant selling a water bottle with a price of ₹ 20/- Maximum Retail Price (MRP) for ₹ 100/- is already charging a premium for the ambience and dining experience. This ₹ 80/- markup, the court argues already covers the costs of the staff, the air conditioning, the seating, and the overall atmosphere. A separate service charge, which is also for “the same service rendered,” is therefore considered unjustified and an unfair trade practice.
The guidelines issued by Central Consumer Protection Authority (CCPA) states that a service charge cannot be added automatically to a food bill and must be voluntary. The Court is of the view that this practice violates the spirit of consumer protection by being deceptive and forcing the consumer to pay twice for the same “service.”
The Court also raised a crucial question about the legality of charging GST on a service charge which further complicates the issue.
- Ø Price Discrepancy and Lack of Transparency – The restaurants price discrepancy lacks any transparency as they are not disclosing it. The menu simply shows the high price, without explaining that a large portion of it is for the dining experience.
- Ø Double Charge – The court of the view that the restaurant is charging for the same item twice. So, there is (i) the Inflated Price (ii) Service Charge. The court argues that if the restaurant is already embedding the cost of the dining experience into the price of food and drinks, a separate service charge becomes redundant and unfair.
- Ø Ambiguity of “Service” – It touches the legal and the ethical grey area of what constitutes “Service” – Is the service an act of a waiter bringing food to your table? or is it the entire package of the restaurant experience that is already being paid for through the inflated prices. Therefore, an additional service charge is not justified. The court is challenging the restaurants to either justify the high markups for the service charges, but not to have both as it amounts to charging customer twice for the same thing.
- Ø GST on Service Charges – The court questioned the legality oflevying Goods and Services Tax (GST) on the service charge, which itself is a discretionary fee. This point raises further questions about the tax implications of the practice.
- Ø Unfair Trade practices – The CCPA guidelines were issued to prevent unfair trade practices and to protect consumer rights. It has already been stated that the restaurants cannot automatically add a service charge to a bill and force a consumer to pay for it.
Main Argument of Restaurant Associations
- Ø No legal Prohibition – The Association argues that there is no law that explicitly disallows restaurant from adding a service charge to the bill. In the absence of specific legal amendment, the practice should be considered legal.
- Ø Voluntary nature of Service Charge- The service charge is not illegal because it is discretionary fee. CCPA has already upheld that service charges should be voluntary, optional and at the consumer discretion.
- Ø Not legally Binding – The Association believes that these guidelines are and overreach of Authority and hence not legally binding.
Conclusion – The Judgement bill likely redefined the relationships between the restaurants and their patrons, ensuring greater clarity on billing and strengthening the consumer’s position in an industry where pricing has often a point of confusion.
The outcome of this case could set a significant precedent, potentially forcing restaurants to either absorb the cost of “ambience” into their menu prices or make the service charge truly voluntary and transparent. Advocate Mamta Singh Shukla
Supreme Court of India
Mob. No. – 9560044035
